Anonymous Author Responds To UDF Statement: Enron, Madoff And Stanford Started With SEC Fact-Finding Investigations

Shares of United Development Funding, a real estate investment trust, plunged on Thursday after an anonymous report was posted to

, a hedge fund network. The report argued that United Development is a "Texas-sized scheme" and "the cracks in UDF's façade are starting to appear." Related Link:

Citron Research's Andrew Left also commented on the report and told Benzinga that the company appears to be a Ponzi scheme. Left also

that UDF's stock "can go to 0."

UDF

to the Ponzi scheme allegations on Thursday, noting that a hedge fund is trying to "unlawfully profit by manipulating and depressing the price of United Development Funding IV shares." The statement added that it has been cooperating with the SEC since April 2014 and that the investigation is "not an indication that any violations of law have occurred or that the SEC has any negative opinion of any person, entity, or security." "We believe that the Companies have appropriate policies and procedures in place to ensure accurate financial reporting and compliance with all applicable rules and regulations," the company added in its statement. "While it is not possible to predict the timing or outcome of the SEC fact-finding investigation, we believe that this matter will not have a material adverse effect on the Companies' consolidated results of operation, financial position, or liquidity."

Harvest provided Benzinga with a copy of the anonymous author's follow up to his original post. The report began by noting that UDF's statement "does not refute any allegations" and actually discloses the "shocking revelation" that it has been under investigation by the SEC since April 2014. "While the Company attempts to down play the seriousness of the investigation, we note that Enron, Madoff, and Stanford all started as non-public SEC fact-finding investigations," the author pointed out. The report went on to describe the company's business practice: UDF III, UDF IV, and UDF V's largest borrower, Centurian, was issued a second-lien loan (via Shahan Prairie LP) by UDF in 2004 to acquire raw land. The same borrower, along with Shahan Prairie, received a loan from UDF III in 2007 – which was modified, extended and increased at least three times over the following seven years, with UDF III's lien on the land tripling over the same time period. Centurion and Shahan Prairie received a loan from UDF V in 2015. Meanwhile, proceeds from the UDF V loan were partially used to repay UDF III and the collateral is "still raw, undeveloped land." "UDF V specifically states that it will not lend to affiliates or participate in loans issued by its affiliates," the anonymous author wrote. "UDF V has done explicitly what it said it would not do; it has just done it in a very opaque way at the asset level rather than directly buying loans from its affiliates, a practice which its predecessors actively engaged." "Half of UDF V's loans to date have been issued to UDF III and UDF IV's largest borrower, Centurion, and specifically to entities that previously (and at the time of issuance) had loans outstanding due to UDF III and UDF IV," the report added.

Bottom line, "The Company does not disclose this, because it appears to be engaging in activities that it claimed it would not and because it appears UDF V is the latest mechanism by which liquidity is being provided to affiliates, UDF III & UDF IV." Finally, "Many other examples just like Shahan Prairie exist within the UDF structure" and this was merely one example to "highlight how capital from later UDF vintages is used to provide liquidity to older UDF vintages (and older investors)."