To fully understand the insidiousness of the entire UDFI saga, one should begin by reading the Advisory Agreement between UDFI and UMTH General Services, LLC., which was posted on EDGAR in May 2014 at the time of listing on NASDAQ.
The substantive meat of the Advisory Agreement begins with the following definitive statement in Section 2.01: "The Advisor shall be deemed to be in a fiduciary relationship with the Trust and its Shareholders."
Section 2.02 of the Advisory Agreement delegates substantially all corporate responsibilities of UDFI to UMTH General Services. UMTH General Services is owned/controlled by the criminal defendants and Etter. The 2015 UDFI Proxy Statement stated: "With the exception of Stacey H. Dwyer, our Chief Operating Officer, we have no employees. Except for Ms. Dwyer, our executive officers are all employees of our Advisor and/or its affiliates, and are compensated by these entities for their services to us. Our day-to-day management is performed by our Advisor and its affiliates. We pay our Advisor fees and reimburse expenses pursuant to our advisory agreement. Other than Ms. Dwyer, we have not previously paid any compensation directly to our executive officers.”
The other massively significant provision is Section 5.01(a) of the Advisory Agreement, in which you will find a broad indemnification section with the following carveout:
“Notwithstanding the foregoing, the Advisor and its Affiliates, including their respective officers, directors, trustees, partners and employees, shall not be indemnified by the Trust for any losses, liability or expenses arising from or out of an alleged violation of federal or state securities laws by such party unless one or more of the following conditions are met: (i) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee; (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee; and (iii) the court of competent jurisdiction approves a settlement of claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission … as to indemnification for violations of securities laws.” (emphasis added)
At the Detention Hearing, it was claimed that the payment of the disgorgement and pre-judgment interest was permissible indemnification of the individual defendants. The Advisory Agreement clearly provides to the contrary, as the US District Court when it entered the order approving the settlement in the SEC enforcement case clearly did not consider a request for indemnification or otherwise rule on that topic.
Payment of disgorgement, prejudgment interest, legal fees, legal costs or any other indemnification payments was never disclosed in any SEC filing. The testimony in the Detention Hearing was "I don't remember" following a strong objection due to lack of relevance by defense counsel - they did not want this fact known because it is evidence of perpetuation of a practice of non-disclosure that produced the criminal trial in the first place. Keep in mind that at the time of the payment of the disgorgement (as well as corresponding legal fees incurred by the individuals), UDFI was still subject to the reporting requirements of the Exchange Act. Included among those requirements was the requirement to file Form 8-K for items covered by the 8-K instructions. It appears to me that the payment of the indemnification was either a verbal compensation arrangement involving named executive officers disclosable under Item 5.02(e) of the Form 8-K instructions or a material modification of the Advisory Agreement (basically abrogating the securities law violation carve-out in Section 5.01(a)) that would have been disclosable as a material modification to a material agreement under Item 1.01 of the Form 8-K instructions. Those failures in and of themselves appear to me to be continuation of the fraud.
The Advisory Agreement also specifically states that the Advisor is in a fiduciary relationship with shareholders. The owners of the Advisor (Greenlaw et al) and the board owned almost no stock in UDFI. What has happened over the past 6 1/2 years is the most deplorable mistreatment of shareholders of a public company that I've ever seen. The Board (are they still taking direction from Greenlaw even though he resigned??) has steadfastly stonewalled shareholders in their attempts to obtain information. I read the earlier posts about loan values and the loan book - what other reasons beside massive impairment of the loan book and expenditure of tens of millions of dollars of shareholder money to defend indefensible criminal allegations would prompt a board of directors to abuse shareholders to this extent - they appear to be hiding something massive.
One further point - it was noted in an earlier post that UDFI reported that 100% of the 2021 distributions to shareholders was return of capital. The balance sheet that management sent to shareholders last summer reflected income producing investments of approximately $350 million, with no debt. At trial, defense counsel presented lots of evidence and made a big deal of the 14% rate of return on UDFI's assets. At that rate of return on that base of earning assets, in 2021, UDFI would have generated revenue of $40.0 million. Assuming the management fee remains approximately $8.9 million, and considering that there are no longer public company costs to be paid, and all litigation involving UDFI seems to have been settled, that would have left between $25.0 and $30.0 million of taxable income for distribution. That doesn't even consider the fact that the 12/31/20 balance sheet that they distributed included $42.0 million of cash. How is it possible, then, that 100% of the distributions were return of capital? Could the answer be that the assets are mostly on non-accrual and/or legal fees related to defending the criminal indictment, which indemnification was impermissible under the Advisory Agreement, has been a massive number?
This continues to be a huge theft from shareholders, and justice is a long way from being served. Why hasn't the board sought a new Advisor to collect the interest and principal on the loans - they can terminate the Advisory Agreement with no penalty on short notice? Are the criminal defense lawyers running the company, and are directors properly carrying out their fiduciary duties by taking the lead from criminal defense lawyers representing persons who are no longer officers or directors of the trust - that would be a very relevant question for directors to answer? What possible justification does one ever have for withholding material information from the persons who provided all the capital necessary to run a business, especially when those shareholders are footing a $9.0 million bill to an Advisor who has agreed to be their fiduciary?
Blaming everything on Kyle Bass is not helping shareholders at all. As best I can ascertain, everything that was reported in the December 2015 written piece that produced the drama has been proven in court - therefore, it seems we don't have a "short and distort," we just have a "short." It is time for shareholders to hold this board accountable.
