A Texas court has ordered sanctions against hedge fund Hayman Capital, headed by outspoken investor Kyle Bass, calling its actions in a legal dispute with another Texas investment firm “reprehensible.”
The sanctions are the latest development in Hayman’s legal skirmish with United Development Funding, a Dallas-area real estate lender that operates various real estate investment trusts. Bass began shorting the stock of a fund operated by UDF, which Hayman accused of operating like a “Ponzi scheme,” in 2015 and shared its findings with regulators. The FBI raided UDF’s headquarters in 2016, according to reports at the time, and in 2018 two UDF funds and four executives settled charges with the Securities and Exchange Commission that they misled investors about using money from an older fund to pay investors in a newer fund, among other things. Hayman booked a $34 million profit.
Bass rose to Wall Street fame more than a decade ago, when he correctly bet that the subprime housing loan market would collapse; since then, he has become better known for his criticisms of the Chinese government. Bass and Hayman often look for companies to short, sometimes sharing the findings from their investigations with regulators.
This summer, the Wall Street Journal reported that securities regulators were now looking at Hayman, investigating whether its claims against the firm contained “false or misleading statements that amounted to market manipulation.”
A proposed order granting the sanctions against Hayman was filed Thursday in Dallas County Court. The judge has not yet signed it. But in the December hearing in which he granted the sanctions, the judge, Ted Akin, had sharp words for Hayman, accusing the firm of executing a plan “to smear these lawyers… maliciously and viciously.”
Akin was referring to UDF’s outside counsel, particularly attorneys Ellen Cirangle and Jonathan Sommer of law firm Lubin Olson & Niewiadomski LLP. In October, Hayman had filed a motion to disqualify the attorneys on the grounds that they had misrepresented the status of UDF’s settlement negotiations with the SEC.
The court denied Hayman’s motion, and in the December hearing, Judge Akin approved the plaintiff’s request for sanctions. Though the total will likely amount to a slap on the wrist for Hayman, the judge did not mince words in his assessment of the firm’s legal filings.
“I don’t like lawyers to, without any evidence whatsoever, attack another lawyer and accused them of dreadful things like being mobster attorneys, potential perjurers, and guilty of judicial terrorism,” said Akin in the hearing, according to a copy of the transcript. “I don’t think any lawyer wants that put out on the internet, particularly when there’s no evidence of that.”
“Hayman Capital contends that the narrative being pitched by UDF to the court and now the media is inaccurate, and it intends on proving that in the lawsuit,” said Jeff Tillotson, an attorney representing Hayman and Bass, in a statement to Institutional Investor. (Tilletson was not involved in the underlying motion and was retained by Hayman after it had been filed.) “With great respect for the court, Hayman Capital nonetheless fundamentally disagrees that its conduct in bringing a motion it understood to be invited by the court was improper.”
An attorney for UDF declined to comment.
“The thing I object to is the way the lawyers have been personally attacked,” Judge Akin said at the December hearing, according to the transcript. “I find it reprehensible, and in my 57 years I have never seen anything as bad as this case.”
Akin said he did not know how much he would ultimately impose in terms of fines, but said he planned to reimburse the plaintiffs for “whatever out of pocket expenses that they have in dealing with this.”
“The question is, how do I get Mr. Bass’s attention and the lawyers’ attention to stop behavior like this,” Akin continued at the hearing. “I don’t know what it will take… I want the lawyers henceforth to devote their time to the facts in the case, not attacking the lawyers in this case.”
He noted that early in the case, someone made disparaging remarks about one of Hayman’s attorneys, “and I jumped on them about it early on.”
UDF separately sued Hayman in 2017, accusing the hedge fund of distorting UDF’s record. Hayman and Bass have denied these claims, but a Texas judge earlier this year ruled that the lawsuit can proceed, according to the Wall Street Journal.
In response, Hayman has said it has acted as a whistleblower, saying it identified a “multi-hundred-million-dollar fraud” at UDF and that any questions about its conduct were motivated by “vendettas of an advance group of charged fraudsters,” attorneys for the firm told the Wall Street Journal this summer.