Registered investment advisor Direct Lending Investments, LLC (CRD# 282476) has been sued by the SEC with multiple fraud charges relating to $11 million in management and performance fee overcharges on private placements. The company also falsified loan repayment information and inflated their annual returns for many years. The suit was filed on March 22 in Los Angeles.
A DLI employee notified the SEC that Direct Lending’s founder, Brendan Ross, “knowingly engaged in a multi-year scheme to mask the poor performance of one of the funds’ largest investments,” the SEC said in its lawsuit. Ross engineered loans that were valued “at par,” but should have been valued at zero. Ross also over-stated the company’s valuation of one of its loans, to a company called Quarterspot, an online small-business lender.
Ross is alleged to have arranged to have falsified repayment data for Quarterspot’s borrowers, and falsely report this information to DLI. Quarterspot erroneously reported that their borrowers had made hundreds of repayments that were never made. This false information overstated the valuation of DLI by $53 million, and incorrectly overstated their performance by 2 to 3 percent. DLI collected over $11 million in management and performance fees that they shouldn’t have, and wouldn’t had the reporting been correct. These actions took place between 2014 and 2017.
Ross’s attorney stated that he denies the allegations. Ross left the company on March 18.
The SEC requests disgorgement of Direct Lending’s gains, and for the company to pay an undisclosed fine.
Founded in 2012, DLI is one of a number of companies that does as its name implies, “direct lending.” The company invests in online lending marketplaces, which usually cater to medium-sized businesses that banks don’t do business with. After the financial and banking crisis of 2008, direct lending began to fill the gaps left by banks that no longer wanted to lend money to small and medium sized businesses. These loans tend to come with higher interest rates, although competition could drive those rates down later. Some lenders are extending loans to distressed companies, which comes with a higher risk.
One of DLI’s borrowers, VOIP Guardian Partners I, filed for bankruptcy on March 11, owing $191.3 million to DLI. This caused DLI to lose 25% of its total portfolio. VOIP Guardian stated that some of its longtime VOIP customers had simply stopped paying their bills.
Did You Invest in Direct Lending Investments?
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