United Development Funding IV, a Texas real estate investment trust, said that it has received a Wells Notice from the U.S. Securities and Exchange Commission. This is a sign that the regulator’s staff will likely recommend an enforcement action against the mortgage and development REIT. There are individuals connected to the company and its adviser that also received SEC Wells notices.
The UDF REITs have been in trouble for months now, ever since Harvest Exchange, a hedge fund that had a short position in UDV IV shares, published a report about how it believes the company has been run like a Ponzi scam for years. Harvest Exchange claimed that the REIT utilized new capital to pay current investors their distributions, while providing earlier UDF companies hefty liquidity in order to pay earlier investors. The hedge fund noted the earlier companies do not appear to be able to stand on their own without this liquidity from the latest UDF REITs.
UDF IV not only denied the hedge fund’s claims, but also it filed a complaint with the SEC claiming it had been the victim of a securities trading scam in which an investor was building a short stock position to illegally manipulate its shares.
In February, the Federal Bureau of Investigation raided UDIV IV’s Dallas offices. Nasdaq then stopped trading of UDF IV shares at $3.20. This week, the stock market delisted the REITs shares.
The company says it will appeal. The REIT has been attempting to start trading in its stock again. According to InvestmentNews, part of the terms for allowing UDV IV shares to remain on Nasdaq was that it had to become current in its quarterly financial reports with the Commission. UDF IV failed to meet the deadline, which was already an extended deadline, for becoming current.
In the wake of all its financial and legal troubles, UDV IV and other UDF REITs have ceased to pay investors.
Although a Wells Notice isn’t a formal complaint or even a finding of wrongdoing by the SEC, it is a preliminary determination that an action is expected. The Wells Notice gives the notified party a chance to respond and convince the regulator that an enforcement action is not necessary. In a press release addressing the Wells Notice, UDV IV maintained that it does not believe that it violated any laws or regulations.
Shepherd Smith Edwards and Kantas, LTD LLP is a Texas securities fraud law firm.
A Texas Sized Scheme, Harvest Exchange
SEC hits troubled Texas REIT with Wells Notice, InvestmentNews, October 18, 2016
Nasdaq decides to delist UDF IV, Dallas Business Journal, October 18, 2016
FBI Raids UDF IV Offices In Dallas, Texas, Stockbroker Fraud Blog, February 19, 2016