Hedge funder Kyle Bass's $34 million real-estate short could cost him $1 billion

Kyle Bass of Hayman Capital speaking at a 2016 appearance.

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A Texas investor who accused a real-estate financing group of operating as a Ponzi scheme now faces a $1 billion lawsuit that is getting closer to trial.

Kyle Bass, the principal of Hayman Capital Management, netted $34 million starting in 2015 by shorting shares of United Development Funding IV, a publicly traded real estate investment trust. Bass called UDF a “Ponzi scheme,” and urged the FBI and the Securities and Exchange Commission to investigate the trust.

UDF responded by suing Bass in 2017, saying he distorted the company’s financials and dealings with Centurion American, one of its biggest borrowers. The company also claimed Bass tried to bully its accountants into saying something that would raise doubts about UDF’s financial health. The case has been underway for about four years, and is scheduled to go to trial in January, though the date may be pushed further.

On July 9, Dallas Judge Sally Montgomery appointed a retired judge to oversee evidence production, which she said Bass and UDF have been arguing over on an almost weekly basis. Judge Montgomery also said the damages in the case “could exceed one billion dollars.”

The case, United Development Funding IV v. Bass, is just one part of a sprawling regulatory and legal morass related to Bass and his six-year war with UDF. In 2018, UDF paid $8.3 million to settle the SEC’s investigation of payments made to developers by one UDF fund that were used to repay loans the same developers had taken from another UDF fund.

But in 2020, the Wall Street Journal said the SEC was also investigating Bass for manipulating the market for UDF IV shares.

Despite settling with securities regulators, UDF has fought back against the FBI in a criminal probe. Earlier this year, it filed what is known as a Bivens action against several federal agents, arguing that its constitutional rights were violated. 

The civil lawsuit between UDF and Bass has also been very contentious. In March, Bass and his codefendants were ordered to pay $256,000 after a judge rejected their request to boot UDF’s lawyers from the case. 

The parties have been fighting for months about which witnesses must testify and what evidence may be produced, with UDF saying Bass is wrongly trying to obtain evidence related to government probes when the focus should be on whether his attacks on UDF were true.

Paul Pelletier, a lawyer for UDF, said in an email that the company is anxious to go to trial and “confident that the truth will resonate loudly in a court of law.” He said discovery has shown that Bass not only sought to profit from his short, but to drive down the value of UDF’s debt and acquire it at firesale prices.

Jeff Tillotson, who represents Bass, said his client plans to mount a vigorous defense. “Mr. Bass denies plaintiffs suffered any damages and, to the extent they were harmed at all, it was caused by their own actions and the manner by which they ran their business,” he said in an interview.

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