Kyle Bass’s market bet against a Texas real-estate lender seemed like an astute move. Throughout 2015, the hedge-fund manager accused the lender, United Development Funding, of operating like a Ponzi scheme. Authorities opened civil and criminal investigations into UDF, and Bass counted his winnings as UDF stock eventually fell to $1.
Today, Bass is also facing regulatory scrutiny.
After earning some $34 million by selling short shares of real-estate investment trust UDF IV, Bass’s Dallas-based company is under investigation by U.S. securities regulators, according to people familiar with the matter. They are looking at whether Bass’s relentless criticism of UDF — including his allegations of widespread undisclosed problems in its loan portfolio — conveyed false or misleading statements that amounted to market manipulation, the people said.
Separately, UDF has sued Bass and his firm, Hayman Capital Management LP, accusing it of distorting the lender’s record — a claim Bass and Hayman deny. A Texas appeals court last year allowed the lawsuit to proceed, rejecting Bass’s argument that his firm’s commentary about UDF was protected by the First Amendment. Bass declined to answer questions about any Securities and Exchange Commission investigation. A lawyer for Bass and Hayman said in a letter that UDF perpetrated a “multi-hundred-million-dollar fraud” and that questions about Hayman’s conduct were driven by “vendettas of an advance group of charged fraudsters against their whistleblower (Hayman).” The SEC investigation is in its early stages and may not result in any formal claims.
Short sellers and government authorities can have a symbiotic relationship, sometimes serving each other’s interests in examining possible fraud. Mr. Bass or other Hayman representatives communicated in person or on the phone with the SEC and the Federal Bureau of Investigation eight times in 2015 before the FBI raided UDF’s headquarters in February 2016, according to records UDF elicited from Hayman in its lawsuit.
In 2018, two UDF funds—UDF IV and UDF III—and the executives who managed them settled SEC claims that the firm fraudulently overstated the value of one loan and misled investors about its practice of using money from one fund to make distributions to shareholders in the other. The two UDF funds are real-estate investment trusts, or REITs, whose shares can trade on stock exchanges.
Five UDF executives paid more than $8.2 million; but they, as well as the funds, neither admitted nor denied the allegations. In the settlement, the SEC didn’t use the term Ponzi scheme, as Mr. Bass did, and UDF has denied being a Ponzi scheme.