2019-03-25 sec-litreleases complaint 211 KB 35,902 chars

SEC v. DAVOL, No. 2:19-cv-02188, Central District of California (Mar. 25, 2019) — Complaint

raw: Comp24432

Comp24432, No. 2:19-cv-02188 (Mar. 25, 2019)

Caption: Beaver v. Davol, Inc.

Exhibit of Direct Lending Investments, LLC

summary

The SEC is suing Direct Lending Investments, LLC (DLI) and its CEO, Ross, for securities fraud, misrepresentation, and breach of fiduciary duty, resulting in a loss of approximately $53 million and overcharging of fees by about $11 million.

paragraph

The SEC is suing Direct Lending Investments, LLC (DLI) and its CEO, Ross, for securities fraud, misrepresentation, and breach of fiduciary duty. The complaint alleges that DLI manipulated data to falsely represent the performance of its funds, leading to overpayment of management and performance fees, resulting in a loss of approximately $53 million and overcharging of fees by about $11 million. The SEC seeks a preliminary injunction, appointment of a permanent receiver, permanent injunctions, disgorgement with prejudgment interest, and civil penalties. The lawsuit also claims that DLI's marketing materials and communications with investors falsely stated the returns and liquidity of their funds, and that Ross directed QuarterSpot to falsify loan payment data to conceal the true performance of the investment.

narrative

Enriched metadata

Scheme: other
Court: Central District of California
Case No.: 2:19-cv-02188

Classified other. No EDGAR filing fingerprint (criminal/DOJ-side scheme). detection rule →

Extracted insights

Dollar amounts 15

$866.30M $866,300,000 $100M–$1B
$192.00M $192 million $100M–$1B
$160.00M $160 million $100M–$1B
$149.61M $149,608,733 $100M–$1B
$139.76M $139,756,336 $100M–$1B
$100.00M $100 million $100M–$1B
$71.51M $71,506,605 $10M–$100M
$55.00M $55 million $10M–$100M
$53.00M $53 million $10M–$100M
$11.00M $11 million $10M–$100M
$427K $427,333 $100K–$1M
$100K $100,000 $100K–$1M

Entities 4

person brendan ross
company direct lending investments, llc
agency Securities and Exchange Commission
organization Securities and Exchange Commission

Triples 24

Direct Lending Investments, LLC perpetrated a multi-year fraud resulting in $11 million in over-charges and inflated returns
Brendan Ross arranged with QuarterSpot, Inc. to falsify borrower payment information and falsely report payments
Brendan Ross helped engineer false payments that caused $53 million overstatement of QuarterSpot position
Direct Lending Investments, LLC collected $11 million in excess management and performance fees from fund investors
Direct Lending Investments, LLC misrepresented the Funds’ performance by approximately two to three percent annually
Direct Lending Investments, LLC perpetrated a multi-year fraud resulting in $11 million in over-charges and inflated returns
Brendan Ross arranged with QuarterSpot, Inc. to falsify borrower payment information and falsely report payments
Brendan Ross helped engineer false payments that caused DLI to overstate its QuarterSpot position by $53 million
DLI collected $11 million in excess management and performance fees due to inflated valuations
DLI misrepresented the Funds’ performance by approximately two to three percent annually between 2014 and 2017
Securities and Exchange Commission alleges fraud
Direct Lending Investments, LLC perpetrated fraud
Brendan Ross perpetrated fraud
Direct Lending Investments, LLC resulted in $11 million in over-charges
Brendan Ross arranged falsify borrower payment information
Direct Lending Investments, LLC overstated valuation of its QuarterSpot position
Direct Lending Investments, LLC collected $11 million in excess fees
Brendan Ross helped engineer false payments
Direct Lending Investments, LLC misrepresented Funds' performance
Securities and Exchange Commission alleges This matter concerns a multi-year fraud perpetrated by Defendant Direct Lending Investments, LLC
Defendant Direct Lending Investments, LLC perpetrated a multi-year fraud through its then-principal, Brendan Ross
Brendan Ross arranged with QuarterSpot to falsify borrower payment information for QuarterSpot’s loans
Brendan Ross helped engineer false payments that caused DLI to overstate the valuation of its QuarterSpot position by approximately $53 million
DLI collected roughly $11 million in excess management and performance fees from the Funds

