FBI Raids Grapevine Financial Firm that Kyle Bass Complained About

What the hec! A few days ago a story came across the desk about Kyle Bass, he of Hayman Capital Management, complaining about a Ponzi scheme going on at a financial institution in Grapevine. This happened about the time we were hearing about Nancy Carroll and the missing funds over at Millennium Title. Unrelated, but my antennae perked.

Now KXAS-TV is reporting that the FBI just raided the office of United Development Funding, a Grapevine company that has financed more than $1 billion in residential development across Texas.

This is the company Bass says operates as a Ponzi scheme.

Agents were seen carrying boxes out of United Development Funding on the 1300 block of Municipal Way and loading the boxes into large trucks.

Starting last month, Bass began posting reports and sending letters to the media with claims that United Development is mishandling investor funds, overstating the value of its assets and making improper loans to developers.

A “billion dollar house of cards” and a “Ponzi-like real estate scheme,” is what he called it.

But Bass had been shorting the company’s stock, United Development Fund, which has lost more than half its value in the last couple of months. Of course, that’s what hedge funds and brokers do to make money for their clients. (Some have accused Bass of being self-serving and making all this noise to benefit his shorts.) It is unusual, however, that they blow the whistle and call foul. Bass even “says he’s aided small investors who might have lost money with the company.” Screen Shot 2016-02-18 at 2.15.08 PM

Financial firms and hedge funds like United Development aren’t as heavily regulated as banks, just as 1031 Exchanges are not. There are fewer restrictions on what the companies do with their money, because the investors are usually high net worth individuals who can stand the risk.

Bass said he started digging into the company – which has funded more than $1 billion in residential project loans – in 2014.

“We have done enormous amount of work on this and we believe it is not as it seems,” Bass said. “Every time we have peeled back a layer of the onion it’s only gotten worse.

“We put the website out for anyone to see and the company to refute,” he said.

The website is udfexposed.com.

United Development’s CEO Hollis M. Greenlaw soundly denies Bass’s accusations. By the way, Greenlaw has quite an accomplished background. He is an attorney with a degree from Columbia University, undergraduate at Bowdoin University, and worked as a partner of The Hartnett Group, Ltd.

“We remain focused on protecting investor value through the preservation of our portfolios, and we will defend our funds aggressively against these unfounded accusations,” — what Hollis Greenlaw posted an online message to shareholders accusing Hayman of making “false and misleading statements about our company.”

KXAS says Kathy Colvin, a spokeswoman for the U.S. Attorney’s office in Dallas, declined to comment on the FBI raid. And an FBI spokeswoman confirmed that agents were at the firm’s offices conducting a law enforcement operation, but she declined to characterize it as a search warrant.

Bass’s main beef is that United Development has improperly transferred money from one fund to others and recklessly loaned millions of dollars.

He also says United Development has too many funds concentrated with just a few developers – especially Farmers Branch-based communities builder Centurion American Development Group, as Steve Brown reported, one of the largest residential land developers in North Texas.

Centurion is headed by Mehrdad Moayedi, and his company has developed more than 15,000 lots in North Texas since 1990. He is also developing the stunning Stoneleigh Residences (which, full disclosure, we love and are working with) and the Statler Hilton in downtown Dallas. Centurion also has a new luxury development going up around Deion Sander’s former mansion up in Prosper. The company has been a leader and innovator in building and development, and has won countless awards including Best Real Estate Deal 2015 from the Dallas Business Journal.

The company told Steve Brown that “all of its debt with United Development is current and that UDF is one of more than two-dozen lenders the company does business with.”

“We have done enormous amount of work on this and we believe it is not as it seems,” Bass said. “Every time we have peeled back a layer of the onion it’s only gotten worse.

Apparently Bass has been working on this for some time. United Development filed with the Securities and Exchange Commission in December, denying the claims. The company did disclose that the Securities and Exchange Commission has been looking at its operations since April 2014.

United says that Bass’s claims “clearly demonstrate a lack of understanding of the residential development project life cycle, which typically involves multi-phase master planned communities and the related financing structures.”

“By design, we concentrate our lending to seasoned and accomplished builders and developers.”

Centurion is certainly seasoned, and has always made smart buys. But Bass apparently believes he may have uncovered a Bernie Madoff-type scheme.

“Show us where we are wrong,” he said. “If you were calling Bernie Madoff at the beginning of his scheme unwinding what would he say to you?