The FBI raid on Grapevine, Texas firm United Development Funding was in wake of allegations brought against the company by Dallas hedge fund manager Kyle Bass, who accused the company of operating a $1-billion “Ponzi-like scheme,” according to Dallas Morning News.
FBI spokeswoman Allison Mahan confirmed the raid saying, “The FBI is lawfully present and conducting law enforcement activity,” at UDF’s corporate office at 1301 Municipal Way in Grapevine. Mahan declined to comment further about the open investigation, which is being conducted by the U.S. Attorney’s office.
UDF, which finances homebuilding projects through four public entities, admitted in regulatory documents filed in December that it is cooperating with an investigation by the U.S. Securities and Exchange Commission since 2014.
But United Development Funding CEO Hollis Greenlaw said the FBI raid in Grapevine was wrong because the firm had done nothing wrong. In a statement to investors on Feb. 8, Greenlaw said, “Our secured loans are underwritten based on collateral value, and UDF IV has not had any realized losses in its portfolio.”
Greenlaw told shareholders earlier this month that Bass is making false statements about the REIT, which has invested about 67 percent of its real estate fund UDF IV into Farmers Branch-based Centurion American Development Group, or affiliates of the development firm.
Meanwhile, Bass’ hedge fund, Hayman Capital Management LP, claims that UDF is operating like a Ponzi scheme by “using new investor money to pay existing investors”. At a website put together by his team at Hayman Capital — UDFexposed.com — the likely outcome is bankruptcy, he predicts.
Bass admits he will benefit financially if the claims turn out to be true after taking a short position in UDF. Though Bass declined to disclose the amount of his short position, UDF IV’s stock has completely tanked — losing more than half its value — since the accusations were leveled against the REIT.
UDF IV started December at $17.51 per share, but ended the year at $11. Since then, the stock has been battered, including another 55 percent drop through trading today that brings share value to just above $3. Over the past year, that is a loss of more than 80 percent.
Even as the raid was underway on Thursday, Dallas appellate lawyer Chad Ruback, who has been following the allegations made by Bass, said the FBI raid is the biggest development thus far in the investigation.
“An FBI raid is the single biggest red flag that business has been up to no good,” Ruback said. “The government has been investigating UDF for quite some time now. We don’t know what they found, but it looks like they have found some damning information about UDF.”
Ruback said the FBI doesn’t typically conduct raids unless they are confident a business has broken the law.
“I wouldn’t be surprised if this is a confirmation of the accuracy of Mr. Bass’ allegations,” said Ruback, who said it was hard to tell who was telling the truth in filings with the SEC. “The raid provides confirmation that something is smelling quite bad at UDF and it’s no longer simply Mr. Bass — who has an interest in seeing UDF fail — that has questions and shows some substance to those allegations,” he said.
Ruback said an FBI raid in Grapevine can be very bad for business and could certainly impact whether another business is going to want to work with UDF. “The real estate holdings aren’t directly impacted, but it can certainly scare away potential real estate business partners, buyers and investors,” he said. “This is certainly the single biggest development more so than a lawsuit.”