In his spacious second-floor office in Grapevine strewn with banker boxes of court documents and PowerPoint presentations prepared for a jury’s eyes, Hollis Greenlaw and other top executives at United Development Funding gird for a battle long in the making.
It’s been almost six years since the FBI came calling, causing the REIT’s already-sinking stock price to plunge so fast that Nasdaq suspended its trading.
Greenlaw, co-founder, CEO and chairman of UDF’s board of trustees, along with three other controlling executives of the real estate investment trust, are headed to trial in federal court in Fort Worth starting Wednesday. They are charged in an alleged plot to cheat investors and banks using funds that provided hundreds of millions of dollars in loans to residential housing developers.
More than $1 billion in loans provided through UDF funds have financed 246 residential developments with a total of over 90,000 lots across North Texas and the Houston, Austin and San Antonio areas, according to the company’s most recent count. Some of the larger projects in North Texas include the 448-acre Valencia on the Lake master-planned community in Little Elm, the 300-acre Frisco Hills master-planned community, and Sendera and the Villages of Woodland Springs in north Fort Worth.
But federal prosecutors say Greenlaw and his colleagues have broken some laws along the way, charges the executives deny.
A 10-count indictment made public Oct. 15 claims that from 2011 through 2015, Greenlaw, UDF partnership president and committee member Benjamin Lee Wissink, UDF chief financial officer Cara Delin Obert and UDF director of asset management Jeffrey Brandon Jester “did knowingly execute and attempt to execute a scheme to defraud the investing public and shareholders” through “materially false and fraudulent pretenses.”
The executives conspired to illegally commingle investment dollars in three of its different funds to deceive banks and investors, prosecutors in the Northern District of Texas allege.
The UDF executives, who have pleaded not guilty, say the charges are without merit.
Greenlaw, his UDF colleagues and lawyers for the indicted UDF officials say the government prosecutors either don’t understand or are misrepresenting the residential development process and the promises the firm allegedly made to investors. They don’t know the business and don’t “get” — or don’t care — how long it takes to develop multi-phase master-planned residential communities, and how financing for those communities is structured, according to UDF’s executives and their legal counsel.
Paul Pelletier, the main lawyer representing Greenlaw, further claims that the government investigation and eventual indictments sprung from what he calls an illegal “short and distort” campaign to discredit UDF by hedge fund manager Kyle Bass, chief investment officer of Dallas-based Hayman Capital Management LP.
Bass in 2015 began shorting the stock of a fund operated by UDF, accused UDF of operating like a “Ponzi scheme,” and pushed its findings on regulators, pressuring them to act, according to Pelletier, who is no stranger to white-collar enforcement, having spent nearly three decades with the Department of Justice before entering private practice.
“Bass purposefully sought to enlist the government’s assistance so that he could profit from harming UDF’s investors and illegally acquire UDF’s assets,” Pelletier wrote in an emailed response to questions from the Dallas Business Journal. “When the truth is told in court, everyone will know that the government, rather than prosecute the bank robber, wrongly chose to prosecute the bank.”
Tiffany Eggers, the assistant U.S. attorney leading the prosecution team in the upcoming UDF trial, spent 13 years prosecuting fraud and money laundering cases in Florida before she was hired in 2018 to lead criminal prosecutions in the Northern District of Texas. The Department of Justice last year named Eggers the Northern District prosecutor of the year. She played a leading role in the recent public corruption prosecution of Dallas developer Ruel Hamilton, who was convicted of conspiracy and bribery and sentenced to eight years in prison.
Presiding over the proceedings is U.S. District Judge Reed O’Connor, who is perhaps best known as the judge who deemed the Affordable Care Act unconstitutional after a Texas-led coalition of 20 states sued in 2018 to kill it. That ruling was later reversed by the U.S. Supreme Court.
In addition to ruling against Obamacare, O’Connor, a George W. Bush appointee, threw out a federal voting rights lawsuit against the city of Farmers Branch and in another case declared portions of the Indian Child Welfare Act unconstitutional because it supported racial preferences.
‘Take the place of the banks’
UDF was founded in 2003 to give investors ways to diversify their portfolios by putting money into private and publicly traded funds that channel capital to the financing of land acquisition and development of single-family home communities, Greenlaw said in a mid-December interview in his office.In addition to funding residential developers, who install infrastructure and carve out finished lots for housing communities, UDF’s strategy evolved to include the financing of private homebuilders who construct the homes on those lots, Greenlaw said.
