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.