PDF

Comp24432 · Source

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Extracted body text (35,902c)

COMPLAINT 1

AMY J. LONGO (Cal. Bar No. 198304)
Email: [email protected]
LYNN M. DEAN (Cal. Bar No. (Cal. Bar No. 205562)
Email: [email protected]
CHRISTOPHER A. NOWLIN (Cal. Bar No. 268030)
Email: [email protected]

Attorneys for Plaintiff
Securities and Exchange Commission
Michele Wein Layne, Regional Director
Alka N. Patel, Associate Regional Director
Amy J. Longo, Regional Trial Counsel
444 S. Flower Street, Suite 900
Los Angeles, California 90071
Telephone: (323) 965-3998
Facsimile: (213) 443-1904

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE
COMMISSION,

Plaintiff,

vs.

DIRECT LENDING INVESTMENTS,
LLC,

Defendant.

Case No.

COMPLAINT

Plaintiff Securities and Exchange Commission (“SEC”) alleges:

JURISDICTION AND VENUE

1. The Court has jurisdiction over this action pursuant to Sections 20(b),

20(d)(1) and 22(a) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. §§

77t(b), 77t(d)(1) & 77v(a), and Sections 21(d)(1), 21(d)(3)(A), 21(e) and 27(a) of the

Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78u(d)(1),

78u(d)(3)(A), 78u(e) & 78aa(a), and Sections 209(d), 209(e)(1) and 214 of the

2:19-cv-2188

COMPLAINT 2

Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C. §§ 80b-9(d), 80b-

9(e)(1) & 90b-14.

2. Defendant has, directly or indirectly, made use of the means or

instrumentalities of interstate commerce, of the mails, or of the facilities of a national

securities exchange in connection with the transactions, acts, practices and courses of

business alleged in this complaint.

3. Venue is proper in this district pursuant to Section 22(a) of the Securities

Act, 15 U.S.C. § 77v(a), Section 27(a) of the Exchange Act, 15 U.S.C. § 78aa(a), and

Section 214 of the Advisers Act, 15 U.S.C. § 80b-14, because certain of the

transactions, acts, practices and courses of conduct constituting violations of the

federal securities laws occurred within this district. In addition, venue is proper in

this district because Defendant has its principal place of business in this district.

SUMMARY

4. This matter concerns a multi-year fraud perpetrated by Defendant Direct

Lending Investments, LLC (“DLI”), a registered investment adviser, through its then-

principal, Brendan Ross (“Ross”), which resulted in approximately $11 million in

over-charges of management and performance fees to fund investors, and the

inflation of DLI’s private funds’ returns.

5. DLI advises a private fund structure that invests in various lending

platforms, including QuarterSpot, Inc. (“QuarterSpot”), an online small business

lender. Management at DLI recently discovered that for years, Ross, DLI’s 100%

owner and then-chief executive officer, arranged with QuarterSpot to falsify 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.

6. According to a senior executive representative of DLI, many of these

loans should have been valued at zero, but instead were valued at par, because of the

false payments Ross helped engineer. The effect of this was that, between 2014 and

2017, DLI cumulatively overstated the valuation of its QuarterSpot position by

COMPLAINT 3

approximately $53 million and misrepresented the Funds’ performance by

approximately two to three percent annually. As a result, DLI collected roughly $11

million in excess management and performance fees from the Funds that it would not

have otherwise collected, had the QuarterSpot position been accurately valued.

7. By engaging in this conduct, DLI violated Section 10(b) of the Securities

Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder,

Section 17(a) of the Securities Act of 1933 (“Securities Act”), and Sections 206(1),

206(2), and 207 of the Investment Advisers Act of 1940 (“Advisers Act”).

8. The SEC seeks a preliminary injunction and appointment of a permanent

receiver; permanent injunctions; disgorgement with prejudgment interest, and civil

penalties.

