“The Board is imposing these sanctions based on its findings that: (1) Powell and Babb violated PCAOB rules and standards in connection with the audits of the 2012-2014 financial statements of United Development Funding III, L.P., and the review of that issuer's Q3 2015 interim financial statements; (2) Lawlis violated PCAOB rules and standards in connection with the audits of the 2013-2014 financial statements of United Development Funding IV and the review of that issuer's Q3 2015 interim financial statements; and (3) WP violated PCAOB rules and standards by failing to design, implement, and maintain appropriate quality control policies and procedures.”
“The Board deems it necessary and appropriate, for the protection of investors and to further the public interest in the preparation of informative, accurate, and independent audit reports, that disciplinary proceedings be, and hereby are, instituted pursuant to Section 105(c) of the Sarbanes-Oxley Act of 2002, as amended (the "Act") and PCAOB Rule 5200(a)(1) against Respondents.”
On July 16, 2019, the U.S. Federal District Judge Sam Lindsay ordered the creation of a Fair Fund to compensate investors in UDF who lost money because of UDF management’s illegal and unethical activities as charged by the Securities and Exchange Commission on July 3, 2018.
"To do so, UDF used funds from UDF IV, V, and LOF to (1) either 'purchase' portions of non-performing loans from UDF III, which loans defaulted shortly after the purchase, or (2) to make 'loans' to entities that had already borrowed money from UDF III but had trouble paying it back, and have those entities in turn repay the earlier loans to UDF III."
The attached complaint was filed by the SEC and alleges from at least January 2011 through December 2015, UDF used money from a newer fund to pay distributions to investors in an older fund, without adequately disclosing the use of funds and the nature and status of loans made to developers.
The Securities and Exchange Commission announced charges against two real estate investment funds and four executives in connection with their alleged roles in misleading investors by failing to disclose that it was using money from a newer fund to pay distributions to investors in the older fund.
Click here to view Megatel's allegations which are consistent with Hayman's research. Below is an excerpt from the pleading.
"For its part, UDF began operating as a Ponzi-like scheme, using freshly-raised capital in newer funds to pay investors in older funds. To implement this scheme, a newer UDF fund (e.g. UDF V) would loan money to Centurion—ostensibly for a specific land-development project—that Centurion would use to repay loans it had received from an older UDF fund (e.g. UDF III). The older UDF fund, in turn, used this money to pay distributions to its investors, thereby concealing the failure of the loans made by the older fund. Each new loan originated from a newer fund to pay an older fund generated millions of dollars in asset management and origination fees for the UDF Defendants, which starved the funding for development projects for which Megatel had contracted."