Scandal-Ridden Texas Real Estate Fund Faces Investor Rights Suit
Bloomberg Law
By Andrew Ramonas and David Hood
19 October 2023
• COURT: Md. Cir. Ct., Baltimore City
A United Development Funding shareholder has sued the beleaguered Texas-based real estate investment trust alleging it thwarted investors’ rights to nominate new board trustees after former executives were convicted of fraud.
UDF, ex-CEO Hollis Greenlaw and other trustees engaged in an “unlawful corporate governance scheme” to protect themselves from removal despite years of wrongdoing, shareholder NexPoint Real Estate Opportunities LLC said in a complaint filed in Maryland state court Thursday. NexPoint is the largest shareholder of UDF IV, a UDF fund organized under Maryland law.
Greenlaw and three former UDF executives who aren’t targets of NexPoint’s lawsuit were convicted in 2022 of using what prosecutors said was “a classic Ponzi-like scheme” to pay one fund’s shareholders with money from another fund’s investors while sidestepping disclosures to the Securities and Exchange Commission. The executives appealed, but lost their challenge in July. Greenlaw is serving a seven-year prison sentence.
“UDF IV has perpetrated and covered up a massive fraud on shareholders, effectively depriving them of their fundamental right to sell their shares and allowing the Company to languish for years with no clear business plan or direction,” NexPoint said in its complaint, which is seeking the ability to nominate and elect new board members.
UDF did not immediately respond to a request for comment.
Years-Long Concerns
The lawsuit comes three years after NexPoint submitted paperwork to the SEC saying it was interested in assuming the management of UDF IV following mounting governance concerns and legal issues for the fund.
The shareholder’s 2020 filing followed an $8.2 million settlement between Greenlaw and other ex-UDF officials and the SEC in 2018 over allegations that fueled the criminal case against the former CEO and others. UDF last held an annual meeting of shareholders in 2015, violating Maryland law, NexPoint said.
Greenlaw and other trustees quickly amended the UDF IV’s bylaws to prevent NexPoint from making board nominations after its SEC filing, the shareholder said. NexPoint said it tried to nominate candidates again ahead of an annual meeting scheduled for this December, but was denied by the fund.
NexPoint also is suing UDF, Greenlaw and other former executives in Texas state court, alleging they inappropriately used fund money to pay legal fees battling criminal convictions. UDF board members didn’t appear to assess whether the ex-officials were entitled to legal assistance, NexPoint said in its Maryland lawsuit.
“UDF IV’s shareholders must have the right to vote these individuals out of office and replace them with individuals who will protect the shareholders’ investments and try to deliver to shareholders the returns that were promised when they invested,” NexPoint said.
NexPoint is represented by Zuckerman Spaeder LLP.
The case is NexPoint Real Estate Opportunities, LLC v. United Development Funding IV, Md. Cir. Ct., Baltimore City, complaint filed 10/19/23.
