DALLAS, April 21, 2020 /PRNewswire/ -- The Public Company Accounting Oversight Board (PCAOB) announced sanctions imposed upon Whitley Penn LLP, the independent auditor of United Development Funding III, L.P. (UDF III) and United Development Funding IV (UDF IV), and three Whitley Penn partners (Susan Lunn Powell, Jeffry Shannon, and John Griffith Babb) in their individual capacities. The sanctions stem from violations of PCAOB rules and standards in connection with (i) the audits of the 2012-2014 financial statements of UDF III and the review of that issuer's Q3 2015 interim financial statements, and (ii) the audits of the 2013-2014 financial statements of UDF IV and the review of that issuer's Q3 2015 interim financial statements.
Whitley Penn will pay a $200,000 penalty and be required to hire an independent consultant to review, evaluate and implement enhancements to Whitley Penn's quality control processes and procedures applicable to audits and reviews. The three named Whitley Penn partners, who served as UDF engagement partner or engagement quality review partner, were each also required to pay personal monetary penalties, and will be subject to further suspensions or limitations in their respective practices on behalf of registered public accounting firms. The PCAOB deemed this action as "necessary and appropriate, for the protection of investors and to further the public interest in preparation of informative, accurate and independent audit reports." These sanctions and restrictions were the result of voluntary offers of settlement submitted by Whitley Penn LLP and the three individual partners, which the PCAOB accepted.
The veracity of the financial statements issued by UDF III and UDF IV are at issue in a defamation lawsuit filed by United Development Funding against Hayman Capital Management, LP and J. Kyle Bass.
The lawsuit has been remanded to Dallas County Court by the Texas Supreme Court where discovery will proceed. Kyle Bass said, "Both the United States Securities and Exchange Commission (SEC) and the PCAOB have now sanctioned and fined UDF's management and auditor based upon specific factual findings consistent with our research – UDF was, among other improper practices, paying purported returns to existing investors by using funds contributed by newer investors. This matches the SEC's textbook definition of a Ponzi-like scheme."
In February 2016, the FBI executed a federal search warrant at UDF's headquarters in Grapevine, TX. UDF III and UDF IV have not filed financial statements for more than 4 years (over 16 reporting periods since September 30, 2015) and are facing SEC action seeking to revoke their securities registrations. The SEC charged UDF III, UDF IV, and its executives with numerous violations of federal securities laws. The charges detail, "from at least January 2011 through December 2015, UDF used money from a newer fund to pay distributions to investors in an older fund, without adequately disclosing the use of funds and the nature and status of loans made to developers." UDF's executives ultimately were ordered by the SEC's Enforcement Division to personally pay $8,200,000 in disgorgement of ill-gotten gains, civil penalties, and prejudgment interest.
UDF III, UDF IV and other UDF entities and officers have also faced a number of past and current private legal actions for their actions, including investor suits in Dallas and Fort Worth federal courts. Pending federal civil suits include (i) Brooks v. United Development Funding III, L.P et al., Case No. 4:20-cv-00150 in the United States District Court for the Northern District of Texas, Fort Worth Division; and (ii) Howell Family Trust DTD 01/27/2004 v. Hollis M. Greenlaw, et al., Case No. 3:18-CV-02684, pending in the United States District Court for the Northern District of Texas, Dallas Division.
Furthermore, on March 20, 2020, Dallas homebuilder Megatel Homes, LLC filed a federal racketeering and fraud lawsuit against Mehrdad Moayedi (UDF's largest borrower) and several United Development Funding entities and executives in Case No. 3:20-cv-00688, pending in the United States District Court for Northern District of Texas, Dallas Division. Megatel's allegations are consistent with Hayman's research.
Click for the full text of the Order issued by the Public Company Accounting Oversight Board.
Click for the full text of the SEC's Press Release and the SEC Complaint.
Click full the full text of Megatel Homes LLC's Complaint.
SOURCE Hayman Capital Management, L.P.