“Our business model is to affiliate with seasoned and accomplished developers and homebuilders and provide them with their financing solutions,” he said.
“The publicly traded homebuilders don’t need homebuilding money. They’ve got Wall Street,” Greenlaw added. “The privates have the regional banks. But when the financial crisis hit, the privates lost a lot of access to capital. So UDF is a good financing solution for the regional homebuilders. We are a source of capital for them to build their houses.” UDF identified the housing bubble before the collapse of the financial markets in 2008, and the firm’s leaders saw an opportunity on the other side of the meltdown, Greenlaw said. He and other company executives foresaw the bust by analyzing U.S. Securities and Exchange Commission filings of publicly traded homebuilders DR Horton, Pulte, Lennar and Centex by region and took note of “significantly high” profit margins for the builders — especially in Arizona, California, Florida and Nevada, the CEO said.
The takeaway, he said, was to shun those four states and focus instead on Texas, where the economic fallout was less severe.
“I called them the not-so-fantastic four, and that’s the epicenter of your housing bubble,” Greenlaw said. “We avoided going into those marketplaces. We knew that there was going to be no [Resolution Trust Corporation] solution when subprime blew up and the global financial crisis hit. So there was going to be a tremendous opportunity, and the opportunity was going to be to take the place of the banks.”
After stringing together three successful funds, in late 2009, the REIT went to market with a fund, UDF IV, to raise $500 million, Greenlaw said. The fund’s aim was to finance the development of housing communities and provide loans for private homebuilders to use to buy residential lots and construct houses in what UDF termed the “Texaplex” — the triangular region anchored by Dallas-Fort Worth, Houston, Austin and San Antonio, the CEO said.
UDF continues to focus on the Lone Star State, where demand fundamentals are robust, he said.
“It’s the strongest homebuilding market in the country,” Greenlaw said. “We’re creating jobs. People are moving into Texas. Consumer confidence is high. People are getting married and they’re forming households.”
On the supply side, coming out of the financial meltdown, Texas’ housing stock wasn’t overbuilt like it was in other markets, and banks had dramatically curbed lending on real estate projects, Greenlaw said. UDF deployed the capital for its fourth fund as the national housing market began a slow recovery. “We were absolutely right on the housing market,” Greenlaw said. “It’s not a V-shaped recovery. It’s not a U-shaped recovery. It’s a slightly sloping L. And the banks were still on the sidelines.”
In addition, the Federal Reserve’s policy of quantitative easing helped keep interest rates low, spurring housing demand not just in Texas but in certain other states, Greenlaw said.
“Now the recovery is going to move beyond Texas, to Florida and the Carolinas,” he said. “So now what do I do? I need a bigger boat. So I came out with UDF V.”
In simple terms, the UDF business model works like this: A UDF fund raises capital from investors and low-interest bank loans and then lends that capital to land developers and homebuilders at interest rates that exceed the UDF funds’ cost of capital. As long as the developers and homebuilders pay back their loans on time, the model works.Federal prosecutors allege in the indictment, however, that delayed payments by developers put the UDF model at risk and that Greenlaw, Wissink, Obert, Jester and others engaged in a scheme to defraud investors, using UDF funds III, IV and V.
Investors were led to believe that the developers who obtained loans from the funds would be required to pay back the loans with interest, and that interest income would then be used to pay distributions to investors, according to the indictment.
However, developers were not repaying loans obtained from UDF III quickly enough, leaving the fund short of cash to pay distributions to investors from its own revenues, the indictment says.
To cover the shortfall, Greenlaw and the other indicted UDF executives created a subsequent entity, UDF IV, and pitched it to investors as an investment vehicle to provide loans to developers, federal prosecutors say. Instead, the cash raised from UDF IV investors was used to repay loans previously issued to developers by UDF III as well as to pay distributions to fund III’s investors and meet other UDF III financial obligations, the indictment states.
Then in 2014, Greenlaw and another UDF employee began forming a fifth fund and led third-party firms and investors to believe that UDF V wouldn’t engage in transactions with the firm’s other funds, prosecutors say.
It was the same song, second verse, prosecutors allege in the indictment.
“Beginning in or around December 2014, because developers were not repaying Fund III and Fund IV loans quickly enough to meet the obligations of Fund III and Fund IV, Fund V began issuing loans to developers for developments that previously had loans with Fund III and Fund IV,” the indictment says.
