SEC Charges Investment Adviser with Long-Running Securities Fraud
On March 22, 2019, the SEC 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 funds, as well as the inflation of the private funds’ returns.
According to the SEC’s complaint, Direct Lending advises a combination of private funds that invest in various lending platforms, including QuarterSpot, Inc., an online small business lender. The SEC alleges that for years, Brendan Ross, Direct Lending Investments’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, in fact, 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 two to three percent annually. The SEC alleges that Direct Lending 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 the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, and Sections 206(1), 206(2), and 207 of the Investment Advisers Act of 1940. 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 to the appointment of 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.
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