THE DEFENDANT

9. Defendant Direct Lending Investments, LLC is an SEC registered

investment adviser with its principal place of business in Glendale, California. It

advises a private fund structure comprised of two “feeder” funds (Direct Lending

Income Fund, L.P. and Direct Lending Income Feeder Fund, Ltd.) and a “master”

fund (DLI Capital, Inc.) (collectively, the “Funds”) and is solely responsible for the

Funds’ management. According to its latest SEC Form ADV Part 1A filing on

February 25, 2019, DLI had approximately $866,300,000 in assets under

management as of May 31, 2018.

OTHER PERSONS AND ENTITIES

10. Brendan Ross is the 100% owner and was until recently the chief

executive officer of DLI.

11. QuarterSpot, Inc. is a private company located in New York that

provides online lending services to small businesses and retailers.

THE ALLEGATIONS

A. DLI’s Business

12. DLI was founded by Ross in 2012, and he was its CEO until his

COMPLAINT 4

resignation on March 18, 2019.

13. Its primary investment focus is on buying loans, participating in loans,

and owning credit facilities and other structures where loans and other assets serve as

collateral.

14. DLI has at times described its “typical investments” as consisting of

“$50-200 million asset-backed credit facilities to a diverse group of specialty finance

companies, special purpose vehicles and other counterparties . . . across the small

business, consumer, receivables, real estate and other sectors.”

15. DLI charges clients both a management fee and a performance fee on the

Funds’ assets. The management fee is calculated as 1% of the master fund’s gross

asset value plus beginning of month subscriptions less redemptions. The

performance fee is incurred when the master fund’s net asset value exceeds its prior

high net asset value and is calculated as 20% of these earnings before interest and

taxes.

16. DLI has regularly communicated with Fund investors through monthly

investor letters signed by Ross and an investor portal.

17. The monthly letters have typically included statements regarding the

amount of DLI’s assets under management and returns on investment broken out by

month.

18. The investor portal has at times provided investors with access to

detailed information on DLI’s asset portfolio and its specific counterparties, including

the valuation of its various counterparty positions by unpaid principal balance and the

profits and losses information (including gross income and changes in loss reserves

data) for those counterparty positions over different periods of time.

19. DLI’s assets under management are reported in the Forms ADV that DLI

files with the SEC.

20. In its marketing materials, DLI has touted its strong, consistent returns to

its investors. For example, DLI “fact sheets” marketed its 10-12% returns, no lock-

COMPLAINT 5

up, and monthly (35-day) liquidity.

21. In multiple written communications with potential and actual investors

spanning at least October 2015 to June 2016, Ross highlighted the Funds’ “10-12%

returns net to investors with no down months,” as well as the fact that defaults could

be as high as 20% without any loss of principal to investors.

B. DLI’s Relationship with QuarterSpot

22. QuarterSpot is one of DLI’s longest standing Fund investments, and its

principals are close business associates of Ross.

23. On its website, QuarterSpot advertises its “lower rates without personal

guarantees or credit checks” and its ability to provide working capital in as little as 24

hours.

24. In August 2013, DLI entered into an agreement with QuarterSpot where

it agreed to purchase “unsecured payment dependent promissory notes (‘Spots’) from

QuarterSpot.”

25. Under the terms of this arrangement, QuarterSpot would continue to

service the loans and keep a service fee, or “investor fee,” that was later

memorialized in several internal and audit-related documents at 17.5% of interest

collected.

26. Between August 2013 and June 2017, DLI’s QuarterSpot position (loan

principal plus cash value) increased significantly from $427,333 to $149,608,733.

27. In late September 2017, DLI entered into a transaction to sell

approximately $55 million of the QuarterSpot assets at par to DL Global Ltd. (“DL

Global”), an investment vehicle run by one of Ross’s business associates, with

foreign investors.

28. Ross personally guaranteed the performance of the QuarterSpot assets

sold in the transaction, and further pledged his equity interest in DLI as collateral for

the guarantee. The transaction resulted in DLI’s position in QuarterSpot (loan

principal plus cash value) dropping from $139,756,336 to $71,506,605 between

COMPLAINT 6

August and September 2017.

29. DLI remained involved in processing the loan information for the

QuarterSpot loans after those loans were sold to DL Global.

