The SEC has charged a Glendale, Calif.-based registered investment adviser and investment manager with a multiyear fraud that resulted in about $11 million in fee over-charges to fund investors.
Direct Lending Investments LLC (DLI), which invested primarily in asset-backed loans and credit facilities, was also charged in the SEC's civil lawsuit with inflating the returns on its three private funds, breaching its fiduciary duty and lying on its ADV form.
Without admitting to or denying the allegations, DLI has agreed to be preliminarily enjoined from violating these provisions and to the appointment of a receiver to marshal and preserve the assets of the company and its funds, the SEC said.
The SEC alleges that between 2014 and 2017 Brendan Ross, DLI's owner and then-chief executive officer, arranged with one of its fund’s investments, New York-based QuarterSpot, to inflate borrower payment information for QuarterSpot's loans and to falsely report to DLI 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, DLI overstated the valuation of its QuarterSpot position by about $53 million and misrepresented the funds' performance by about 2 percent to 3 percent annually.
The SEC alleges that DLI collected about $11 million in excess management and performance fees from its funds that it would not have otherwise collected had the QuarterSpot position been accurately valued.
A senior executive representative of DLI reported the fraud, according to the SECs lawsuit, which was filed Thursday in the Central District of California. The suit charges DLI with antifraud violations and numerous violations of securities law.
DLI advises a private fund structure comprised of two feeder funds, the Direct Lending Income Fund and the Direct Lending Income Feeder Fund, and a master fund, DLI Capital, and has been solely responsible for the Funds’ management, the SEC said.
The complaint also seeks disgorgement of allegedly ill-gotten gains along with interest, monetary penalties and permanent injunctions.