Direct Lending Investments founder and chief executive officer Brendan Ross was arrested for allegedly inflating the value of funds he managed and fraudulently collecting millions of dollars in fees from investors.
Ross, who founded Direct Lending in 2012, was indicted by a grand jury on ten counts of wire fraud for a scheme he conducted between late 2013 and early last year, according to an August 11 statement from the U.S. Department of Justice. His firm managed more than $1 billion of assets, including an investment in a company that provided loans to small business and retailers.
He allegedly falsified reports to make it appear the loans were performing when some of the borrowers were failing to make payments on time. The “payments” actually stemmed from fee rebates provided by the company that originated the loans, according to the statement.
“By lying about the true status of the loans, Ross caused DLI to overstate the value of these loans on the funds’ books and fraudulently inflate the funds’ value,” the U.S. Attorney Office for the Central District of California said in the statement. Ross allegedly overstated the monthly asset values by more than $300 million over a period of about four years, allowing him to charge more in fees.
The Securities and Exchange Commission filed a complaint against Ross on August 11, alleging his firm collected at least $5 million to $6 million in extra management and performance fees from its funds. In the document, filed with the U.S. District Court for the Central District of California, the SEC cited inflated asset values tied to his firm’s investment in online business lender QuarterSpot.
“At Ross’s direction, in or around spring 2014, QuarterSpot began making monthly ‘rebate’ payments to the funds that took the form of individual ‘principal payments’ against particular delinquent loans that Ross specified each month,” the SEC alleged in the complaint. “In December 2014, Ross directed QuarterSpot to randomize the ‘rebate’ payments on weekdays throughout the month.”
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In 2017, Ross arranged to sell about $55 million of the QuarterSpot loans to an unnamed fund that raised money from overseas, according to the SEC. The Department of Justice alleged the sale was part of an effort to conceal his scheme, overvaluing the loans and falsely telling the buyer that the borrowers had been making payments on many of them.
A committee of senior executives at Direct Lending Investments demanded that Ross resign and relinquish control of DLI after an internal investigation uncovered his misconduct last year, according to the SEC. The agency charged the firm with multiyear fraud in March 2019.
Each count of wire fraud in the indictment against Ross carries a maximum sentence of 20 years in federal prison, according the Department of Justice. He was expected to be arraigned in court in Los Angeles on August 11, with the DOJ noting that “every defendant is presumed innocent until and unless proven guilty beyond a reasonable doubt.”