Update: United Development Funding IV to Settle Shareholder Lawsuit
January 31, 2018 | James Sprow | Blue Vault
In an article posted on Blue Vault’s website in December, 2017, entitled “How An Attack on a Nontraded REIT Sponsor Made a Hedge Fund Manager $60 Million,” we referred readers to a lawsuit filed by United Development Funding LP and its related companies accusing hedge fund manager J. Kyle Bass and his closely held company Hayman Capital Management, L.P., of perpetrating a “short-and-distort” scheme by spreading false and damaging information about UDF in order to drive down the company’s stock price and profit by covering their short positions by buying shorted shares at much lower prices.
In February, 2016, a shareholder named Richard Evans filed a complaint demanding that the sponsored nontraded REIT program UDF IV’s board “authorize and empower an independent committee of investigators to assess the truth of the recent allegations asserted by Hayman for the purpose of making any and all findings of fact and determinations regarding responsibility”; “take corrective actions against the individuals responsible, including but not limited to legal action and corporate governance measures”; and “[a]dopt and implement adequate internal controls and systems at [UDF IV] designed to prohibit and prevent a recurrence” of the alleged wrongdoing.”
On December 21, 2017, a Stipulation of Settlement was filed among the Plaintiff (Richard Evans) and the defendants (which included Hollis Greenlaw, Chairman of the Board and CEO of UDF IV and five other executives). In the settlement the Plaintiff maintained that his claims had merit while the defendants stated that the Plaintiff’s claims were without merit and denied any liability in connection with the action and stated that Hayman’s allegations were false, and that UDF had never operated as a Ponzi scheme or perpetrated a fraud, and had always operated in accordance with strong corporate governance and oversight standards.
The proposed settlement is currently scheduled to be approved on April 16, 2018, in the U.S. District Court for the Northern District of Texas.
Both the Plaintiff and the Defendants stated that the settlement was in the best interest of UDF IV and its shareholders, with the Defendants stating that they “recognize that the time and expense of continued proceedings, and the distraction of UDF IV’s Board and management from the Trust’s business, is detrimental both to UDF IV and its shareholders.”
Bottom line, the settlement requires UDF IV to set aside $1.5 million in an escrow account. The funds will be used as follows: An amount not to exceed $650,000 for Plaintiff’s attorneys’ fees and expenses. Also, based on the results of the action, Plaintiff’s counsel reserves the right to request Court approval for a limited incentive award for Plaintiff, in an amount not to exceed $2,500 in total, which, subject to Court approval, shall be paid out of the Fee and Expense Award. The balance of the $1.5 million will be used to implement a number of corporate governance measures.
UDF IV will add one additional independent trustee to its Board who will qualify as an “audit committee financial expert” as defined by the SEC and will serve as Chairman of the Audit Committee. UDF IV will also appoint a qualified person to serve as Chief Compliance Officer to develop a comprehensive legal compliance and ethics program and make quarterly reports to the Audit Committee regarding the Compliance Program. Other governance actions include revisions to the REIT’s related party transactions policy, rules pertaining to borrowers with borrowings in excess of 15% of UDF IV’s loan portfolio, and other provisions regarding director training, whistleblower policy and a minimum duration for the improvements of three years following the settlement.
At least in this case it appears to Blue Vault that the Plaintiff’s attorneys settled for no more than $650,000 in fees and expenses, the Plaintiff receives no more than $2,500, and the executives at United Development Funding and UDF IV will make some useful changes to their Board of Directors and their procedures to improve their governance. The cost to those UDF executives and to the UDF IV shareholders must be substantial, but all of the attorneys involved as well as J. Kyle Bass may walk away with millions. It remains to be seen whether UDF’s lawsuit against J. Kyle Bass and Hayman Capital Management will succeed and compensate UDF and UDF IV for any of the losses they have suffered.