Executives of United Development Funding Convicted of Fraud
February 16, 2022 | James Sprow | Blue Vault
Roughly 30,000 victims nationwide lost money or were misled by North Texas-based United Development Funding and the firm’s executives, who were convicted last month of misusing proceeds from investors and financial institutions in a Ponzi-like scheme involving loans to residential housing developers across Texas.
Four top executives of Grapevine-based UDF, including CEO Hollis Greenlaw, were found guilty on Jan. 21 of 10 counts apiece, including securities fraud, wire fraud affecting a financial institution and conspiracy to commit securities fraud.
The four UDF executives were convicted of defrauding the investing public, shareholders and banks using funds that provided more than $1 billion in loans to developers of residential housing communities and, to a lesser extent, homebuilders.
Prosecutors in the Northern District of Texas charged the UDF executives with conspiring to illegally shift investment dollars in three of the firm’s different funds to deceive banks and investors and enrich themselves.
In a nutshell, United Development offered a fund called UDF III, presenting it to investors as a company that would provide loans to residential housing developers who needed funds to build large communities, mostly in the Dallas-Fort Worth area. Investors in the fund were led to believe that the developers would be required to pay back the loans with interest, which would then be used to pay distributions to the investors.
However, developers were not repaying loans obtained by UDF III quickly enough, leaving the fund without sufficient cash to pay distributions to investors from its own revenues.
At the direction of the UDF executives, UDF began raising money through a fund called UDF IV, saying it, too, would be used to provide loans to developers. Instead, the cash raised from UDF IV investors was used to repay loans previously issued to developers in UDF III, and to pay distributions to UDF III investors.
Afterward, UDF V was created in a similar manner and loans issued by it were used to repay loans previously issued to developers by UDF III and IV and pay distributions to UDF III and IV’s investors, as well as other UDF III financial obligations.
In a court filing Wednesday, federal prosecutors said for the first time that there are approximately 30,000 investors who are victims of the UDF executives under the Crime Victims Rights Act. The act provides certain rights to victims in federal criminal proceedings including the right to “reasonable, accurate and timely notice” of public court proceedings.
Sentencing for the UDF executives is set for May 20 before U.S. District Judge Reed O’Connor.
The CVRA requires the U.S. Department of Justice and other federal departments and agencies involved in investigating or prosecuting crimes to “make their best efforts” to see that crime victims know of and can exercise their rights.
Because of the volume of victims, the DOJ is seeking the permission of O’Connor, who presided over the trial, to use the Justice Department’s website to direct victims to a case-specific website where all required notices would be posted.
In addition, the government will notify broker-dealers and financial advisors who offered UDF III, IV and V to their clients, so that the broker-dealers and financial advisors can provide the information to their clients who invested in the fund, the prosecutors’ motion says.
In pretrial filings, lawyers for the UDF executives argued that investors in UDF III, IV and V are not victims under the CVRA.
In the prosecutors’ motion filed Wednesday, the government argues the investors are victims because they were “directly and proximately harmed as a result of the commission of a federal offense for which the defendants have now been convicted.”
Greenlaw, co-founder, CEO and chairman of UDF’s board of trustees, was convicted along with Cara Delin Obert, UDF chief financial officer; Jeffrey Brandon Jester, UDF director of asset management; and Benjamin Lee Wissink, UDF partnership president and committee member.
All four executives were convicted on all 10 counts they faced. Lawyers for the defendants said they plan to appeal the jury’s decision.
The names of more than a dozen banks that lent to UDF surfaced in the trial and in court documents.
They include Dallas-based Texas Capital Bank, Plano-based LegacyTexas Bank, Dallas-based Veritex Bank, Arlington-based Affiliated Bank (bought in 2018 by Susser Banc Holdings Corp. and renamed Susser Bank), and Dallas-based United Texas Bank. Others include Houston-based Prosperity Bank, Independent Bank of Dallas, Ruston, La.-based Origin Bank, Capital Bank of El Paso, UMB Bank, Bank of America, BB&T (formerly based in Winston-Salem, N.C., and now merged with SunTrust to form Charlotte-based Truist), and City National Bank.
More than $1 billion in loans provided through UDF funds have financed over 200 residential developments with a total of more than 90,000 lots across North Texas and the Houston, Austin and San Antonio areas.
Some of the communities UDF loaned money on include the 448-acre Valencia on the Lake master-planned community in Little Elm, the 300-acre Frisco Hills master-planned community, and Sendera and the Villages of Woodland Springs in north Fort Worth.
Others include Frisco Ranch, Shahan Prairie in Oak Point, Elizabeth Creek in north Fort Worth, Shale Creek and Alpha Ranch north of Fort Worth, and Sunset Hills and Carmel Creek near Austin.
By far the most active developer that’s borrowed from UDF is Farmers Branch-based Centurion American Development Group. Others who have borrowed from or partnered with UDF include Buffington Land Group of Austin, Addison-based Scarborough Lane Development Co., Colglazier Properties of San Antonio, Trio Residential Developers of Austin, REOC San Antonio, Austin-based Scott Felder Homes, Katy-based MAK Development Group, and Columbus, Ohio-based M/I Homes.
Source: www.bizjournals.com/dallas/news/2022/02/10/victims-united-development-funding.html
