Independent Brokerage Firms that Sold UDF REITs May Be Subject to Arbitration Claims Over Alleged Ponzi Scam

According to InvestmentNews, a number of independent broker-dealers could find themselves in legal hot waters, should investors decide to pursue them through arbitration for selling UDF real estate investment trusts. United Development Funding is under investigation over allegations that the UDF IV was run for years like a Ponzi scam. UDF IV was initially a nontraded real estate investment trust that later became listed as a publicly traded REIT.

The article goes on to name four firms that sold the UDF REITs or private deals to investors: Financial Services Inc., Berthel Fisher & Co., VSR Financial Services Inc., and Centaurus Financial Inc. Other firms also have sold UDF REITs to investors.

The allegations against UDF first surfaced in December in an anonymous post published on Harvest Exchange, an investor website. Among the accusations: that the UDF umbrella demonstrated traits “emblematic” of a Ponzi scam; new capital was used pay existing investors; and newer UDF companies were giving liquidity to earlier UDF companies to pay earlier investors. Noting that a hedge fund had created a short position in UDF IV shares, the company accused the fund of trying to illegally profit by depressing and manipulating UDV IV’s share price.

Recently, J. Kyle Bass of Hayman Capital also published a website about the allegations. On the site, Bass acknowledged that Hayman maintains a short position in UDV IV common stock.

Last week, the Federal Bureau of Investigation raided UDF’s offices in Dallas, Texas. The company’s management was subpoenaed and ordered to give company documents to a grand jury. Also, Nasdaq stopped trading of UDF IV shares at $3.2-an 81% drop over the last year. Prior to the Ponzi scam allegations, UDV IV’s total assets were $684M, most of which were notes receivables. Its REITs and private deals promised investors 8-10% returns and were high yield offerings.

Many of the investors that purchased UDF REITs and private deals were retirees. Already, class action lawyers have filed securities fraud claims suing UDF in federal court. The plaintiffs contend that UDF IV and a number its officers broke federal securities laws.

One of the reasons that brokers may become embroiled in the UDV Ponzi scandal is that broker-dealers have an obligation to provide proper due diligence when marketing and selling investments to their clients. If brokerage firms committed misrepresentations and omissions, gave unsuitable investment advise, or failed to properly supervise its financial advisers related to their sale of UDV shares to investors, the latter may have a reason to pursue claims against them for financial recovery.

At Shepherd Smith Edwards and Kantas, LTD LLP our REIT fraud law firm represents investors that have sustained losses related to fraud. If you are an investor who purchased UDV IV shares, please contact one of our Texas REIT attorneys. Your initial case consultation with us is a free, no obligation assessment that can help you determined how to best proceed.

Bass’s Website

The article on Harvest Exchange

Broker-dealers that sold UDF REITs to face investor claims, Investment News, February 24, 2016