Hedge Fund Attacks Texas REIT as ‘Ponzi-Like Scheme’

Hedge fund manager Kyle Bass is shorting the United Development Funding IV REIT, which was sold by RCS Capital

As the Broncos and Panthers practiced and then battled it out at Super Bowl 50 over the past week, Texan hedge fund manager Kyle Bass was stepping up his conflict with United Development Funding IV (UDF), a public nontraded real estate investment trust also based in the Lone Star State.

Bass, who runs Hayman Capital, recently revealed that he is the anonymous short seller going after UDF. Also, he introduced a website (UDF Exposed) which claims the company operates a "Ponzi-like real estate scheme."

United Development worked with now-bankrupt RCS Capital (RCAP) to bring in investors for this REIT and paid RCAP commissions for sales of UDF IV. (RCAP is in the process of spinning off the Cetera Financial Group of independent broker-dealers as part of its bankruptcy proceedings.)

On Friday, United Development Funding IV fought back and said in a statement that Bass was making "multiple false and misleading statements about our company and management team."

According to CEO Hollis Greenlaw, its secured loans are “underwritten based on collateral value, and UDF IV has not had any realized losses in its portfolio.”

In addition, Greenlaw points out, Hayman Capital’s website says it “will profit if the stock price of UDF IV falls, and given this financial incentive we believe the hedge fund intends to continue disseminating misleading information.”

SEC Issues

According to Bass, United Development is using money raised for UDF IV to provide liquidity for UDF I and UDF III, while UDF V is supporting UDF IV’s funding.

But United Development insists it has been working “since April 2014 with a nonpublic fact-finding investigation being conducted by the SEC … [T]he SEC has not identified to us any specific issues that are the subject of its investigation [and] … has informed the companies that this investigation is not an indication that any violations of law have occurred …”

Bass has a reputation for making the right calls on the market. For instance, he bet against subprime mortgages before the housing crisis and shorted biotech stocks before they weakened last year.

In his letter to investors, the hedge-fund manager argues that the situation is rapidly deteriorating.

“After years of mismanagement, the UDF structure has begun to implode. Evidence of UDF's dire situation includes a series of defaults, bankruptcy petitions, lawsuits, key resignations — including that of UDF's audit firm, a key UDF director, and the CFO of UDF's largest borrower — followed by UDF's own overdue admission that it has been the subject of an SEC investigation since April 2014,” he explained.

UDF, he adds, “faces significant bankruptcy risk.”

--- Check out As Cetera Splits From RCAP, Will Its Advisors Split, Too? on ThinkAdvisor.

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