This class action concerns investment offerings known as United Development Funding (UDF), and specifically UDF III. The complaint alleges that the defendants made false statements about UDF III’s success to induce people to invest, or to invest more. It backed up the false statements by distributions—which, according to the complaint, were not in fact earnings from UDF III, but money paid for investments in UDF IV and UDF V. Since the securities were never offered for sale on an exchange, certain federal securities laws do not apply. The complaint claims violations of the Texas Securities Act, among other things.
The class for this action is all individuals or entities who bought or otherwise acquired UDF III securities in the Secondary Dividend Reinvestment Plan, between January 1, 2011 and the present, and who were damaged thereby
UDF supposedly financed home builders and land developers and earned a return on these loans. The returns were to be paid out as distributions to investors in the funds. The complaint says that the funds claimed they could generate annualized returns of 8% to 9.75%. In 2006, UDF III began offering limited partnership interests, and the complaint says that they raised roughly $350 million from private investors. However, according to the complaint, all of the UDF investments were failures.
The complaint alleges that UDF III presented an image of success by paying distributions to its investors—not with real returns on investments, but with money obtained from investments in UDF IV and UDF V. They then persuaded some of the UDF III investors to take their returns not in cash but in more UDF III units.
According to the complaint, from January 2011 through July 2018, UDF III hid (1) the true source of its distributions, (2) that between 2011 and 2015 it was exceeding its loan limit restrictions, (3) that its loans were invested in unimproved real property and not projects under construction, and (4) that roughly $80 million in loans to one of its largest borrowers was impaired. Meanwhile, the complaint says, accountant Whitley Penn, LLC facilitated the scheme by providing false and misleading audit opinions.
In July 2018, the Securities Exchange Commission (SEC) filed a complaint stating that UDF III’s reported financial and operational success was false.
The complaint claims fraudulent sale, control person liability, and other violations under the Texas Securities Act as well as negligence and breaches of fiduciary duties.