Texas REIT sues hedge fund boss Kyle Bass
United Development Funding alleges Mr. Bass made false claims that damaged its business
A troubled real estate development company in Texas, United Development Funding, on Tuesday filed a lawsuit against hedge fund boss Kyle Bass for making allegedly “false and disparaging statements” in 2015 conveying that various UDF real estate investment trusts were working as a Ponzi scheme.
UDF filed the court complaint in Dallas County, Texas. It alleges that Mr. Bass and his hedge fund, Hayman Capital Management, made the false statements first anonymously on a website and then later in the company’s name on a proprietary website “in order to destroy the UDF Funds’ business,” according to a filing with the Securities and Exchange Commission.
Mr. Bass is a well-known short seller. He and his hedge fund “profited from the resulting damage to the business of the UDF Funds because the Bass entities had, prior to the publication of the false statements, established a large short position in the UDF Funds,” according to the SEC filing.
PONZI ALLEGATION
In December 2015, an investor website published a report that one of the UDF companies, UDF IV, operated like a Ponzi scheme. It was later revealed that Mr. Bass had a short position in the company.
The alleged false assertions made by Mr. Bass against UDF included: the UDF Funds had no ability to carry on their business; the shares were basically worthless; real estate developments were not genuine; investor money was misappropriated; and the funds’ largest borrower was not independent or operating at “arm’s length” from UDF.
“In truth, the UDF Funds were a family of successful real estate investment funds engaged in genuine real estate development with arm’s length borrowers with a long track record of real estate development,” according to the SEC filing.
Hayman’s general counsel, Blake Jones, countered that stance. “It is our strong belief that this lawsuit is without merit, and is intended to distract and deflect from UDF’s other problems, including significant investor litigation and law enforcement issues,” Mr. Jones wrote in an email. “We look forward to addressing these allegations in open court and firmly believe that we will prevail on all these claims.”
TROUBLED HISTORY
UDF IV raised money from investors as a nontraded REIT from 2009 to 2013 for $20 per share before listing on the Nasdaq in 2014. UDF IV reported $684 million in assets in 2015.
UDF, which has been sued by investors in class action claims, and its related companies have problems. Broker-dealers that sold UDF REITs are also being sued by investors through securities industry arbitration.
In February 2016 the FBI raided the suburban Dallas offices of UDF IV and management of the company was subpoenaed to hand over company documents to a grand jury. The share price of UDF IV collapsed after the news of the FBI raid came to light.
Then, in October 2016, the SEC issued a Wells notice against the firm, an indication that SEC staff has made a preliminary determination to potentially recommend an enforcement action against the firm. And the Nasdaq delisted UDF IV shares.
UDF manages a series of REITs and funds with a total of $1.3 billion in assets, according to filings with the SEC. None of the REITs have issued financial statements in the past two years.
“The fund and its auditors continue to work on the fund’s financial reporting for multiple years and quarters beginning December 31, 2015 through 2017,” according to a Nov. 3 statement on UDF’s website addressed to investors in UDF III, which reported $391.5 million in assets two years ago. “The process is ongoing, however prolonged.”
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