Kyle Bass is going to war with his latest short target

Texan hedge fund manager J. Kyle Bass has stepped out as the anonymous short-seller going after United Development Funding IV, a Texas-based real-estate-investment trust (REIT).

Bass, who runs Dallas-based Hayman Capital, has launched a website on Friday that alleges the company is operating a “Ponzi-like real estate scheme.”

He also published the following letter:

Dear Reader:

At Hayman Capital, we attempt to identify market inefficiencies and invest around opportunities created by those inefficiencies. Last year, we took a short position in United Development Funding (UDF) IV. Our research showed that UDF exhibited characteristics consistent with a Ponzi scheme, the size and scope of which exceeded a billion dollars.

The Securities and Exchange Commission (SEC) describes a Ponzi scheme, in part, as “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.”

This is consistent with, in many ways, how UDF operates:

  • UDF is using new investor money to pay existing investors. When UDF’s first fund faltered, UDF used money from a second entity — a public affiliate, registered with the SEC — to bail out the first fund. UDF management has been trying to cover its tracks ever since, by perpetuating a Ponzi-like real estate scheme across multiple funds.
  • UDF management is misleading investors. UDF management has been distorting its poor track record and the financial condition of its public SEC-registered affiliates dating back to the financial crisis.
  • UDF management is preying on “Mum and Pop” retail investors, using the complexity of real-estate backed loans and a UDF-controlled web of related entities to obscure the fact that UDF is using new investors’ money to make payments to existing investors, and thereby perpetuating the scheme.

After years of mismanagement, the UDF structure has begun to implode. Evidence of UDF’s dire situation includes a series of defaults, bankruptcy petitions, lawsuits, key resignations — including that of UDF’s audit firm, a key UDF director, and the CFO of UDF’s largest borrower — followed by UDF’s own overdue admission that it has been the subject of an SEC investigation since April 2014.

Today, as a consequence of mismanagement and concealed losses, UDF faces significant bankruptcy risk, which would leave its shares virtually worthless.

The research on this website exposes how a Texas real estate developer built a billion dollar house of cards and why it is now on the verge of collapse. If you take the time to review the facts on this site, we believe you will come to a similar conclusion.


J. Kyle Bass

Chief Investment Officer and Principal

Hayman Capital Management L.P.

Back in December, UDF’s stock plummeted after an anonymous short-seller using the pseudonym “Investor For Truth” published a report on an investing website Harvest Exchange. At the time, value-investing blog ValueWalk speculated that the short-seller was Bass. It was never publicly confirmed.

Shares of United Development Funding, a nontraded REIT, have fallen more than 41% since that initial report. On Friday, the stock was last trading 4.4% around $9.75 per share.

Bass’ thesis is that the low-interest-rate environment for the past six years has been the main driver of growth in the nontraded REIT asset class. In 2015, the Securities and Exchange Commission named nontraded REITs as one of the five most serious problems affecting retail investors.

Nontraded REITs are public because they reach the minimum threshold of shareholders to be considered public. They’re not liquid investments, according to Bass.

UDF Investors For TruthShahan Prairie is a Centurion American development. This is the land that has served as collateral for multiple UDF loans issued by various UDF entities. The land was acquired by Centurion American in 2004. The photo is from November 2015.

Bass believes that it’s the unsuspecting “mum and pop” retail investors, who are seeking yield in the low-interest-rate environment, that get pitched to invest in nontraded REITS by financial advisers. These financial advisers are incentivized to sell nontraded REITS by getting paid commissions from the company, the report said.

United Development Funding is a mortgage REIT that lends money to develop properties and charges interest on the loans.

UDF I was a real-estate lender and real-estate developer in the years leading up to the financial crisis. However, UDF I began to default on its debt and used United Mortgage Trust (UMT) to provide liquidity for UDF I, according to the report. As that problem continued, UDF III came along and then UDF IV, the report said.

The short-seller said that the company has raised over $1 billion for four different public entities.

The company partnered with brokerage firm RCS Capital (RCAP) to raise money from retail investors for UDF IV. RCS Capital was paid commission fees for selling the REIT to retail investors.

Bass alleged that UDF IV has since used that money to provide liquidity for UDF I and UDF III. Right now, UDF V is being used to provide liquidity to UDF IV.

The company released a response to Bass’ allegations in December in a form 8-K.

The company said that they “were attacked by a hedge fund or funds. We believe that the hedge fund(s) built a significant short position in UDF IV with the intention of unlawfully manipulating the price of UDF IV shares (a type of securities trading scheme known as “short and distort”).”

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