FBI Raids Grapevine Financial Firm: United Development Funding Suspected In Ponzi Scheme

The FBI raided a Grapevine, Texas, financial firm amid rumors of an alleged Ponzi scheme, which was exposed by an anonymous source in December 2015. Although United Development Funding IV vehemently denies any wrongdoing, their headquarters were raided by FBI agents on Thursday.

The report, which is titled “A Texas Sized Scheme,” was published on the Harvest Exchange website. According to the anonymous source, “United Development Funding… markets itself to retail investors as an opportunity to diversify portfolios with ‘unique and fundamentally sound investments in affordable residential real estate’.”

Instead, the source suggests UDF is running a Ponzi scheme, which is quite the opposite of “fundamentally sound.” Ponzi schemes got their name from Charles Ponzi, who was the first known operator of a fraudulent investment scheme.

There are always risks associated with investments. However, Ponzi operators entice investors with promises of uncharacteristically consistent and high returns.

In traditional investments, returns are drawn from profits. In Ponzi schemes, they are drawn from capital paid by new investors. Although investors in both scenarios are taking a risk, investors in Ponzi schemes are usually unaware they are participating in an illegal, and particularly risky, scheme.

Ponzi operators and their initial investors can make a generous profit. However, the schemes are destined to fail.

In most cases, the schemes are exposed when investors become suspicious and try to withdraw their funds. Unfortunately, the investors are unable to withdraw their funds because they were used to pay the operator and the initial investors.

As discussed in the “Texas Sized Scheme” report, United Development Funding “exhibits characteristics emblematic of a Ponzi scheme.” According to the anonymous source, “subsequent UDF companies provide significant liquidity to earlier vintage UDF companies, allowing them to pay earlier investors.”

However, the investors are at a significant risk, as the source said “the earlier UDF companies do not appear to be capable of standing alone… “

The anonymous source included correspondence from Mr. Larry Autrey, the managing partner of United Development Funding, to support the claims.

In November 2015, Whitley Penn, which served as United Development Funding’s independent registered public accounting firm, severed ties with the financial firm.

The December 4 letter, which outlined numerous “red flags,” appears to have served as a catalyst for the anonymous report and eventual FBI raid at the grapevine, Texas, facility. However, UDF Chief Executive Officer Hollis M. Greenlaw denies the accusations in the letter and report. In a statement to United Development Funding shareholders, Greenlaw suggests the “misleading information” was published by one or more people who “will profit if the stock price” declines.

According to another UDF statement, the company has been “cooperating since April 2014 with a non-public fact-finding investigation being conducted by the SEC.” However, the details of that investigation were not disclosed.

On Thursday morning, the FBI raided the Grapevine, Texas, location. Dallas News reports the raid lasted several hours and “trading in UDF IV shares was halted” just after noon. As NASDAQ spokesperson confirmed, UDF IV shares will not be traded until the financial company complies with requests for documentation.

Witnesses said the FBI removed numerous boxes from the Grapevine building during the raid. However, the agents did not discuss the raid or the content of the boxes.

Spokespersons for the SEC’s Fort Worth office and the U.S. Attorney in Dallas also refused to comment on the ongoing investigation.

Although the agencies are not disclosing any information about the FBI raid at the Grapevine, Texas, location, it appears that there may have been some truth to the rumors about United Development Funding’s questionable business practices.

[Image via LuckyImages/Shutterstock]