30. As part of DLI’s monthly reporting and closing process, QuarterSpot is

required to provide DLI with loan-level data, including performance figures for each

loan.

31. DLI used this loan-level information to determine how the QuarterSpot

loans are performing, and to create a monthly closing report and valuation for the

QuarterSpot position.

32. The monthly fair values of QuarterSpot and each of the Funds’ other

investments are used to determine the aggregate fair value of the Funds’ portfolio and

in turn, the master fund’s value.

33. Monthly management fees are calculated based on the gross asset value

of the master fund.

34. The net asset value of the master fund serves as the basis for calculating

that month’s performance fees and the monthly returns reported to current and

prospective investors.

35. According to a senior DLI representative, for DLI’s QuarterSpot

position, every single dollar paid (or not paid) on a given loan impacts DLI’s

financials.

C. Ross’s Scheme to Manipulate QuarterSpot’s Payment Data

36. Between 2014 and at least February 2018, Ross knew of problems with

the quality of DLI’s QuarterSpot loan portfolio and actively took steps to conceal

these issues.

37. Email communications between Ross and QuarterSpot’s principals

between 2014 to early 2018, frequently from his personal email account and always

without copying anyone else from DLI, show that Ross encouraged QuarterSpot to

manipulate the loan-level information that it reported to DLI, including both directing

COMPLAINT 7

QuarterSpot to delay recognizing delinquent loans, and falsifying borrower payment

information to make it appear as though payments had been made by borrowers,

when they had not.

38. More specifically, Ross regularly emailed QuarterSpot principals at the

beginning of each month spreadsheets that appear to contain falsified payment figures

that Ross was directing QuarterSpot to apply to certain non-performing loans.

39. For example, on March 8, 2014, Ross sent QuarterSpot’s principals an

email titled “Late Loans.,” where he noted “a very substantial number of Late loans

that are not written off”, describing the problem as “scary” and saying “I need to

understand how we get out of the woods that we’re in right now, where you are using

up equity to make up for the underwriting, which is scary as hell for both of us.”

40. On January 18, 2015, Ross emailed QuarterSpot’s principals

spreadsheets titled “Payments 12-31-2014” and “LateLoans,” that appear to direct

QuarterSpot to add borrower payments for 42 loans that totaled $13,734 before

sending the information to others at DLI.

41. On February 8, 2015, Ross emailed QuarterSpot’s principals, expressing

concern that “more loans are going late each month than I can afford and still have

normal returns, so that the can we are kicking down the road is growing in size,” and

asking QuarterSpot to send “a version of the Late Loans report that has their true,

non-quarterspot Last Posted date.”

42. On February 3, 2016, Ross emailed QuarterSpot that “quite a few of

these loans have Payment amounts of 50, 100, or 200,” noting that “they will stick

out and should be reverted back to their normal payment amount for these late loans.”

43. On August 7, 2017, QuarterSpot informed Ross, using his personal

rather than his DLI email address, that it planned to add values for borrowers who did

not make payments; Ross responded, “Do you want to permanently edit the

‘Payment’ field for those borrowers, inserting $150 or something like that? Seems

like there should be a value in the database for them.”

COMPLAINT 8

44. The spreadsheets that Ross regularly sent to QuarterSpot at the

beginning of each month often had “BR” or “BRpays” in their titles and included

falsified monthly payment figures that in some cases included hundreds of loans in a

given month.

45. The total value of the falsified payment figures in a given month ranged

from just under $20,000 to just under $100,000.

46. In many of these emails, Ross directed QuarterSpot to apply the

fictitious payment figures and to then send on the information to DLI’s finance team.

47. According to a company representative, up until at least February 2018,

the falsified borrower payments that Ross directed QuarterSpot to make were

included in what QuarterSpot reported to DLI on a monthly basis.

48. A recent analysis by DLI also showed that the money that was falsely

labeled borrower payments likely came from QuarterSpot rebating its servicing fees,

meaning that QuarterSpot did not take portions of its fees during certain months and

that these amounts were paid or credited to DLI but disguised as loan borrower

payments to give the false impression that the underlying loans were performing.

