SEC Charges Private Placement Sponsor with Overcharging Fees in Alleged Multi-Year Fraud
The Securities and Exchange Commission has charged registered investment adviser Direct Lending Investments LLC with a multi-year fraud that resulted in approximately $11 million in over-charges of management and performance fees to its private placement funds, as well as the inflation of the private funds' returns.
The Securities and Exchange Commission has charged registered investment adviser Direct Lending Investments LLC with a multi-year fraud that resulted in approximately $11 million in over-charges of management and performance fees to its private placement funds, as well as the inflation of the private funds’ returns.
Defendant Direct Lending Investments advises 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.) and is solely responsible for the funds’ management. Direct Lending Investments reported approximately $866.3 million in assets under management as of May 31, 2018.
According to the SEC’s complaint, Direct Lending’s funds invest in various lending platforms, including QuarterSpot Inc., an online small business lender. The SEC alleges that for years, Brendan Ross, Direct Lending’s owner and then-chief executive officer, arranged with QuarterSpot to falsify borrower payment information for QuarterSpot’s loans and to falsely report to Direct Lending that borrowers made hundreds of monthly payments when they had not.
The SEC alleges that many of these loans should have been valued at zero, but instead were improperly valued at their full value, because of the false payments Ross helped engineer.
As a result, between 2014 and 2017, Direct Lending cumulatively overstated the valuation of its QuarterSpot position by approximately $53 million and misrepresented the funds’ performance by approximately 2 to 3 percent annually.
Direct Lending allegedly collected approximately $11 million in excess management and performance fees from the funds that it would not have otherwise collected, had the QuarterSpot position been accurately valued.
The SEC’s complaint, which was filed in the Central District of California, charges Direct Lending with violating certain antifraud provisions of federal securities laws.
Without admitting to any violations of federal law alleged in the SEC’s action, Direct Lending has agreed to be preliminarily enjoined from violating these provisions and appoint a receiver to marshal and preserve the assets of Direct Lending and the funds. The stipulated order is subject to court approval.
The complaint also seeks disgorgement of allegedly ill-gotten gains along with interest, monetary penalties, and permanent injunctions.
