Legal sparring escalates in NexPoint suit against imprisoned former CEO and executives of United Development Funding - Dallas Business Journal (2024)

A trial date has been set, and legal maneuvering has intensified in a lawsuit pitting multibillion-dollar alternative investment firm NexPoint Advisors LP against the imprisoned former CEO and top executives of beleaguered North Texas residential real estate lender United Development Funding.

Dallas-based Nexpoint claims in its lawsuit that the lender’s co-founder and now-former CEO and others formerly in management positions have improperly used tens of millions of dollars in shareholder funds to pay their personal legal fees.

NexPoint’s lawsuit against Grapevine-based United Development Funding, investment fund UDF IV, and one current officer plus three imprisoned former officers of the firm and its network of investment trusts and funds, further claims the executives tried to cover their alleged misuse of shareholder money by making it look like the funds came from payments from UDF’s largest borrower, Mehrdad Moayedi, owner and president/CEO of Farmers Branch-based Centurion American Development Group.

Moayedi and United Development Funding deny any wrongdoing in their business dealings.

The case is set for a non-jury trial on April 8, 2024, in Texas’ 192nd Judicial District. While that’s more than a year away, there’s plenty of legal ground to cover between now and the opening statements, according to a scheduling order signed on Oct. 27 by District Judge Kristina Williams.

Some of the matters on the pretrial to-do list for the attorneys for NexPoint and UDF include depositions; the exchange of an abundance of data, reports and business records; designation of expert witnesses; exchange of witness lists and lists of exhibits; and pretrial arguments over the admissibility or relevance of all of the above and more.

Williams’ scheduling order sets staggered deadlines and ground rules for the pretrial proceedings. An example of the ground rules and scope: Williams’ order "limits" each side to 75 hours of depositions and each party to 50 interrogatories.

The order also requires the sides to attempt to settle the case through mediation in Dallas County Civil District Court. But first, UDF and NexPoint's lawyers and executives — who have a bitter and battle-scarred history — must agree on a mediator, or Williams will appoint one.

In court documents, NexPoint calls itself a “significant shareholder” in UDF IV, one of the United Development Funding’s real estate investment trusts. The REIT owns, operates and finances income-generating real estate, focusing on loaning money to developers of masterplanned communities.

NexPoint’s position as a major shareholder in UDF IV gives it standing to sue the REIT, NexPoint’s filings in the case state.

The folks at UDF, past and present, disagree.

UDF attorney Paul Pelletier has filed motions seeking to have the case dismissed, claiming in court documents that UDF’s claims have no merit and NexPoint has no standing to file it in Texas. If the case is dismissed and NexPoint refiles, the venue should be in Maryland, where UDF IV is chartered, and not in Texas, Pelletier’s motions argue.

UDF former executives Hollis Greenlaw,Benjamin Wissink andCara Obert, who are now serving prison sentences, along with non-incarcerated UDF executive Todd Etter,have already used UDF IV shareholder assets to pay more than $65 million in legal fees and indemnification expenses, and they may be continuing to misuse shareholder assets, NexPoint’s lawsuit alleges.

Centurion American is one of Dallas-Fort Worth’s largest developers of residential and mixed-use communities, as well as other projects, including high-profile jobs like the renovation of the Statler Hotel and adjacent development in downtown Dallas that houses The Dallas Morning News. Another notable project being handled by Centurion is the redevelopment of the Collin Creek Mall site underway in Plano.

Nexpoint’s lawsuit, importantly, does not name Moayedi or Centurion American as a defendant. However, Moayedi is mentioned by name more than 50 times in the 42-page original complaint in NexPoint’s lawsuit, and Centurion is named five times. References to Moayedi and his company have subsequently appeared in motions and other documents filed by NexPoint since the original complaint was submitted in August.

NexPoint’s recent court filings make it clear that the connection between UDF and Moayedi and Centurion will be central to its case.

For example, Nexpoint’s lawyers in court documents have requested that Greenlaw,Wissink, Obert and Etter produce:

Nexpoint’s filings also specify that “Moayedi” refers to “any entity owned or controlled by him, including but not limited to Centurion.”

When contacted after NexPoint's initial filing, Moayedi denied any wrongdoing and said he has been completely transparent with all inquiries.

"We have been totally cleared of any kind of wrongdoing we would have with anybody,” Moayedi said in a brief interview with theDallas Business Journal in September. “We’ve looked at everything. Whatever it is we've had to do, we've done. We've gone through the proper channels with all the people that looked at it from the SEC to the DOJ.”

A spokesperson for NexPoint told theBusiness Journalin an interview in September that the firm’s aim with the litigation is to protect its investment and that of thousands of other shareholders.

“NexPoint is continually seeking to engage with UDF’s board, management, and advisors that have the authority to do what’s right and act in a responsible manner,” Lucy Bannon, chief communications officer, said in an email to theBusiness Journal. “This is a formerly public company that hasn’t complied with the most basic filing requirements or held a shareholder meeting in years.”