49. Any reasonable investor would have believed it important to know that

Ross was manipulating and falsifying data necessary to value the Funds’ position in

QuarterSpot and DLI’s management fees.

50. Ross acted knowingly, recklessly, and negligently in deceiving DLI, the

Funds, Fund investors, and others at DLI, concerning the QuarterSpot loan quality

and performance, and failed to exercise reasonable care to ensure that Fund investors

were not deceived as to this information.

D. Material Misstatements of DLI’s Funds’ Fees and Performance

51. According to a representative of DLI, Ross’s falsification of borrower

payment information led DLI to value many of the nonperforming QuarterSpot loans

at par when the values should have been reduced to zero.

52. Even though DLI still received money from QuarterSpot in the form of

COMPLAINT 9

rebated fees, the false payment data undermined DLI’s ability to assess the credit of

the underlying loans, which should have been considered defaulted.

53. This caused the QuarterSpot position to be overvalued and the Funds’

net asset value to be inflated.

54. According to a DLI representative, the falsified QuarterSpot borrower

payment information led DLI to materially overstate the valuation of its QuarterSpot

position by an approximate cumulative amount of $53 million between 2014 and

2017.

55. According to a DLI representative, the incorrect valuation of the

QuarterSpot position resulted in DLI overstating the Funds’ heavily marketed returns

by an approximate 2-3% on an annual basis between 2014 and 2017, with the most

significant effect felt earlier in time when the QuarterSpot position was a larger

percentage of the DLI portfolio.

56. According to a company representative, the false valuation and

performance figures for the QuarterSpot position resulted in DLI collecting roughly

$11 million in excess management and performance fees through 2017.

57. According to a DLI representative, Ross’s manipulation of borrower

payment data for loans held by the Funds likely continued up until at least February

2018.

58. Any reasonable investor would have wanted to know that DLI was

overcharging management and performance fees and that the Funds’ returns were

overstated.

59. Ross acted knowingly, recklessly, and negligently in materially

misstating the Funds’ valuation, performance, and fees, and failed to exercise

reasonable care to ensure that Fund investors received the Funds’ true valuation,

performance and fees.

E. Ross’s Recent Resignation from DLI

60. In October 2018, a debt collector for DLI’s QuarterSpot loan portfolio

COMPLAINT 10

informed a representative of DLI that certain borrower payment data on DLI’s books

did not match data the collector had received directly from QuarterSpot.

61. When that DLI representative confronted QuarterSpot, QuarterSpot’s

representatives indicated it was “an IT issue” and that QuarterSpot would work it out.

62. In December 2018, a DLI employee responsible for debt collection

spoke to a QuarterSpot representative, who said the borrowers identified as having

made small payments had not actually made the payments.

63. When next asked about this issue in or about January 2019, the

QuarterSpot representatives refused to answer and directed the DLI representative to

Ross, who denied knowledge of the false payments.

64. On February 11, 2019, DLI announced to Fund investors that the Funds

had suspended withdrawals and redemptions because one of DLI’s largest

counterparties, VOIP Guardian Partners I, LLC (“VOIP Guardian”), had ceased

making payments on a $192 million loan. DLI indicated in its announcement that it

suspected that the cessation of payments was likely a result of undetermined

misconduct and that a substantial portion of the outstanding $160 million loan

balance may not be recoverable.

65. On March 19, 2019, DLI announced to Fund investors that another of

the Funds’ positions, QuarterSpot, may have been materially overstated for a period

of years, and that, following the request of DLI’s management committee that he take

a leave of absence, Ross had formally resigned all positions at DLI on March 18,

2019 and had ceded control to its management committee.

F. Defendant DLI is an Investment Adviser

66. Defendant DLI is an investment adviser registered with the SEC.

67. It acted as an investment adviser to the Funds because it advised the

Funds about investing in securities and received compensation in the form of a

percentage of assets managed and a performance fee.

68. As an investment adviser, DLI owed the Funds a fiduciary duty and was

COMPLAINT 11

prohibited from making untrue statements of material fact or from omitting to state

material facts necessary to make its statements not misleading. Through Ross’s

conduct, which is imputed to DLI because he was chief executive officer and 100%

owner, DLI violated these obligations, by the acts alleged in this Complaint.

