JWE Investigating Ponzi-Like Scheme Involving UDF IV REITs as SEC Issues Wells Notice

Attorney Advising Disclaimer

With the SEC's recent issuance of a Wells Notice against the troubled Texas real estate investment trust (REIT) known as United Development Funding IV, or UDF IV, combined with NASDAQ's decision to delist UDF IV shares from the market, The Law Offices of Jonathan W. Evans & Associates is investigating brokers and firms that have sold clients the troubled UDF IV product, as well as other items in the UDF family of REITs that similarly have drawn regulators' ire on several occasions since 2015.

According to InvestmentNews, the SEC's preliminary determination that it may recommend a civil enforcement action against UDF spurred the Wells Notice, which is just the latest in what has been a tumultuous year for United Development Funding, whose UDF IV REIT dropped in value drastically and led one analyst to surmise, "Total Ponzi Scheme, worth zero."

In February 2016, we listed several firms that have sold UDF REITs to investors, including Berthel Fisher & Co. Financial Services Inc., Centaurus Financial Inc., IMS Securities Inc., Realty Capital Securities (RCS Capital Corp), and VSR Financial Services Inc. (aka Cetera Financial Group). This list is not exhaustive and simply indicates those firms which sold a large dose of problematic UDF REITs to retirees and other customers for whom the product was not suitable, or who concentrated a significantly high portion of their net worth in UDF products.

Earlier in February, the FBI raided the United Development Funding offices in Texas, suggesting a potential criminal investigation into what KXAS-TV stated, according to some analysts, amounted to a Ponzi scheme with the Hayman Capital Management hedge fund.

In late 2015, UDF shares plunged dramatically after a short-seller accused the Texas REIT of operating in a fashion similar to that of a Ponzi scheme, finding that UDF and Hayman Capital Management may have overstated profits and failed to provide for loan losses "despite a material outstanding balance of past due loans."

The report also claimed that many different UDF REITs (I, II, III, IV, and V) made loans against properties previously financed by other (earlier) UDF entities, noting for instance that the "Shahan Prairie" development first drew financing from UDF I, before receiving additional financing from UDF III, after which UDF V issued an even larger loan to the same project and used the proceeds to repay UDF III, an earlier product.

In other words, the report states that, "a large portion of [UDF's] 2015 distributions to shareholders were funded with borrowed money," and that a photograph of the purported Shahan Prairie Estates project suggests "little to no development work" had been completed to date.

If a broker or financial adviser has sold or unsuitably recommended you purchase the problematic UDF IV REIT, or another troublesome product in the United Development Funding family, and the product's troubled history, questionable practices, and sudden price plummet has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.

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