Excessive legal fees and other expenses continue to erode UDF IV's value, Bannon added at the time. “It’s imperative that we reach a resolution that enables the company to move beyond the outrageous acts that have been carried out,” she said.

The alleged wrongdoing by UDF’s entities and its executives dates back to about 2014 and has spawned multiple civil suits and a criminal case in early 2022 that resulted in combined sentences of 20 years in federal prison for UDF’s top four executives.

TheBusiness Journalprovided gavel-to-gavel coverage of the trial and its aftermath.

NexPoint’s latest litigation in state court alleges that Greenlaw,Etter, Obert and Wissinkused shareholder money to pay their own personal obligations under an SEC settlement, lied about using shareholder money to satisfy their financial obligations, improperly spent millions of dollars in shareholder money to fund their criminal defense, paid themselves lucrative management fees on overvalued assets, and tried to hide their actions by blocking audited financials of UDF.

Moayedi owes UDF entities roughly $1 billion, NexPoint’s complaint says. Yet UDF and its executives “have continuously refused to undertake any collective actions” for money owed by Moayedi or Centurion, according to the complaint.

“To have held Moayedi accountable would have been to blow up the railroad track that the UDF fraud train has barreled down since at least 2014,” NexPoint’s original complaint in the lawsuit says. “The massiveness of this debt, the lack of collection or enforcement action and the ever-presence of Moayedi in the questionable business dealings of the UDF management team begs the question of who was in control of UDF — UDF management or Moayedi?”

Some connections between UDF executives and Moayedi-controlled entities surfaced in the criminal trial in January 2022 in federal court in Fort Worth. Heading into the trial, Moayedi was named as a potential witness to testify about his and Centurion’s relationship with UDFand transactions with the company, but he was never called to the stand by the prosecution or the defense.

Ultimately, the jury convicted Greenlaw, Obert and Wissink, along with their UDF colleague Jeffrey Brandon Jester, of 10 counts each, including securities fraud, conspiracy to commit securities fraud, and conspiracy to commit wire fraud affecting a financial institution.

At the time of the convictions and in the years preceding, Greenlaw, who co-founded United Development Funding with Etter in 2003, was CEO and board chairman of the firm, CEO and board chairman of UDF IV, and held other titles and ownership stakes in UDF and its entities. Greenlaw has, since his conviction and imprisonment, stepped down as CEO.

Obert, at the time of her conviction, was chief financial officer of UDF, treasurer and CFO of UDF IV, and held other positions, including CFO of UMTH Land Development LP, an entity that operates under the United Development Funding conglomeration of companies andserves in an asset management capacity for UDF IV and select other UDF entities.

When the convictions were handed down, Wissink was UDF partnership president and chief operating officer of UMTH General Services LP, which is part of the UDF family of companies and acts as an advisor for UDF IV and other UDF entities. Wissink also served on the UDF IV Investment Committee.

At the time of conviction, Jester was asset management director for UDF and carried out other management responsibilities.

Etter did not stand trial in the criminal case and has not been indicted for any criminal offense. He was, however, a defendant in a lawsuit brought by the SEC and entered into a settlement agreement in 2018 in connection with the SEC suit. In addition to co-founding United Development Funding with Greenlaw, Etter serves on the UDF IV Investment Committee and in other capacities for UDF and its family of investment funds and entities. Etter is the 100% owner of UMT Services, which is the general partner of UDF IV and select other UDFentities.

Together, Etter and Greenlaw have more than 60% beneficial ownership of all the partnership interests of UDF IV and over 50% ownership of select other UDF entities, meaning they effectively control those entities.

Greenlaw, Obert, Wissink and Jester were sentenced in May and reported to U.S. Bureau of Prisons facilities in July.

U.S. District Judge Reed O’Connor sentenced Greenlaw to seven years in federal prison and Obert and Wissink to five years. Jester was sentenced to serve three years. Greenlaw, Wissink and Obert were also ordered to pay fines of $50,000 each.

All four executives have appealed their convictions to the U.S. Fifth Circuit in New Orleans. The appeal is scheduled for oral argument on Feb. 6.

Federal prosecutors claimed during the trial last January that UDF duped thousands of investors nationwide, including individuals, banks and other institutions, out of more than $100 million in a Ponzi scheme involving loans to residential housing developers across Texas.

NexPoint is among the largest investors in UDF IV, with more than 1.76 million shares accumulated over the five years since its first purchase of 5,000 shares in June 2017, the alternative investment firm’s current lawsuit in state court says. NexPoint now owns about 5.8% of the outstanding UDF IV shares, according to the suit.

“The remaining UDF IV shares are owned by an estimated 30,000 shareholders, most of whom are ‘mom and pop’ retail investors,” the original complaint in the lawsuit says.

United Development Funding manages and controls a family of investment funds that raise capital through the issuance of securities. The purpose of each UDF fund is to make relatively high-interest loans to developers of residential real estate — typically large, masterplanned communities, including many in Texas — and then pay monthly dividends to investors earned from those loans.