G. The Limited Partnership Interests in the Funds Are Securities

69. Investor funds were pooled in the Funds to finance various ventures that

DLI would choose to invest in.

70. The investors in the Funds were dependent on the success of the

underlying businesses to generate their return, while DLI was also dependent on the

success of the businesses because the DLI management and performance fees were

directly tied to how the positions grew and performed, respectively.

71. The efforts of DLI and Ross in allocating capital and managing the

Funds’ investments were critical to the enterprise’s success, as there is no indication

that investors in the Funds played an active role in managing DLI’s investment

decisions.

FIRST CLAIM FOR RELIEF

Fraud by an Investment Adviser

Violations of Sections 206(1) and 206(2) of the Advisers Act

(against Defendant DLI)

72. The SEC realleges and incorporates by reference paragraphs 1 through

71 above.

73. DLI breached its fiduciary duties when it defrauded its clients, the

Funds, by fabricating borrower payment figures and otherwise manipulating

information concerning the value of the underlying loans, which caused the Funds to

pay materially inflated management and performance fees. The effect of this was to

make the QuarterSpot loans look stronger than they were, which made DLI’s

QuarterSpot investment appear sounder, which inflated the Funds’ assets, valuation,

and performance numbers. Information concerning the viability and profitability of

COMPLAINT 12

the QuarterSpot investment, which for many years exceeded $100 million in DLI’s

portfolio, was certainly material to the Funds’ valuation and performance data, as

confirmed by a representative of DLI.

74. The false information regarding the QuarterSpot loans also materially

impacted the management and performance fees that DLI charged the Funds. As a

result of this manipulation concerning the value of DLI’s QuarterSpot position, the

Funds were charged roughly $11 million in excess management and performance fees

between 2014 and 2017.

75. Ross, whose scienter and negligence can be imputed to DLI, was fully

aware of the underlying manipulation of loan-level data and appears to have directed

that process, seemingly for the very purpose of mismarking the Funds’ assets and

inflating their performance numbers.

76. By engaging in the conduct described above, Defendant DLI, directly or

indirectly, by use of the mails or means and instrumentalities of interstate commerce,

knowingly, recklessly or negligently: (a) employed or is employing devices, schemes

or artifices to defraud clients or prospective clients; and (b) engaged in or is engaging

in transactions, practices, or courses of business which operated as a fraud or deceit

upon clients or prospective clients.

77. By engaging in the conduct described above, Defendant DLI has

violated, and unless restrained and enjoined, is reasonably likely to continue to

violate, Sections 206(1) and (2) of the Advisers Act, 15 U.S.C. §§ 80b-6(1) & 80b-

6(2).

SECOND CLAIM FOR RELIEF

Fraud in the Connection with the Purchase and Sale of Securities

Violations of Section 10(b) of the Exchange Act and Rule 10b-5

(against Defendant DLI)

78. The SEC realleges and incorporates by reference paragraphs 1 through

71 above.

COMPLAINT 13

79. DLI made false and misleading statements and engaged in deceptive

conduct towards the investors in its Funds. Through its investor letters and investor

portal, DLI provided the Funds’ investors with information concerning its assets

under management, the valuation of different positions within its portfolio, and the

performance of its different loan platforms, including QuarterSpot. The information

that DLI provided to investors regarding QuarterSpot was false and misleading

because it was based on fabricated underlying loan level data that concealed the true

delinquency levels for the QuarterSpot loan portfolio, thereby masking the true

performance and valuation of DLI’s QuarterSpot position. This in turn caused DLI to

make false and misleading statement to the Funds’ investors about the management

and performance fees that the Funds owed.

80. The misrepresentations made by DLI were material because investors in

the Funds would have considered it important to their investment decisions to have

accurate information concerning the financial stability of the underlying platforms in

which the Funds were investing their money, as that could directly impact their

ability to receive back their principal investments and achieve the high returns that

DLI advertised. The misrepresentations were also material because they directly

impacted the management and performance fees that DLI charged the Funds, thereby

diminishing the returns flowing to the investors.

