After a five-day trial, four executive at United Development Funding, a real estate investment trust manager, were found guilty of fraud Friday, according to the U.S. Attorney for the Northern District of Texas.
They are: UDF CEO Hollis Greenlaw, UDF partnership president Benjamin Wissink, UDF CFO Cara Obert and UDF asset management director Jeffrey Brandon Jester. After 12 hours of deliberation, a jury found the REIT executives guilty of 10 counts, including conspiracy to commit wire fraud affecting a financial institution, conspiracy to commit securities fraud and securities fraud.
The UDF executives now face up to 25 years each in federal prison, according to a statement by the Department of Justice.
They were charged by the feds in October. UDF was one of a long list of managers of nontraded REITs, which have been sold by independent broker-dealers and in the past typically paid high commissions of 7% to the broker.
"These executives conspired to commit multiple fraud schemes in order to mislead investors and the [Securities and Exchange Commission], with multi-million dollar losses," Matthew DeSarno, special agent in charge of the FBI's Dallas division, said in the statement.
A company spokesperson was not available Monday afternoon to comment. But on Monday morning, UDF said it was making changes at two of the REITs, UDF IV and UDF V, pending an appeal of last week's conviction. Those changes include Greenlaw resigning as a trustee of both REITs and Jim Kenney taking over as CEO for both REITs and as managing trustee for UDF IV.
The UDF real estate dilemma has been unwinding for years. In February 2016, the FBI raided the suburban Dallas offices of UDF IV. Around the same time, hedge fund manager Kyle Bass revealed that he was shorting shares of one of the listed UDF REITs, UDF IV.
And in 2018, the Securities and Exchange Commission reached an agreement with two UDF REITs to pay $8.2 million in fines and payments to investors for failing to disclose that it could not meet its distribution payments.
According to the statement by the Department of Justice, the UDF defendants orchestrated a scheme to mislead investors and the SEC about their funds’ performance.
Founded in 2003 and headquartered in Grapevine, Texas, UDF utilized a family of five funds — UDF I, II, III, IV and V — to invest in various residential real estate developers and private homebuilders.
When developers failed to repay money they borrowed from one fund, triggering multimillion-dollar shortfalls, the UDF executives transferred money out of another fund in order to pay distributions to the original fund’s investors, all without disclosing the transfers to the SEC and the investing public, according to the Department of Justice.
Rajesh Markan earlier this year pleaded guilty to one count of criminal fraud related to his sale of fake investments to 10 clients totaling $2.9 million.
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