In addition, UDF V’s investors’ money was used to pay distributions to UDF III and UDF IV’s investors and to pay other Fund III obligations, contrary to representations made to Fund V’s investors, according to the indictment.
UDF III, created to originate, acquire and manage a portfolio of mortgage loans or equity interests in various real estate investments, attracted $350 million in investments and had originated loans of $636.9 million, according to court documents. UDF IV was purportedly created as a loan facility for developers of single-family homes and mixed-use community developments. The fourth fund traded on the Nasdaq Global Select Market and raised $651 million from investors.
Between January 2011 and November 2015, more than $65 million raised by UDF IV was used to pay investors in UDF III a return on their money, as well as other corporate expenses, according to the indictment.
UDF V was created in early 2015 with a maximum offering of $1 billion. By September 2015, Fund V had attracted only $42.9 million for its investor shares, court documents state. Through December 2015, about $4.5 million had been used to pay off UDF III investors, according to the indictment.
During the same period, the UDF entities were also borrowing from various banks to provide enhanced credit for various real estate deals, the indictment says. Proceeds of those loans were also used to pay off investors instead of for real estate lending, according to the charges against the four executives.
Furthermore, investor money from one fund was used to pay off a term loan secured by UDF that required $1.25 million in quarterly payments, the indictment says.
The trial comes almost six years after the FBI raided the offices of UDF on Feb. 18, 2016. Agents stormed the office at 1301 Municipal Way in Grapevine, seizing boxes of documents and computer files destined to be used as evidence in the upcoming trial and loaded them into large trucks.UDF had previously acknowledged the company was under investigation by the SEC and said it was cooperating. But the raid was the most visible indication that a criminal probe into the company was underway, and the images of FBI agents at the company’s headquarters sent publicly traded shares of UDF down 55% immediately after the raid and trading was halted.
Pelletier said he relishes the opportunity to set the record straight for what UDF sees as an unfair “attack” by Bass and the government, which the lawyer accuses of buying Bass’s allegations “hook, line and sinker.”
“We look forward to trial where, finally, on a level playing field with a highly respected judge, we can alert the public to the truth about the government’s accusations,” Pelletier said. “For the past 18 years, UDF has operated a successful Texas-based residential real estate finance company that supported the building of hundreds of real communities to house tens of thousands of Texans and create thousands of real jobs.”
In addition to the criminal trial, UDF and its leadership are enmeshed in a maze of civil litigation.
The SEC sued UDF over similar allegations to those in the indictments in July 2018. UDF agreed to pay roughly $8.2 million to resolve those claims without admitting or denying wrongdoing.
In a more recent development, a U.S. District judge on Dec. 27 dismissed a civil lawsuit filed by UDF, Greenlaw and other UDF executives against federal officials.
In that civil case, UDF, Greenlaw and other company management attempted to hold two FBI special agents and a now-former U.S. attorney monetarily responsible for allegedly “spreading lies, falsifying evidence, and unlawfully searching their headquarters to aid a notorious short seller’s fraudulent scheme,” according to an order by U.S. District Judge Sean Jordan.
Jordan dismissed the case with prejudice, meaning UDF cannot refile the same claim in that court. The judge, however, did not rule on whether the UDF officials’ constitutional rights — including their Fourth Amendment right to be free from unreasonable searches and seizures — were violated, as claimed by the executives in the lawsuit.
“The question is not whether such conduct violates the Constitution,” Jordan’s order states. “The question here is whether, assuming the alleged constitutional violations exist, an implied cause of action for money damages is available to remedy such violations under the Constitution itself. … The answer is no.”
Greenlaw and UDF have also sued Bass and Hayman Capital, accusing the hedge fund manager of torpedoing UDF’s business operations and causing its stock to plummet by claiming the lender was operating a billion-dollar Ponzi-like scheme and distorting the company’s record.
In that lawsuit, UDF alleges Hayman and Bass mounted an illegal campaign to spread false information about UDF and its affiliates to reap massive financial gains. Bass and Hayman deny the claim and countered in court documents that his firm’s commentary about UDF is protected by the First Amendment and was designed to caution potential investors against sinking money into a disreputable company.
The Ponzi allegation
To win convictions, a key element prosecutors will need to prove is that UDF misrepresented to investors how money in its funds would be used, said Stephanie Luce Ola, a Dallas-based defense attorney who has successfully represented individuals and companies in securities fraud, bank fraud and other white-collar investigations and prosecutions in federal court.
