Four Arkansans face lawsuit over failed mortgage company: investors pumped in more than $10 million before Colorado Venture went bankrupt

Arkansas Business, July 10, 2006 by Mark Friedman

In late 2003, Florian Homm thought he could turn around UCAP Inc., a publicly traded mortgage company in Denver run by four Arkansas businessmen.

"Please treat my money as if it were your own," Homm said in an e-mail to UCAP's president and CEO, Dan Moudy of Benton, and board member William McCord of Hot Springs on Nov. 19, 2003, after he agreed to pump $5.1 million into UCAP. "Everybody--please make sure we do not satisfy those creditors who make the most noise but ... those that accept a large hair cut."

Within a few months, Homm's money was spent. By July 2005, the Securities & Exchange Commission had delisted UCAP.

Homm of Majorca, Spain, was one of three investors who now say they were duped into pouring more than $10 million into UCAP.

Homm, Joseph McAdams of Hot Springs and Richard Smyth of Amelia Island, Fla., are suing Moudy; McCord; Lynn Bradley of El Dorado, UCAP's chief financial officer; and David Colwell, UCAP's chief operating officer. The investors also have named the Little Rock accounting firm Moore Stephens Frost in their lawsuit filed in U.S. District Court in Hot Springs.

The investors are seeking more than $30 million in damages for alleged fraud, violations of sate and federal securities laws, breach of contract, and breach of fiduciary duty.

"The defendants used false and misleading financial reports that hid more than $30 million in losses and glorified financial forecasts to induce further investment including investments by Homm and McAdams," according to the lawsuit filed in May by the investors. "(Moore Stephens Frost) was an active participant in the scheme to defraud, recklessly issuing false financial statements which it knew would be used to raise money from plaintiffs."

Moudy and McCord deny the allegations. Bradley and Colwell haven't filed their answers yet and couldn't be reached for comment.

Moore Stephens Frost vehemently has denied that it did anything wrong and has asked that the case be thrown out of court.

"The complaint does not plead a single fact--a single document, memorandum, e-mail, meeting, etc.--that even arguably raises any (much less a strong) inference that MSF made or issued a false statement knowing that it was false or that MSF had any improper motive to engage in fraudulent conduct," MSF said in its court documents.

MSF also said the statute of limitations has run on the allegations.

McCord and Moudy said they too lost millions in UCAP, which had operations in Arkansas through its main subsidiary, United Capital Mortgage Corp. of Aurora, Colo.

McCord and Moudy have filed their own lawsuit against UCAP seeking a judgment for any amount that they have to pay related to UCAP.

McCord is seeking more than $3.5 million that he has lost as result of being a creditor and investor of UCAP.

Moudy said in his court papers that there was never any "fraudulent scheme" by anyone to encourage the plaintiffs to invest in UCAP or loan the company money.

The four Arkansas businessmen blame the demise of UCAP on the investors, who Moudy said were trying to control UCAP, a once profitable company co-founded by McCord in 1986.

But the investors said that from November 2001 until April 2004, the four Arkansans controlled UCAP and its subsidiary, and they ruined the business.

"The control exercised by the Arkansas Four allowed them to keep the true financial condition of UCAP hidden from plaintiffs, outside directors, investors and the SEC," the investors said in the lawsuit.

The motive for keeping the true financial picture murky, the investors alleged, "was to enable UCAP to continue its lending arrangement with its primary lender, (GMAC Residential Mortgage Funding Corp.) ... (The lender) required UCAP to meet certain financial covenants, such as tangible net worth, shareholder's equity, leverage ratios and net income."

McCord personally guaranteed the mortgage funding's line of credit and was "highly motivated" to make UCAP's financial statements avoid recognition of losses or any facts that would cause the lender any concern about the financial viability of UCAP, the investors said.

"During the period from January 2000 until April 2004, defendants intentionally manipulated the UCAP income statements and balance sheet to enable UCAP to meet the financial covenants of the (Residential Mortgage Funding) loan," the investors said.

David Wells, a Little Rock attorney who is representing McCord and Moudy, said, "We don't believe the case has merit, and we think the details provided in the pleadings clearly establishes that."

Beginnings

UCAP was a multistate provider of mortgage lending and brokerage services that also had real estate investments.

UCAP's business was handled through its wholly owned subsidiary, United Capital Mortgage Corp., which was a full-service residential mortgage lender. It had about 200 employees and generated "substantial" revenue for UCAP.

UCAP had operated under the name of Lahaina Acquisitions Inc. of Denver. (The name wasn't changed to UCAP until July 2002.)

In October 2001, Lahaina appointed Homm, an award-winning fund manager, entrepreneur and capital markets expert, to its board of directors.