Texas REIT subpoenaed after FBI raid

Management of distressed real estate investment trust United Development Funding IV — which a hedge fund claims is no more than a Ponzi scheme — has been subpoenaed to hand over company documents to a grand jury.

The FBI last Thursday raided the suburban Dallas offices of UDF IV, a REIT that listed on the Nasdaq in 2014 and had $684 million in total assets. At the same time as they executed their search, “law enforcement officers served executive officers of the trust and certain other employees of the trust’s advisor and its affiliates” with the subpoenas for company documents, according to a filing with the Securities and Exchange Commission from Monday morning.

The share price of UDF IV collapsed after the news of the FBI raid came to light. UDF shares fell almost 55% during trading on Thursday to $3.20 per share. On the same day, the Nasdaq told UDF it was halting trading in its shares.

A UDF spokeswoman, Stacey Dwyer, did not return a phone call on Monday morning to comment about the subpoenas.

In the SEC filing, the company said that it did not “believe that it, its officers or the employees of its advisor and its affiliates have violated any laws or regulations, and the trust intends to cooperate fully with the government’s investigation.”

UDF and affiliated companies, including a nontraded REIT UDF V, with $55.6 million in assets, have been closely watched since December. That’s when an investor website published a report that alleged that the REIT, which was a nontraded REIT and then listed in 2014, operated for years like a Ponzi scheme. The company’s management fired back, claiming in a filing with the Securities and Exchange Commission that the REIT was the victim of a type of securities trading scheme known as a “short and distort,” in which an investor builds up a significant short position in a stock “with the intention of unlawfully manipulating” its shares. UDF also disclosed in December that it had been the subject of a fact-finding investigation by the SEC since April 2014.
Earlier this month, hedge fund manager Kyle Bass revealed that he was shorting UDF. “UDF is using new investor money to pay existing investors,” he wrote. “UDF Management is misleading investors and is preying on ‘Mom and Pop’ retail investors.”