The Securities and Exchange Commission has charged Brendan Matthew Ross, the owner and former CEO of registered investment adviser Direct Lending Investments LLC (DLI), with directing a multi-year effort to fraudulently inflate the value and returns for an investment position held by the funds that DLI advised.
DLI, which had approximately $866.3 million in assets under management as of May 31, 2018, advised a private fund structure comprised of two feeder funds (Direct Lending Income Fund L.P. and Direct Lending Income Feeder Fund Ltd.) and a master fund (DLI Capital Inc.). The SEC previously charged DLI in 2019, and the firm and its affiliates were placed in receivership.
The SEC alleges that from early 2014 through late 2017, Ross manipulated payment data for the funds’ investments in loans made by QuarterSpot Inc., an online small business lender.
Ross is accused of orchestrating a scheme where he secretly directed QuarterSpot, as part of its monthly reporting to DLI, to “rebate” a portion of its servicing fees by making payments to the funds, which gave the impression that borrowers were making principal payments on seriously delinquent loans.
The SEC alleges that DLI cumulatively overstated the valuation of the funds’ QuarterSpot position by approximately $53 million and materially misrepresented returns.
According to the SEC, under DLI’s valuation policy, many of these non-performing loans should have been fully marked down but were not because of the payments Ross engineered.
As result of the alleged scheme, DLI’s monthly returns reported to investors were materially inflated, and DLI allegedly collected at least $5 million in extra management and performance fees from the funds. The firm’s asset values were also overstated in its required Forms ADV filed with the SEC.
To conceal his scheme, Ross allegedly hid information from the DLI management team, as well as from the funds’ auditors, and other third parties. When irregularities in the QuarterSpot portfolio came to light, the SEC claims that he lied to others in management about the “rebate” payments.
In March 2019, after an internal investigation that revealed Ross’s alleged misconduct, a committee of senior DLI executives demanded that he formally resign and relinquish control of the company, to which he agreed.
In a parallel action, the U.S. Attorney’s Office for the Central District of California filed criminal charges against Ross.