Key Facts

In 2015, the SEC released an investor bulletin regarding the perils of certain real estate investment trusts (REITs). Around this very same time Hayman Capital’s research into UDF began to expose the cracks in the company’s publicly-traded and public non-traded REITs. The research on this website highlights the extent to which UDF exhibits characteristics consistent with a ponzi scheme. Before you explore all of our findings, here are basic facts that you should know:

Who is Hayman Capital Management LP?

Hayman Capital Management, L.P. is an SEC-registered investment advisor based in Dallas, Texas. Founded by J Kyle Bass in December 2005, Hayman Capital Management, L.P. manages assets of privately offered pooled investment vehicles and separately managed accounts. 

What is United Development Funding (UDF)?

UDF operates a number of publicly-traded and public non-traded real estate investment trusts (REITs) and alternative real estate companies. The UDF companies originate and invest in loans for the acquisition and development of single-family residential lots. 

UDF’s operations resemble that of a business development corporation (BDC) more so than a traditional real estate investment trust (REIT) in that UDF’s assets are almost exclusively loans that it originates. UDF primarily originates loans to real estate developers and homebuilders, almost exclusively in Texas and primarily in Dallas-Fort Worth. Whereas traditional REITs own properties that generate rental income, UDF originates and owns development loans that bear interest. The principal and interest on single-family residential development loans are typically funded by the borrowers through the eventual sale of finished residential home lots to homebuilders and consumers as opposed to rent from real property. 

How many public companies make up the UDF family of funds?

There are four public entities affiliated with UDF: 

  • United Mortgage Trust – public non-traded
  • UDF III – public non-traded
  • UDF IV – publicly-traded (Nasdaq ticker: UDF)
  • UDF V – public non-traded

What is the difference between a public non-traded entity and a publicly-traded entity?

A public non-traded entity is public principally because it has the minimum number of shareholders to be public, but it is not traded on a major stock-exchange. This means that generally there is not a market to sell the shares of a public non-traded entity. A publicly-traded entity is an entity that is both public and traded on a major stock exchange such as the Nasdaq or the New York Stock Exchange. Both public non-traded entities and publicly-traded entities file audited and interim financial statements with the Securities and Exchange Commission (SEC).

How does UDF raise capital to issue loans?

UDF utilized RCS Capital, a publicly-traded company affiliated with Nicholas Schorsch, through its network of 12,000 independent brokers and financial advisors to sell shares to the public. Numerous news reports linked Schorsch and an affiliated public entity to investigations by the Federal Bureau of Investigation (FBI) and the SEC in late 2014.

Subsequently, one of RCS Capital’s affiliated broker-dealer, Realty Capital Securities, LLC, reached a settlement with the Secretary of the Commonwealth of Massachusetts in December 2015 and agreed to voluntarily withdraw its broker-dealer license in all state and federal jurisdictions. Realty Capital Securities, LLC is currently in the process of membership revocation with FINRA. 

RCS Capital announced that it planned to file for bankruptcy protection in January 2016.

Is the SEC investigating UDF?

Yes.  In December 2015, UDF disclosed that it has been the subject of an SEC investigation since April 2014.

How does the SEC define a Ponzi Scheme?

According to the SEC’s website, “a Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business.” 

A Timeline of Recent Events

  • SEC begins its UDF investigation

  • UDF’s largest borrower, Centurion American, defaults on third-party loan

  • CFO of UDF’s largest borrower, Centurion American, resigns

  • Lawsuit filed naming UDF IV as a defendant alleging fraud and fraudulent transfer

  • The auditor for all four public UDF affiliates “declines to stand for reappointment” after having been approved by shareholders

  • UDF board member, affiliated with RCS Capital and Nick Schorsch, resigns

  • UDF filed an involuntary bankruptcy petition against UDF III and UDF IV’s second largest borrower

  • Hayman sends letter to UDF’s auditor, Whitley Penn LLP, highlighting red flags and questioning the reliability of its audits

  • Lawsuit filed naming UDF IV as a defendant alleging shell scheme of straw-borrowers