$8.2M distribution approved in United Development Funding civil case as criminal trial filings mount – Dallas Business Journal – Dallas Business Journal

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A court-appointed agent tasked with distributing an $8.2 million civil settlement involving Dallas-Fort Worth-area residential real estate investment trust United Development Funding has approved a plan for paying certain investors in the REIT’s securities.
Strategic Claims Services, the court-appointed distribution agent in a civil action brought by the Securities and Exchange Commission against United Development Funding III LP and related entities, on Thursday alerted investors who held an interest in UDF IV securities between 2011 and 2015 that they may be eligible for compensation from a fund established in that action. 
Meanwhile, pre-trial filings continue to flow in for a criminal case against UDF CEO Hollis Greenlaw and three of his colleagues at the Grapevine-based REIT. They are charged with conspiring to illegally commingle investment dollars in three of its different funds to deceive banks and investors.
The defendants pleaded not guilty at their initial appearance in federal court in Fort Worth in October.
A trial on the criminal charges is set to start on Jan. 3 in Fort Worth before U.S. District Judge Reed O’Connor. That trial will involve real estate investment funds that raised billions of dollars to finance “hundreds” of residential developments across North Texas and the Austin area, according to court filings. 
In that case, federal prosecutors in the Northern District of Texas claim in an indictment made public last month that Greenlaw and three other UDF executives conspired to improperly use investor money, defraud banks and hide the true financial condition and performance of UDF funds from shareholders, the investing public, external auditors and the SEC.
In the civil case, UDF executives agreed to pay $8.2 million in penalties after being accused in a 22-count complaint of misleading investors about the use of revenues in two of UDF’s key funds. Specifically, lawyers for the SEC accused UDF, which manages a series of privately held and publicly-traded REIT funds, of failing to disclose that it was using investment money from one of its newer funds to pay distributions of older trusts.
In 2018, UDF and the SEC negotiated a settlement of the charges in which UDF officials agreed to pay federal regulators a combined $8.275 million in civil penalties, disgorgement of profits and prejudgment interest. Neither UDF as a company nor the executives admitted or denied the SEC’s allegations as part of the settlement.
The settlement officially ended the SEC’s multi-year investigation into the UDF III fund, but it did not affect an FBI probe of the company.
In the civil complaint, the SEC alleged, among other things, that from Jan. 1, 2011, through yearend 2015, the UDF family of investment funds used money from UDF IV to pay distributions to investors in UDF III and to pay down UDF III loans without adequately disclosing to investors the use of the funds. According to the plan approved Thursday, the $8.275 million will be distributed among individuals and entities that invested in UDF IV and/or the common stock of UDF IV traded on the Nasdaq Global Direct Market under the symbol UDFI.
The distribution plan is publicly available on the SEC’s webpage for this matter.  
The criminal case involves some of the same and similar allegations to the civil case.
In that case, O’Connor last week denied a request from the UDF executives to suppress evidence collected during a 2016 FBI raid of the housing development financial firm’s office in Grapevine.
The defense attorneys for the UDF executives argued that federal prosecutors had based the government’s search on evidence that did not amount to probable cause that a crime or crimes had been committed. O’Connor, in his ruling last week, rejected that argument.
In another motion, the defense argued that the search warrant relied upon to justify the raid was overly broad because it applied to all records and did not have a time limit. O’Connor ruled against that argument as well.
The affidavit for the search warrant included charts with information about UDF’s various funds’ offerings, outstanding debt, SEC filings reports and loan-loss reserves, as well as emails including information about cash flow projections, changes to cash flow analysis, loan portfolio analysis, and other financial information that, taken as a whole, justified the search, according to O’Connor’s ruling.
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