ValueWalk learned several months ago that Hayman Capital was short United Development and we just broke the story on twitter. We have FOIAed SEC for further info and been stonewalled on the request although according to an FOIA expert the response from the SEC indicates a possible investigation. We broke the story today because two posts – one on VIC and the other on HVST (by an anonymous individual possibly connected with Hayman) allege the company to be a fraud. We have several reasons to believe those reports came from Hayamn Capital, but it is not confirmed yet. However, both reports use a similar thesis to Hayman’s. Hayman and United Development have not responded to a question for comment. UDF is the company we alleged to in this post. Stay tuned for more on this story, follow up documentation, and the non public REIT sector in general.

What follows is a thesis on why the stock is a zero – the thesis is similar to Hayman’s but it is unclear if it is Hayman’s. Also VIC summary screenshot.


United Development Funding – Originally posted by Investors for Truth on Harvest

December 4, 2015

Mr. Larry Autrey

Managing Partner

Whitley Penn LLP

8343 Douglas Avenue, Suite 400

Dallas, Texas 75225

Mr. James Penn

Mr. B. Glen Whitley

1400 West 7th Street, Suite 400

Fort Worth, Texas 76102


On November 24, 2015, United Development Funding III, L.P. (“UDF III”), United Development Funding IV (“UDF IV”), United Development Funding Income Fund V (“UDF V”), and United Mortgage Trust (“UMT”) (collectively, the “Companies”) each filed an 8-K with the Securities and Exchange Commission (“SEC”) stating that Whitley Penn, LLP “has declined to stand for reappointment as the Company’s independent registered public accounting firm,” and its declination was “accepted by the Company’s audit committee.” These 8-Ks further state that

(i) there were no disagreements between the [Companies] and Whitley Penn on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Whitley Penn, would have caused Whitley Penn to make reference to the subject matter of the disagreement in its report on the [Company]’s consolidated financial statements, and (ii) there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

Whitley Penn acknowledged the filings and agreed “with the statements concerning our firm contained therein.” As you know, the Companies are affiliates of each other, externally managed or advised by the same principal group of related individuals, and generally engage in the business of unregulated lending to residential real estate developers, primarily in North Texas and to the same, small group of developers. A review of the Companies’ periodic filings (Forms 10-K, 10-Q, 8-K, proxy statements and offering documents, collectively, the “Filings”) filed with the SEC, a review of county property records (central appraisal districts and deed recordings) and visits to numerous project and development sites raises a number of serious questions about (i) the legitimacy of the financial and other relationships between affiliated entities and individuals and (ii) apparent accounting irregularities. In addition to potentially significant issues regarding the adequacy of the disclosures in the Filings, it also appears that there may be material misstatements in the audited financial statements for the fiscal years ending 2012, 2013 and 2014, as well as the interim quarterly filings for the same periods. These issues raise serious concerns about Whitley Penn’s prior audit work, but, more importantly, Whitley Penn’s specific representations to shareholders and the public market that there were no “disagreements between the [Companies] and Whitley Penn” and no “reportable events.” As discussed below, there are a number of apparent irregularities that give rise to questions as to (i) whether Whitley Penn had a reasonable basis for making the representations contained in the Companies’ Forms 8-K (which shareholders and the market have clearly relied upon) and (ii) whether Whitley Penn intentionally, recklessly or negligently ignored obvious red flags.

United Development Funding

United Development Funding – Red Flags:

  • The primary assets of the Companies are loans, and the book value of assets appear to be materially overstated, either because the loans have insufficient reserves or have inadequate collateral supporting them.
  • Loans appear to accrue larger and larger balances for years (more than doubling in some cases) without ever generating any cash receipts, which lead to questions about the accounting treatment of these loans, including how income is recognized and later capitalized to long-term asset accounts. This raises serious questions about the carrying value of the loans and the potential for materially overstated book value of assets.
  • Management fees are assessed on the value of assets under management. If the book value of the Companies’ assets is materially overstated, the external manager may have improperly received inflated management fees.
  • United Development Funding IV is not accruing any provision for loan losses despite a material outstanding balance of past due loans (loans that have matured without being repaid or extended).
  • United Development Funding III, UDF IV and UMT are not reserving against certain loans that have a high probability of being impaired (e.g. loans that remain outstanding but that have not matured).
  • United Development Funding IV’s largest borrower is a private real estate developer based in Farmers Branch, Texas which does business under the name of Centurion American through a complex web of affiliated entities, which are controlled by Dallas businessman, Mehrdad Moayedi (“Moayedi”) (Moayedi, Centurion American entities and their affiliates are collectively referred to as “Centurion”). Loans to UDF IV’s largest borrower, Centurion, do not appear to be armslength transactions. These loans do not appear to be repaid upon maturity, and UDF IV does not appear to receive any compensation for such extensions.
  • The largest borrower of United Development Funding III represents 43% of loans. The largest borrower of UDF IV represents 67% of loans. The largest borrower of UDF V represents 62% of loans. While this loan concentration is disclosed individually for each of the Companies, it is not disclosed that the largest borrower of each of UDF III, UDF IV and UDF V is one and the same – Centurion – and that there exists an inherent default risk across the Companies associated with this concentration in a single borrower. As a consequence, each of the Companies’ financial condition appears to be affected by, and dependent on, one another, which also does not appear to be disclosed.
  • The largest borrower of each of United Development Funding III, UDF IV and UDF V may be insolvent. This concern is based on, among other information, the fact that
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