The Securities and Exchange Commission has reached an agreement with two real estate investment trusts to pay $8.2 million in fines and payments to investors for failing to disclose that it could not meet its distribution payments.
The two REITs are among those in the Texas-based United Development Funding brand of REITs. UDF is a group of nontraded and publicly-traded investment funds that deploys investor capital as loans to homebuilders and land developers.
The SEC had been investigating UDF since 2014 and issued a Wells notice against one REIT, UDF IV,
in 2016.
"UDF allegedly solicited investors by advertising annualized returns of up to 9.75% as well as regular distributions,"
according to the SEC, which filed its complaint and settlement in the matter on Tuesday.
From January 2011 to December 2015, or almost five years, "UDF did not tell investors that it lacked the monthly cash flow at times to cover investor distributions in one of its older funds, UDF III," according to the SEC's complaint. "Instead, to pay these distributions, the newer UDF IV fund loaned money to developers who had also borrowed money from UDF III."
"Rather than using those funds for development projects that were underwritten by UDF IV, UDF directed the developers to use the loaned money to pay down their older loans from UDF III," according to the SEC. "In most of these cases, the developer never received the borrowed funds at all, and UDF simply transferred the money between funds so that UDF III could make the distributions to its investors."
In February 2016, the FBI
raided the suburban Dallas offices of UDF IV.
A
statement from UDF makes no mention of the status of the FBI investigation.
"We believe that it was time to put this matter behind us and that this settlement is in the best interests of UDF and its investors," said Hollis Greenlaw, CEO of UDF IV.
The company and its executives neither admitted to nor denied the SEC's allegations.
Mr. Greenlaw, along with UDF executives, Benjamin Wissink, Theodore Etter and Cara Obert were also named in the SEC's complaint. David Hanson, the chief accounting officer at UDF IV, agreed to pay a fine of $75,000.
The executives "knew or should have known that they had misled investors about the use of funds and the nature and status of loans made to developers," according to the SEC.