Prosecutors don’t have to prove that UDF was operating a Ponzi scheme to prove securities fraud occurred, but the government has an incentive to present the facts in a way that indicate that such a scheme occurred because sentencing guidelines allow for tougher penalties in cases involving Ponzi schemes, Ola said.
“If you want to speak colloquially about a Ponzi scheme, you could say ‘robbing Peter to pay Paul,’” Ola said.
“When funds are created and representations are made that the funds are going to be used in a certain way, and then, in fact, one fund starts paying a previous fund that is not performing as well as it should, those allegations are about as classic a representation of a Ponzi scheme as a first-year law student could come up with.”
The testimony of investors in UDF funds will play an important role in the trial, Ola said.
“The prosecution is going to be looking for investors who can take the stand and say, ‘This is what I was told. I believed it was true. If I had known it was a different way, or if I thought that wasn’t true, then I wouldn’t have put my money into this fund.'”
Prosecutors will also need to prove that misrepresentations made to investors by UDF were made with criminal intent, Ola added.
Click here for the Government’s Witness List; Click here for the Defendants’ Joint Witness List
Mixed track record for prosecutors
Federal prosecutors in the 100-county Northern District of Texas have a mixed record with relatively recent high-profile fraud cases.
The office won convictions against physicians and business partners charged with receiving millions of dollars in bribes and kickbacks from now-defunct Forest Park Medical Center.
Seven defendants in the case were convicted in an April 2019 trial and sentenced in March 2021 by U.S. District Judge Zack Zouhary. Ten other defendants pleaded guilty prior to trial, and one, who was granted a mistrial, pleaded guilty after trial. The $200 million scheme was designed to induce doctors to steer patients with high-reimbursing, out-of-network private insurance to Forest Park.
A total of 14 of the defendants convicted in the bribery scam were sentenced to a combined 74-plus years in federal prison and ordered to pay a total of $82.9 million in restitution, according to a statement from the Northern District.
In June, a federal jury convicted Dallas real estate developer Ruel Hamilton, the president of AmeriSouth Realty Group, of one count of conspiracy and two counts of bribery of an agent of a local government receiving federal funds. Hamilton was sentenced by Chief U.S. District Judge Barbara Lynn in November to eight years in federal prison for bribing two former Dallas City Council members. Eggers played a lead role in the prosecution of Hamilton.
In the loss column, the Northern District’s prosecutors were unsuccessful in the trial of longtime Dallas County Commissioner John Wiley Price on charges of conspiracy to commit bribery, mail fraud and tax evasion. Prosecutors in that case alleged that Price conspired over a decade to trade votes for bribes worth nearly $1 million in cash. He was accused of receiving roughly $950,000 in the form of money, cars and land.Jurors in the April 2017 trial, however, found Price not guilty of bribery and other charges and deadlocked on accusations that he defrauded the IRS. After the verdict, Lynn declared a mistrial on the tax charges, then threw out the mail fraud charges against Price, ruling that the government hadn’t proved its case. Prosecutors announced a month later that Price would not be retried on any charges because to do so would “not serve the interests of justice.”
In the last 15 years or so, a significant number of high-stakes, complex white-collar cases such as this UDF trial have been reversed at the Court of Appeals and Supreme Court level, Ola said, potentially putting more pressure on prosecutors.
“One thing that’s always — now, especially — in the back of the mind of prosecutors who are trying these cases is really trying to keep the potentially appealable issues to a minimum,” she said. “The last thing they want to do is obtain a conviction and then either have the case reversed so that a judgment in favor of the defendant is rendered at the appellate level or to have to retry it.”
The seriousness of a fraud case is in large part determined by the monetary amount involved, and in this case, the dollar figure is high, Ola said.
For example, federal sentencing guidelines call for six years for securities fraud and additional time tacked on based on the dollar loss involved, the defendant’s role and level of involvement in the crimes of which they are convicted, and other factors. The loss amount is determined at the sentencing phase, but the evidence that comes out in the trial is important in determining the final loss amount, Ola said.
The federal sentencing table could put Greenlaw or other executives who might be found highly involved in the upper ranges, which could tack upwards of 11 to 14 years to the six-year base when certain punishment enhancers are factored in.
“(The sentencing guidelines) give you a sense of the scope of what the critical, mastermind, inner-circle people are looking at,” Ola said.
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