81. DLI knew, or was reckless in not knowing, that its statements regarding

its QuarterSpot position, including the valuation and performance of that position,

were false or misleading because it was Ross himself who manipulated the

underlying borrower payment information, creating a situation where the QuarterSpot

position could not be properly valued or its performance assessed. Ross’s use of his

personal email account to communicate with QuarterSpot about adjusting the

borrower payment information is further evidence of his efforts to conceal his

conduct and his fraudulent intent. Ross’s scienter can be imputed to DLI.

82. Ross, DLI’s principal, knowingly engaged in a multi-year scheme to

COMPLAINT 14

mask the poor performance of one of the Funds’ largest investments, QuarterSpot.

The principal purpose and effect of this was to allow the Funds to delay recognizing

losses on the QuarterSpot position, which could have threatened DLI’s ability to

attract or maintain investors and eroded its ability to cite the strong performance of

the Funds. Ross committed acts in furtherance of the scheme by routinely falsifying

borrower payment entries for QuarterSpot’s loans. This scheme had a material effect

on the information that DLI provided to the investors in the Funds.

83. By engaging in the conduct described above, Defendant DLI, directly or

indirectly, in connection with the purchase or sale of a security, by the use of means

or instrumentalities of interstate commerce, of the mails, or of the facilities of a

national securities exchange: (a) employed devices, schemes, or artifices to defraud;

(b) made untrue statements of a material fact or omitted to state a material fact

necessary in order to make the statements made, in the light of the circumstances

under which they were made, not misleading; and (c) engaged in acts, practices, or

courses of business which operated or would operate as a fraud or deceit upon other

persons.

84. Defendant DLI, with scienter, employed devices, schemes and artifices

to defraud; made untrue statements of a material fact or omitted to state a material

fact necessary in order to make the statements made, in the light of the circumstances

under which they were made, not misleading; and engaged in acts, practices or

courses of conduct that operated as a fraud on the investing public by the conduct

described in detail above.

85. By engaging in the conduct described above, Defendant DLI violated,

and unless restrained and enjoined will continue to violate, Section 10(b) of the

Exchange Act, 15 U.S.C. § 78j(b), and Rules 10b-5(a), 10b-5(b), and 10b-5(c)

thereunder, 17 C.F.R. §§ 240.10b-5(a), 240.10b-5(b) & 240.10b-5(c).

COMPLAINT 15

THIRD CLAIM FOR RELIEF

Fraud in the Offer or Sale of Securities

Violations of Section 17(a) of the Securities Act

(against Defendant DLI)

86. The SEC realleges and incorporates by reference paragraphs 1 through

71 above.

87. DLI engaged in deceptive conduct and obtained money by means false

and misleading statements to the investors in its Funds. Through its investor letters

and investor portal, DLI provided the Funds’ investors with information concerning

its assets under management, the valuation of different positions within its portfolio,

and the performance of its different loan platforms, including QuarterSpot. The

information that DLI provided to investors regarding QuarterSpot was false and

misleading because it was based on fabricated underlying loan level data that

concealed the true delinquency levels for the QuarterSpot loan portfolio, thereby

masking the true performance and valuation of DLI’s QuarterSpot position. This in

turn caused DLI to make false and misleading statement to the Funds’ investors about

the management and performance fees that the Funds owed.

88. The misrepresentations made by DLI were material because investors in

the Funds would have considered it important to their investment decisions to have

accurate information concerning the financial stability of the underlying platforms in

which the Funds were investing their money, as that could directly impact their

ability to receive back their principal investments and achieve the high returns that

DLI advertised. The misrepresentations were also material because they directly

impacted the management and performance fees that DLI charged the Funds, thereby

diminishing the returns flowing to the investors.

89. DLI’s statements regarding its Funds’ performance and assets under

management were pillars of its marketing strategy that brought investors to the

Funds. By inflating those key metrics through manipulation of the QuarterSpot loan

COMPLAINT 16

figures, DLI was able to recruit and maintain investors in the Funds on whose assets

it could charge management and performance fees, thereby obtaining money by

means of the misrepresentations.

