Texas REIT sues hedge fund boss Kyle Bass

United Development Funding alleges Mr. Bass made false claims that damaged its business

Nov 30, 2017 @ 12:56 pm

By Bruce Kelly

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.


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."


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."


What do you think?

View comments

Recommended for you

Upcoming Event

Mar 14



InvestmentNews is honoring female financial advisers and industry executives who are distinguished leaders at their firms. These women have advanced the business of providing advice through their passion, creativity, inclusive approach and... Learn more

Featured video


Where in the U.S. are RIAs growing the fastest?

InvestmentNews' deputy editor Robert Hordt talks to senior columnist Jeff Benjamin about his report on how registered investment advisers are faring in different regions of the country.

Latest news & opinion

Top 10 RIAs in the South

These are the largest registered investment advisory firms in the Southern U.S., based on AUM.

Top 10 RIAs in the Midwest

These are the largest registered investment advisers in terms of AUM in the Midwestern U.S.

Top 10 RIAs in the Northeast

These are the largest registered investment advice firms in the Northeastern U.S., in terms of assets under management.

10 predictions for financial advice in 2019

Deloitte expects these 10 changes will hit the financial advice business in 2019.

Midwestern magic? RIA assets soared nearly 30% there last year

Theories for what's driving the growth spurt abound, but it surpassed all other regions of the country.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print