United Development Funding IV fka UDFI

[Enterprising Investor]

'Where is the shredding of documents?' Fate of UDF execs in jury's hands as closing arguments end (1/20/22)

By Bill Hethcock

After a week-long trial, the fate of United Development Funding CEO Hollis Greenlaw and three other top executives at the North Texas-based residential real estate development lending firm is in the hands of the jury.

In closing arguments this morning, assistant U.S. Attorney Tiffany Eggers, the lead prosecutor, told the jury that the UDF executives “engaged in a large-scale scam and they did it month after month.”

“The defendants had to choose failure or fraud, and they chose fraud,” Eggers said.

Paul Pelletier, who represents Greenlaw and Grapevine-based United Development, said the REIT's business is so complex that the government investigators and prosecutors don’t understand it, and they never truly tried.

“The government got it wrong,” he said.

“There is no attempt by the government to understand the business economics,” Pelletier added later in his summation. “Why? Because it was inconvenient.”

Jurors were handed the case about 1 p.m. today, after a trial that started Jan. 12 in which U.S. District Judge Reed O’Connor put tight time limits on how long federal prosecutors and defense attorneys got to present their respective sides.

Greenlaw, co-founder, CEO and chairman of UDF’s board of trustees, is charged alongside Cara Delin Obert, UDF chief financial officer; Jeffrey Brandon Jester, UDF director of asset management; and Benjamin Lee Wissink, UDF partnership president and committee member.

The four UDF executives are accused of an alleged scheme to defraud the investing public, shareholders and banks using funds that provided more than $1 billion in loans to developers of residential housing communities and, to a lesser extent, homebuilders.

Federal prosecutors in the Northern District of Texas charged the UDF executives with conspiring to illegally shift investment dollars in three of its different funds to deceive investors and banks and enrich themselves.

Eggers hammered away at that argument in her summation. At the same time, defense lawyers attempted to convince jurors that the evidence and testimony presented at trial were outright unconvincing or at least left room for reasonable doubt.

Guy Lewis, who is Wissink’s lawyer and a former U.S. Attorney for the Southern District of Florida, said prosecutors didn’t prove that any investors lost money or that the company failed to pay back bank loans that UDF took out to in turn lend to developers willing to borrow at higher interest rates.

The case prosecutors presented had few hallmarks of major white-collar crime investigations and prosecutions because there was no illegal activity to uncover, Lewis said.

“Where’s the undercover tape? They do it (in other investigations) all the time,” Lewis said. “Where is the evidence of living big? Spending like a madman? Where is the shredding of documents?”

“This case isn’t even close,” he added.

Neal Stephens of law firm Jones Day, who represents Obert, also said no investors lost money.

“What’s completely lacking in this case is any evidence that any of these people did anything to harm any investor,” he said.

At the outset, the FBI thought they were investigating a billion-dollar Ponzi scheme. When their findings didn’t match those expectations, the government refused to be open to the far less-interesting truth, the UDF executives’ lawyers argued.

“They picked a conclusion and then derived a way to arrive at that conclusion,” Stephens said. “It’s confirmation bias. That’s not enough.”

Eggers said that Jester conspired with another UDF employee to manipulate spreadsheets so it looked to investors and banks like the lending firm had more projects in progress than it had.

Arianna Goodman, representing Jester, said Jester trusted the asset managers he oversaw and approved adding prospective projects to spreadsheets if the managers deemed them likely to come to fruition.

Jester and the other United Development executives voluntarily met with the government during the lengthy timeframe that UDF was under investigation, and they all cooperated fully, Goodman said.

“Mr. Jester operated openly, transparently, and in the light — not in the dark,” she said.

Goodman characterized the government’s case as “an attempt at criminalization of business.”

UDF has a family of five public and private funds: UDF I, II, III, IV and V. Each aims to give investors differently tailored opportunities to diversify their portfolios with investments in residential real estate.

Eggers argued that transfers made between the REIT’s funds are illegal and were triggered by shortfalls that arose when developers were slow to repay the money they borrowed from UDF.

The defense lawyers said their clients individually and UDF as a company broke no laws. Prosecutors and government regulators who investigated the case don’t understand the residential development process and how housing communities are financed and constructed in phases, lawyers for the executives claimed.

In one example cited by prosecutors, United Development created UDF III to originate, acquire and manage a portfolio of mortgage loans or equity interests in various real estate investments.

A separate entity called UDF IV was later created as a loan facility for developers of single-family homes and mixed-use community developments.

When UDF III borrowers became slow to pay their obligations, UDF executives began using fund IV capital for fund III obligations, according to prosecutors. Between January 2011 and November 2015, more than $65 million in cash raised by UDF IV was used to pay investors in UDF III a return on their money, as well as other corporate expenses, according to the indictment.

UDF V was created in early 2015, and millions from it were also used to pay off UDF III investors, prosecutors allege.

During the trial, Brian Downey, a certified public accountant and auditor with Eisner Amper of New Jersey, testified that he raised questions about various transfers but couldn’t get satisfactory answers from executives of UDF.

Much of the testimony revolved around fund transfers between entities with common ownership. Downey, testifying for the prosecution, said those transfers are known as affiliate transactions or related-party transactions, and in most cases, they’re not permitted.

Downey further said he raised concerns with Greenlaw, Obert, Wissink and other UDF executives that related-party transactions were occurring. Downey never received the necessary documentation he sought to rule out that possibility, he testified.

However, when questioned by defense attorneys, Downey said many variables factor into whether something is a related-party transaction, so it’s not clear-cut.

Eggers implored the jury of seven women and five men to pore over the thick binders and digital copies of bank account statements, emails between UDF employees and developers outside the company, and other evidence.

She urged the jury to not “feel sorry” for the defendants and to decide on guilt or innocence without considering the potential sentence they will face if they’re convicted.

O’Connor will determine the punishment if a guilty verdict or verdicts are rendered.

She also asked the jury to ignore the argument that UDF has a good working environment, which multiple witnesses — most testifying at the prosecution’s behest — emphasized during the trial.

“Nowhere in the jury instructions does it say, ‘If everyone enjoys their job, it’s not a crime,'” Eggers said.

She also aimed at Greenlaw’s testimony that included UDF’s backstory from its inception.

“Just because something starts as a good idea doesn’t make it a defense,” she said.

Pelletier, his raspy voice cracking, ended his argument thusly:

“There is insufficient evidence to prove any of this,” he said. “Let these people go back to their jobs.”

SUMMARY OF CHARGES

The indictment alleges that the defendants were part of a scheme to defraud and conspiracy, ending in 2015, in connection with the business operations of United Development Funding:

Count 1: Conspiracy to commit wire fraud affecting a financial institution

Count 2: Conspiracy to commit securities fraud

Counts 3 through 10: Substantive counts of securities fraud

https://www.bizjournals.com/dallas/news/2022/01/20/udf-trial-day-6.html