SEC Charges UDF with Misleading Investors

Update on United Development Funding – UDF III – UDF IV

According to a press announcement on July 3, the Securities and Exchange Commission announced charges against United Development Funding and four executives in connection with their alleged roles in misleading investors.  A fifth executive was charged with signing false SEC filings.

According to the SEC’s complaint, United Development Funding (UDF), based in Grapevine, TX, is a family of private and publicly-traded investment funds that deploys investor capital as loans to homebuilders and land developers.

UDF allegedly solicited investors by advertising annualized returns of up to 9.75 percent as well as regular distributions. According to the complaint, for almost five years, UDF did not tell investors that it lacked the monthly cash flow at times to cover investor distributions in one of its older funds, UDF III. Instead, to pay these distributions, the newer UDF IV fund loaned money to developers who had also borrowed money from UDF III.

Rather than using those funds for development projects that were underwritten by UDF IV, UDF directed the developers to use the loaned money to pay down their older loans from UDF III. In most of these cases, the developer never received the borrowed funds at all, and UDF simply transferred the money between funds so that UDF III could make the distributions to its investors. The SEC alleges that UDF III, UDF IV, and UDF executives knew or should have known that they had misled investors about the use of funds and the nature and status of loans made to developers.

The complaint also alleges that UDF III failed to appropriately impair loans in violation of GAAP, and that UDF IV did not adequately disclose the status of real property within its portfolio.

Finally, the complaint alleges that an executive “signed false and misleading SEC filings and management representation letters without taking sufficient actions to ensure the accuracy of or a sufficient basis for many of their representations.”

Without admitting or denying the SEC’s allegations, the four executives agreed to pay $8.2 million in disgorgement, prejudgment interest, and civil penalties. The fifth executive agreed to pay a $75,000 civil penalty.

Recovery of Investment Losses

The White Law Group has received numerous calls from investors who have suffered losses investing in UDF funds. The firm continues to investigate potential claims in all of the UDF offerings such as UDF III, UDF IV and UDF Income Fund V.

Unfortunately for investors, some brokers will represent Real Estate Investment Trusts (REITs) and limited partnerships (LPs) as “safe” investments.

In general, limited partnerships and REITs lack liquidity and are inherently risky. These types of products are sophisticated complex investments that are better suited for institutional investors or investors who can afford total loss of their capital investment.

If a broker-dealer makes unsuitable investment recommendations or fails to adequately disclose the risks associated with an investment they may be liable for investment losses through FINRA arbitration.

If you have suffered losses investing in United Development Funding, please contact The White Law Group at 888-637-5510 for a free consultation.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Franklin, Tennessee. For more information on the firm, visit www.WhiteSecuritiesLaw.com.