Shares of United Development Funding IV have plummeted after an investor website published a report that alleged the real estate investment trust has operated for years like a Ponzi scheme.
On Thursday, Harvest Exchange, an online professional network for investors, published
an anonymous post about UDF titled: “A Texas-Sized Scheme: Exposing the Darkest Corner of the REIT Business, United Development Funding,” which has $1.3 billion of assets on the books of various REITs, including UDF IV.
After the post was published, the REIT's share price dropped to $10.10 from $17.53, a decrease of 42.4%. Shares fell further on Friday, closing at $8.55, down 51% for the week.
Based in the Dallas area, UDF IV was a nontraded REIT that listed on the Nasdaq in June 2014. It was sold to investors from 2009 to 2013 at $20 per share.
Realty Capital Securities, a wholesaling brokerage started by Nicholas Schorsch as part of RCS Capital Corp., or RCAP, was the marketing and wholesaling broker-dealer for UDF IV. That firm
is closing down after it agreed to pay a $3 million fine to the Massachusetts securities division to settle charges it fabricated shareholder proxy votes.
“The UDF umbrella exhibits characteristics emblematic of a Ponzi scheme,” according to the Harvest posting. Those characteristics include new capital used to fund distributions to existing investors and subsequent UDF companies providing significant liquidity to earlier vintage UDF companies, allowing them to pay earlier investors. Once the funding of retail capital to the latest UDF fund is halted, the “earlier UDF companies do not appear capable of standing alone and the entire structure will likely unravel, with investors left holding the bag,” according to the Harvest post.
UDF fired back, putting the blame for the post on
a hedge fund looking to profit by taking a short position in the company. The UDF companies “are aware that a hedge fund has created a significant short position in” UDF IV shares, according to a company statement from Thursday night. “We believe that this hedge fund is trying to unlawfully profit by manipulating and depressing the price of” UDF IV shares, according to the company's statement.
In the same release, UDF IV said it was cooperating in a Securities and Exchange Commission “fact-finding investigation” since April 2014, or two months before it became a listed company. “The SEC has informed the companies that this investigation is not an indication that any violations of law have occurred or that the SEC has any negative opinion of any person, entity or security,” according to UDF IV's statement.
(Related: SEC warns brokerages: Monitor risky products better)
UDF spokeswoman Stacey Dwyer on Friday did not return a call to comment. William Kahane, who along with Nicholas Schorsch was a co-founder of AR Capital, resigned from the board of another UDF REIT, UDF V, last month. At the same time, the REIT's accounting firm, Whitley Penn, said it declined to stand for reappointment as the auditor for each of the various UDF companies.
