On November 19, 2015, Whitley Penn LLP resigned concurrently as the auditor of all four public SEC-registered UDF affiliates (UDF III, UDF IV, UDF V and United Mortgage Trust); Whitley Penn LLP had audited UDF since inception (2009) and its affiliated public programs dating back to 2003 (13 years). While UDF IV initially stated that Whitley Penn simply “declined to stand for reappointment,” UDF IV later claimed that it was unable to timely file its financials due to “the resignation on November 19, 2015 of Whitley Penn LLP,” suggesting that the resignation was done before Whitley Penn had completed its audit and that it was unexpected by UDF IV. Indeed, in previous SEC filings prior to the resignation, UDF IV had disclosed that its board of trustees had ratified its audit committee’s appointment of Whitley Penn LLP to continue as its independent public accounting firm for the year ending December 31, 2015, and that its public shareholders voted and overwhelmingly approved the appointment. This all raises important questions about what exactly led Whitley Penn to resign, questions which UDF IV has not to date answered.
Within six months of the auditor’s resignation, UDF IV defaulted on a $35 million loan effective as of March 4, 2016 and acknowledged by UDF IV on May 17, 2016. This default occurred despite the fact that UDF IV had recently reported, in its Form 10Q for the period ended September 30, 2015, total assets of $684 million including $626 million in loans which bear interest at an average interest rate of 13% per annum (or an implied $81 million in annual interest income). After entering into a forbearance agreement in May 2016 and later amending and extending the forbearance agreement in August 2016, UDF IV disclosed that it had repaid the remaining amount owed on this loan as of September 29, 2016. The default raises more questions than the ultimate repayment answers given UDF IV’s latest stated financial position:
Stated Financial Position: $684 million in assets; $171 million in debt.
Economic Reality: Default on $35 million loan within six months of filing.
Hayman’s latest presentation analyzes how the circumstances surrounding the default do not seem to square with how UDF IV described its financial position in its last public filing, the Form 10-Q for the period ended September 30, 2015. The material number of red flags that existed should prompt a reasonable auditor to ask common-sense questions concerning the accuracy of UDF IV’s stated financial position and disclosures.
If UDF IV omitted material facts from its public filings, that would be significant under relevant securities laws. Rule 10b-5 is one of the most important rules targeting securities fraud promulgated by the U.S. Securities and Exchange Commission (SEC), pursuant to its authority granted under § 10(b) of the Securities Exchange Act of 1934. Rule 10b-5 stipulates that it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, in connection with the purchase or sale of any security. Informed by case law, an omitted fact is generally material if there is a substantial likelihood that a reasonable investor would consider it significant in deciding whether to make an investment decision.
The information in this presentation is relevant to investors, regulators, and tax authorities, as well as former and current auditors, and is being made public for any and all interested stakeholders to review. While the list of red flags already identified to date is confounding, additional red flags will be highlighted in the days, weeks and months to come.