Just weeks after Direct Lending Investments (DLI) announced to private fund investors that it was suspending redemptions and withdrawals after one borrower defaulted on a $191.3M loan, the US Securities and Exchange Commission (SEC) filed civil charges against the registered investment adviser (RIA). The regulator contends that Direct Lending engaged in a multi-year, $11M fraud that allegedly involved overcharging clients for both performance and management fees related to private funds, as well as for inflating fund returns.
The RIA advises private funds, which includes a private fund structure made up of the feeder funds Direct Lending Income Feeder Fund, Ltd. and the Direct Lending Income Fund, LP. The funds invest in different lending platforms, including the online small business lender QuarterSpot.
The SEC, in its complaint, is accusing Direct Lending owner Brendan Ross of making a deal that allowed QuarterSpot to “falsify borrower payment information” for its loans and “falsely report” to the RIA that borrowers had submitted hundreds of monthly payments when this was not true at all. The regulator contends that a significant number of these loans should have been given a zero valuation rather than their “full value.” Because of this, the SEC alleges, between 2014 and 2017 the valuation of QuarterSpot’s position was “cumulatively overstated” by about $53M, which caused the Funds’ performance to be misrepresented by about 3% yearly. Meantime, Direct Lending allegedly collected about $11M in excess fees from the Funds.
Just a few days before the SEC announced its charges against the RIA in March, Direct Lending notified Fund investors about possible material overstatements involving QuarterSpot. The regulator is accusing Ross of trying to hide problems involving the quality of RIA’s QuarterSpot loan portfolio.
The RIA’s management recently asked Ross to take a leave of absence. He resigned as CEO and has reportedly given up control of Direct Lending.
Without admitting to or denying any wrongdoing, the RIA agreed to a preliminary enjoinment from violating the provisions of the Securities Exchange Act of 1934, the Securities Act of 1933, and the Investment Advisers Act of 1940, among others, that the SEC is accusing it of violating. The Commission is seeking disgorgement of any ill-gotten gains plus interest, permanent injunctions, and monetary penalties.
In regard to the reason that Direct Lending gave for the redemption and withdrawal suspensions in February, its announcement seemed to imply that suspension of loan payments by the borrower, VOIP Guardian Partners I, was involved and that misconduct may have been a factor. According to Bloomberg, however, VOIP founder Rodney Omanoff denies any wrongdoing.
Investment Adviser Fraud
Investment advisers owe those whom they offer investment advice a fiduciary obligation and they are not allowed to make material misstatements or omissions. They also are supposed to refrain from defrauding their clients and they must always act in latter’s best interests above their own. Please contact our investment adviser fraud lawyers at Shepherd Smith Edwards and Kantas, LLP (SSEK Law Firm) today if you believe your RIA caused you to sustain unnecessary financial losses or pay excess fees due to their negligence, wrongdoing, or carelessness.
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