United Development Funding has been under investigation by the Securities and Exchange Commission since April 2014. United Development Funding IV, or UDF IV, and its predecessor, UDF III, are what are known as non-traded Real Estate Investment Trusts, or REITs. Non-traded REITs are not traded on any public stock exchanges. They are incredibly illiquid and high cost products that are unsuitable for most investors.
Non-Traded REITs
Due to their private nature and illiquidity, it is very difficult to ascertain the true value of the investment. Similar to other non-traded REITs, UDF III and UDF IV are incredibly high-risk products and also lack the transparency that comes with purchasing securities on the public market. It is that very lack of transparency, as well as the complex nature of the security, that makes it easier for brokers to sell them to their clients through misrepresentations of static pricing and non-correlation to the securities markets.
Non-traded REITs, by their very design, are very self-serving for the broker. For instance, selling them generates very high commissions for the broker. There are many instances of brokers recommending non-traded REITs to clients they know aren’t suited, simply to receive that large commission. Broker commissions for non-traded REITs can be as high as ten percent of the investor’s principal. These commissions compounded with other upfront fees can drain an investor’s principal of up to seventeen percent before any funds are actually put toward the investment. This substantial drain of principal makes it near impossible for investors to see any returns under anything other than a booming market.
Non-traded REITs are poor investments, deceptive in nature, and very difficult to regulate. They are high-risk, illiquid investments that are especially bad for investors looking for conservative to moderate investments. Incredibly, these non-traded REITs are only sold by third-tier brokerage firms. The wire house firms – like Morgan Stanley, Merrill Lynch and Wells Fargo – prohibit their brokers from selling these products because they know that the products are so detrimental to the customer, and the companies involved often has significant conflicts of interest.
United Development Funding III and IV
UDF III and UDF IV were both non-traded teal estate investment trusts that took the deceptive nature of the security to an entirely different level. In 2014 allegations began to arise that UDF IV had been acting as Ponzi scheme. The allegations presented the idea that UDF IV had been falsifying growth and paying investor dividends with money coming in from new, unsuspecting investors. This involved numerous transfers made between UDF IV and UDF III meant to continuously repay loans and pay the shareholders distributions. This also meant that, allegedly, money was not being used to actually develop the property it was meant to be invested in, thus no actual growth was achieved.
In 2015, the United Development Fund filed for bankruptcy, and, just one year later, the FBI raided the UDF offices. In July 2018, the Securities and Exchange Commission officially filed charges against both UDF III and UDF IV, as well as four of the higher up executives at the company. A fifth executive was charged for allegedly signing false SEC filings. The four executives agreed to pay $8.2 million in disgorgement, prejudgment interest, and civil penalties.
Oakes & Fosher Can Help
Many investors are unaware of the legal recourse available to them after losing money due to securities broker fraud and/or negligence. The truth is that investors who have lost money in this fashion may actually be entitled to damages. Oakes & Fosher dedicates its entire legal practice to helping investors across the nation. If you, or someone you know, have lost money investing with United Development Funding III of IV, or non-traded REITs in general, please contact Oakes & Fosher for a free and private consultation. Oakes & Fosher handles cases on a contingency basis, which means there are no fees charged unless we collect for you.
