FBI Visit Continues Grapevine Real Estate Firm's Downward Spiral

United Development Funding is having a no good, terrible, very bad month. A visit from FBI agents yesterday is the latest trouble for the embattled firm. 

During the first week of February, Kyle Bass, who runs Dallas' Heyman Capital hedge fund, shorted UDF's Nasdaq stock, basically betting that UDF's stock would tank. When he did, Bass announced, through a comprehensively documented website, that he didn't like UDF — which is already under Securities Exchange Commission investigation — because the firm "exhibited characteristics consistent with a Ponzi scheme."

"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.

Today, as a consequence of mismanagement and concealed losses, UDF faces significant bankruptcy risk, which would leave its shares virtually worthless," Bass said on February 5.

UDF's stock dipped almost immediately. On February 4, UDF's stock was worth $10.20, by February 9, it had dipped to $6.76. Bass is seen as something of an oracle in the financial world. In 2008, he made a bunch of cash — about $500 million, according to reports — when he got ahead of the mortgage crisis thanks to a tip from a New York banker buddy with whom Bass attended a wedding in Spain. Last year, he shorted biotech stocks just before that industry took a dive.

When Bass talks, people listen, even when UDF's CEO accuses Bass of misleading the investment world to enhance his position: 

"On February 5, 2016, after launching a website containing multiple false and misleading statements about our company and management team, a Dallas-based hedge fund has confirmed they have built a significant short position in UDF IV.

We direct you to our initial response filed with the SEC on December 14, 2015. As is clearly detailed in our regulatory filings, our secured loans are underwritten based on collateral value, and UDF IV has not had any realized losses in its portfolio. We are confident that we have appropriate policies and procedures in place to ensure accurate financial reporting and compliance with all applicable rules and regulations," UDF CEO Hollis M. Greenlaw said.
Thursday, the other shoe dropped when the FBI showed up at UDF's headquarters to, FBI spokeswoman Allison Mahan said, "conduct law enforcement activity." Agents could be seen carrying boxes from UDF's headquarters and placing them on trucks.

As the raid went down, UDF's stock took yet another plunge, dipping to $3.20 Thursday afternoon from a 2015 high of $19.95.

UDF did not respond to a request for comment on this story.

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Stephen Young has written about Dallas news for the Observer since 2014. He's a Dallas native and a graduate of the University of North Texas.
Contact: Stephen Young