Kyle Bass' latest short target got raided by the FBI and the stock is tanking

Before you go, we thought you'd like these...
China Banks May Lose 5 Times US Banks' Subprime Losses in Credit Crisis

The FBI raided the office of United Development Funding IV, a Texas-based real estate investment trust (REIT), according to people familiar with the matter.

The stock fell more than 54% and was last trading around $3.20 per share.

NBC Dallas-Fort Worth reports that agents were seen carrying boxes away from the premises.

UDF is the latest short target of Texas hedge fund manager J. Kyle Bass, the founder of Dallas-based Hayman Capital Management.

See photos of Bass:

6 PHOTOS
J. Kyle Bass, Hedge fund manager
See Gallery
Kyle Bass' latest short target got raided by the FBI and the stock is tanking
From left, Texas-based fund manager, Kyle Bass, Peter J. Solomon Company Chairman Peter J. Solomon, and Managing Director and Financial Services Analyst Michael Mayo, are sworn-in on Capitol Hill in Washington, Wednesday, Jan. 13, 2010, prior to testifying before a the Financial Crisis Inquiry Commission. (AP Photo/Pablo Martinez Monsivais)
Erik Schatzker, editor for Bloomberg Television, left, and J. Kyle Bass, managing partner of Hayman Capital Management LP, participate in a discussion during a Bloomberg Link Japan event in New York, U.S., on Tuesday, June 7, 2011. The conference is focused on how Japan will finance its reconstruction while dealing with debt, deflation and an aging demographic; and the opportunities that presents for investors. Photographer: Timothy Fadek/Bloomberg via Getty Images
J. Kyle Bass, managing member with Hayman Advisors LP, speaks during the Value Investing Congress in New York, U.S., on Wednesday, Oct. 13, 2010. Top money managers offer attendees proven approaches to navigate the current investment market during the two-day conference. Photographer: Jonathan Fickies/Bloomberg via Getty Images
J. Kyle Bass, managing partner of Hayman Capital Management LP, speaks during a Bloomberg Link Japan event in New York, U.S., on Tuesday, June 7, 2011. The conference is focused on how Japan will finance its reconstruction while dealing with debt, deflation and an aging demographic; and the opportunities that presents for investors. Photographer: Timothy Fadek/Bloomberg via Getty Images
UNITED STATES - DECEMBER 15: J. Kyle Bass smiles in the office of his company, Hayman Capital Partners, in Dallas, Texas, on Friday, Dec. 14, 2007. In 2006, Bass sat in a conference room at one of Wall Street's biggest investment banks, selling his story of the meltdown to come in the U.S. housing market. (Photo by Mike Fuentes/Bloomberg via Getty Images)
of
SEE ALL
BACK TO SLIDE
SHOW CAPTION +
HIDE CAPTION

Earlier this month, Bass launched a website that accuses the company of operating a "Ponzi-like real estate scheme."

United Development Funding IV responded in statement that same day saying Bass' website contains "multiple false and misleading statements."

The company also said it believes that Hayman Capital "intends to continue disseminating misleading information. We remain focused on protecting investor value through the preservation of our portfolios, and we will defend our funds aggressively against these unfounded accusations."

The short report

Back in December, UDF's stock plummeted after an anonymous short seller using the pseudonym "Investor For Truth" published a report on the investing website Harvest Exchange. At the time, the value-investing blog ValueWalk said it believed that the short seller was Bass. It was never publicly confirmed until this month.

Investors For TruthBass' thesis is that the low-interest-rate environment for the past six years has been the main driver of growth in the nontraded REIT asset class. In 2015, the Securities and Exchange Commission named nontraded REITs as one of the five most serious problems affecting retail investors.

Nontraded REITs are public because they reach the minimum threshold of shareholders to be considered public. They're not liquid investments, according to Bass.

Bass believes that it's the unsuspecting "mom and pop" retail investors, who are seeking yield in the low-interest-rate environment, who get pitched to invest in nontraded REITS by financial advisers. These financial advisers have incentives to sell nontraded REITS by getting paid commissions from the company, the report said.

United Development Funding is a mortgage REIT that lends money to develop properties and charges interest on the loans.

UDF I was a real-estate lender and real-estate developer in the years leading up to the financial crisis. UDF I began to default on its debt, however, and used United Mortgage Trust to provide liquidity for UDF I, according to the report. As that problem continued, UDF III came along and then UDF IV, the report said.

Bass said the company had raised over $1 billion for four different public entities.

The company partnered with the brokerage firm RCS Capital (RCAP) to raise money from retail investors for UDF IV. RCS Capital was paid commission fees for selling the REIT to retail investors.

Bass accused UDF IV of since using that money to provide liquidity for UDF I and UDF III. Right now, UDF V is being used to provide liquidity to UDF IV.

The company had said that it's been cooperating with the SEC in a "fact-finding investigation" since April 2014.

NOW WATCH: Shockingly common misconceptions about Islam

See Also:

Read Full Story

People are Reading