I don't believe a 'smoking gun' is required for conviction. The evidence was compelling when taken as a whole.
I find it interesting that the whistle blower was the analyst at Buffington that compared what he thought could be repaid vs what UDF III and IV were reporting. He reported that to the SEC. The Buffington loan write down seems to suggest his analysis was correct.
Also people inside Centurian held a similar view that the loans were not likely to be repaid in full.
In addition, some asset managers within UDF shared the same concern with UDF management.
It sounds like all those concerns were shared with, and known, to UDF management.
It sounds like it was an open secret that the loans were not properly accounted for. UDF was paying Centurian and Buffington cost plus overhead fees to develop. That implies that UDF, while technically a lender, really had control and equity-like risk. There was no equity in the deals. based on this- one of Hayman claims was this meant they should not have been classified as a REIT. If that's the case then they have significant tax implications to sort out.
According to the documents, UDF had the right to force a loan draw and then pay back a previous loan. But the bank lender testified that he was unaware that his bank's line was being drawn in order to pay back previous loans. That was not a permitted use under the loan document. That was damaging.
It was also made clear that all the movement of money from one fund to the next was often controlled by UDF in order to make distributions.
Buffington's testimony about how Hollis pitched setting up Buffington II and taking loans from UDF V was damaging. Buffington made it clear prior to that, that the loans had no chance of full repayment. The solution of setting up a new scheme was pretty close to a smoking gun.
If the loans were always properly collaterized as claimed, there would be no impairment to that loan portfolio over the past 6 years. The land value is up a great deal over the last 6 years.
Early UDF funds had a 30% accrued interest rate. That seems to have started the problem- accruing loan balances at 30% per annum can quickly get your loan balance far ahead of collateral value. Paying out 9.75% cash interest on generally non cash flowing land development was not a wise model.
It seems clear that the loan portfolio was marked too high, and clear that new funds were being raised to pay back old funds. The defense put their hopes on the fact that all this was disclosed in SEC documents. Maybe technically it was but it was obfuscated, at best.
If management had an opportunity to settle before trial I'm surprised they didn't. The jury verdict makes sense to me.
AI
