The Federal Bureau of Investigation has raided the Dallas offices of United Development Funding. The publicly traded real estate investment trust recently came under fire amid allegations that it has been run like a Ponzi scam for years.
Since the accusations against UDF IV were published on the Harvest Fund website, the REIT’s stock has dropped 81% in the last two months. News that the FBI went to the UDF headquarters caused the company’s share price to plunge nearly 55% during the raid on Thursday to close at $3.20/share.
UDF IV has denied the allegations that it is a Ponzi scam. Following news of the accusations, It filed a complaint with the U.S. Securities and Exchange Commission alleging that it was the victim of a “short and distort” securities trading scam involving an investor that was building up a short position in a stock. The aim , said UDV, was to illegally manipulate shares. In December, UDF revealed that it has been under investigation in a fact-finding probe by the SEC since 2014.
This month, hedge fund manager Kyle Bass said that he is the one who has been shorting UDF. He accused the nontraded REIT of using new investor funds to pay existing investors and exploiting “Mom and Pop” retail investors. Bass’s Hayman Capital Management LP has been betting against UDF IV shares. He was the one who made the Ponzi scam claims against UDF at the end of last year.
In an article this week, The Wall Street Journal warned that United Development Funding, which also sponsors a traded REIT and other investment vehicles, deals with the risks of concentrated lending. 99% of its UDV IV Fund’s portfolio is made of loans issued to Texas borrowers. According to filings, UDF V, also a nontraded REIT, has 100% of its investments and loans secured by Texas properties. This indicates a lack of diversification, which may increase the risk that can result from placing too much investment money in just one investment basket.
The Wall Street Journal said that another possible danger for investors of UDF is that as of September 30, 69% of its loan balances were made to Centurion American Development or its affiliates-that’ a single borrower.
UDF Funds Spotlight Potential Risk of Concentrated Lending, WSJ, February 16, 2016
FBI raids offices of Texas REIT, InvestmentNews, February 18, 2016