According to NexPoint, a flaw with UDF’s business plan is that its fund does not typically begin to receive cash interest on the loans until the masterplanned community is developed and lot sales begin on the project that was pledged as collateral to secure the loan. In many cases, cash interest does not begin for several months or even years. All interest not paid on loans is accrued and compounded — meaning interest is paid on interest — sometimes resulting in large accumulations of unpaid interest on loans until lot sales begin, according to NexPoint’s lawsuit.

The portfolios of UDF funds were supposed to be diversified as to borrowers and developments, NexPoint contends in its lawsuit. But, according to trial testimony and the NexPoint lawsuit’s recap of it, there was considerable overlap of borrowers between the various UDF funds and heavy concentrations of borrowers within individual UDF funds.

Transactions with Moayedi, for example, made up 67% of the loans in UDF IV, 43% of the loans in UDF III, and 62% of UDF V’s loans, according to the NexPoint suit.

Although Moayedi and Centurion are not defendants in the lawsuit, NexPoint calls the allegations in its suit “an extensive, but not exhaustive, list of abusive behavior, fraud, misconduct and breach of duties on the part of the defendants, Moayedi and the UDF IV board of trustees.”

Citing testimony from the criminal trial, NexPoint’s suit says that UDF’s loans to developers typically carried interest rates of 13% or more, depending on the UDF fund that made the loan, and such loans were “interest-only” loans. The loans also had an origination fee.

Because the loans were made against properties that were not income-producing properties and borrowers were dependent on the completion of development activities and lot sales for the repayment of interest and principal, interest at the rate of 13% accrued on UDF IV loans to Moayedi, and accrued interest was added to the principal balance of the loan, resulting in substantial compounding of interest, NexPoint's suit says.

From 2015 to 2020, Moayedi’s loan balance increased by roughly $300 million, much of it due to accrued and rapidly compounding interest payments that could not be made because of a lack of sufficient lot sales by Moayedi, according to NexPoint's complaint.

As one former employee of Moayedi’s business told the FBI during the agency's investigation, there was no possibility that Moayedi could repay his ever-increasing loan balance. But UDF management continued to loan to Moayedi in order to continue paying themselves management fees for advisory and other services through various UDFentities, according to NexPoint’s recap of trial testimony.

Instead of trying to collect on Moayedi’s balance, UDF continually decreased Moayedi’s personal guaranty and eventually eliminated it entirely, NexPoint’s lawsuit alleges.

In 2014, public disclosures cited by NexPoint show that Moayedi’s guaranty was decreased from $25 million to $10 million, and in 2018, Moayedi’s guaranty was completely eliminated.

The high concentration of loans made to a single borrower, the rapid compounding of interest on the loans, the alleged refusal by UDF to collect the debt, the release of personal liability, and personal ties between Greenlaw and other UDF executives and Moayedi point to Moayedi’s participation in UDF’s fraud scheme, the NexPoint complaint says.

In a private offering memorandum, Centurion said that as of March 2020, the outstanding balance of loans made by UDF to Centurion entities associated with the Centurion UDF projects totaled about $837 million, NexPoint’s suit says.

The UDF executives’ failure to encourage UDF IV to attempt to collect on Moayedi’s “ever-ballooning debt” constitutes a breach of their fiduciary duty, NexPoint contends in its suit.

UDF entities and the executives named in NexPoint’s suit continued to collect fees from UDF IV under an advisory agreement at the rate of $708,333 per month, causing UDF IV to tap shareholder funds to pay legal fees and expenses on behalf of the individual executives, NexPoint contends.

NexPoint further alleges Moayedi improperly collaborated with UDF and its executives to deceive shareholders through “fake” loans and “fake” payments that made it appear that UDF IV was on stronger financial footing than the fund really was.

“UDF needed Moayedi, first to continue its fundraising and growth, as Moayedi served as UDF’s primary source of loan deals, and second to support the defendants as they ran into legal troubles,” NexPoint’s complaint says.

Moayedi told theBusiness Journalin September that his dealings with UDF, its executives and entities have been thoroughly investigated by the appropriate regulatory agencies and any claims of wrongdoing have been found to be without merit.

“Everybody's looked at it (his dealings with UDF) and we've done everything we were supposed to do,” he said.

NexPoint, founded by hedge fund manager Jim Dondero, has a contentious history with United Development Funding and, outside the courtroom, pursued a hostile takeover of UDF IV.NexPoint Advisors LP made more than a dozen unsolicitedtender offers to buy all shares of the fund. The offers were repeatedly extended to UDF shareholders from December 2020 through mid-September 2022, at which time NexPoint withdrew the offer.

UDF repeatedly urged shareholders to reject NexPoint’s offers, arguing in press releases and regulatory filings that theprice they were offering per share was too low.

Pelletier argues in the lawsuit that NexPoint is now trying to use the courts to take control of UDF IV after failing to do so through the repeated tender offers.