A government-funded loyalist charity met with police to defend a sinister UVF "show of strength" in east Belfast.
The ACT Initiative, which has strong links to the terror gang, told senior cops that the display earlier this month was a peaceful "walk-through" to deter anti-social behaviour in the Pitt Park area.
Its east Belfast branch later wrote to the PSNI repeating the claim, a letter that was referenced in court on Friday when alleged senior UVF figures Derek 'Banic' Lammey (56) and David 'Wee Mac' Matthews (34) were refused bail. Along with East Belfast UVF boss Stephen 'Mackers' Mathews (58), the trio are charged with unlawful assembly and affray.
But what was not revealed in court are the annual six-figure sums of public cash given to ACT, which was set up to help the UVF transition into a community organisation.
Last year the registered charity, which counts several former UVF life sentence prisoners on its board of trustees, was given almost £300,000 of government cash.
UVF leaders John 'Bunter' Graham and Harry Stockman have met with senior civil servants under the auspices of ACT to ask for £5m of funding to help the paramilitary group abandon criminality.
Government sources told Sunday Life that the charity's public defence of the Pitt Park intimidation could damage future cash requests.
A senior official said: "We were blindsided by this and it will cause problems, particularly with public perception.
"People will rightly ask why taxpayers' money is being given to a charity that is justifying naked displays of paramilitary intimidation."
ACT's defence of the Pitt Park mob came from its east Belfast branch, which regularly meets with the PSNI.
Four other loyalists arrested in connection with the UVF show of strength, which resulted in 11 people seeking shelter in the Ballymac Community Centre fearing for their lives, were freed without charge yesterday.
Among them were Glenn Rainey (34), who had been on bail charged with the murder of Ian Ogle and separate accusations of cocaine dealing.
Loyalist sources told Sunday Life that the UVF's Shankill Road bosses are using the arrests of Stephen Matthews and Derek Lammey to attempt to install a new leadership in east Belfast.
This non-violent coup is seen as essential if the organisation is to get its hands on £5m of government Fresh Start funding.
Graffiti telling Matthews and Lammey, his alleged 2IC (second-in-command), that "your days are done" appeared in east Belfast on Friday.
But UVF sources in the area are claiming it was written by local criminals and is not reflective of feelings on the ground. One said: "The graffiti is strikingly similar to other graffiti that has gone up in east Belfast recently, which points to an agenda-driven and orchestrated campaign designed to cause tension in the loyalist community.
"There is growing frustration that the PSNI has not properly investigated the smashing up of homes belonging to a mother-of-three and a pensioner, or secured CCTV, or arrested the well-known suspects.
"Despite all the provocation, the orchestrated social media campaigns, the false-flag graffiti which appears at key moments and the perceived two-tier policing, loyalists in east Belfast are not going to fall into the trap by reacting."
At Derek Lammey's failed bail hearing last Friday, a prosecution lawyer repeated the PSNI's belief that he is a member of the UVF.
She said: "Based on the evidence, it's the police belief that all of these men are members of the UVF. This (the gathering in Pitt Park) involved a display of sinister force by the group acting together in this manner."
A barrister for Lammey claimed a majority of people living in the area were in support of what occurred.
"There is a small family who the Pitt Park residents group say have tortured the broader community for years," he told the court.
"This was a protest on behalf of residents of Pitt Park, who are tired of the behaviour of a certain family and their connection."
A lawyer for David Matthews called for the UVF allegation against his client to be discounted, saying: "Opinion evidence and anonymous hearsay evidence is not admissible in any form of court proceedings."
Stephen Matthews, Derek Lammey and David Matthews are expected to reapply for High Court bail next month.