90. DLI knew, or at a minimum was negligent in not knowing, that its

statements regarding its QuarterSpot position, including the valuation and

performance of that position, were false or misleading because it was Ross himself

who manipulated the underlying borrower payment information, creating a situation

where the QuarterSpot position could not be properly valued or its performance

assessed. Ross’s use of his personal email account to communicate with QuarterSpot

about adjusting the borrower payment information is further evidence of his efforts to

conceal his conduct and his fraudulent intent. Ross’s scienter and negligence can be

imputed to DLI.

91. By engaging in the conduct described above, Defendant DLI, directly or

indirectly, in the offer or sale of securities, and by the use of means or instruments of

transportation or communication in interstate commerce or by use of the mails

directly or indirectly: (a) employed devices, schemes, or artifices to defraud; (b)

obtained money or property by means of untrue statements of a material fact or by

omitting to state a material fact necessary in order to make the statements made, in

light of the circumstances under which they were made, not misleading; and (c)

engaged in transactions, practices, or courses of business which operated or would

operate as a fraud or deceit upon the purchaser.

92. Defendant DLI with scienter, employed devices, schemes and artifices to

defraud; with scienter or negligence, obtained money or property by means of untrue

statements of a material fact or by omitting to state a material fact necessary in order

to make the statements made, in light of the circumstances under which they were

made, not misleading; and, with scienter or negligence, engaged in transactions,

practices, or courses of business which operated or would operate as a fraud or deceit

upon the purchaser.

COMPLAINT 17

93. By engaging in the conduct described above, Defendant DLI violated,

and unless restrained and enjoined will continue to violate, Sections 17(a)(1),

17(a)(2), and 17(a)(3) of the Securities Act, 15 U.S.C. §§ 77q(a)(1), 77q(a)(2), &

77q(a)(3).

FOURTH CLAIM FOR RELIEF

False Forms ADV

Violations of Section 207 and of the Advisers Act

(against Defendant DLI)

94. The SEC realleges and incorporates by reference paragraphs 1 through

71 above.

95. DLI violated Section 207 by filing multiple annual amendments to its

Forms ADV between 2014 and March 2018 that included materially inflated numbers

for the adviser’s regulatory assets under management and for the Funds’ gross asset

values. These numbers were inflated because they were based on a valuation for the

QuarterSpot position that was materially false due to Ross’s falsification of the

underlying loan-level performance data.

96. By engaging in the conduct described above, Defendant DLI, directly or

indirectly, willfully made untrue statements of material fact in any registration

application or report filed with the Commission under section 203, or 204, of the

Advisers Act and willfully omitted to state in any such application or report any

material fact which is required to be stated therein.

97. By engaging in the conduct described above, Defendant DLI has

violated, and unless restrained and enjoined, is reasonably likely to continue to

violate, Section 207 of the Advisers Act, 15 U.S.C. § 80b-7.

PRAYER FOR RELIEF

WHEREFORE, the SEC respectfully requests that the Court:

Issue findings of fact and conclusions of law that Defendant committed the

COMPLAINT 18

alleged violations.

II.

Issue judgments, in forms consistent with Rule 65(d) of the Federal Rules of

Civil Procedure, preliminarily and permanently enjoining Defendant DLI, and its

officers, agents, servants, employees and attorneys, and those persons in active

concert or participation with any of them, who receive actual notice of the judgment

by personal service or otherwise, and each of them, from violating Sections 206(1),

206(2), and 207 of the Advisers Act [15 U.S.C. §§ 15 U.S.C. § 80b-6(1), 80b-6(2),

80b-7]; Section 10(b) of the Exchange Act [15 U.S.C. §§ 78j(b)] and Rule 10b-5

thereunder [17 C.F.R. § 240.10b-5]; and Section 17(a) of the Securities Act [15

U.S.C. §77q(a)]; and imposing a receiver over DLI and its successors, affiliate

entities, and subsidiaries.

III.

Order Defendant to disgorge all funds received from their illegal conduct,

together with prejudgment interest thereon.

IV.

Order Defendant to pay civil penalties under Section 20(d) of the Securities

Act [15 U.S.C. § 77t(d)], Section 21(d)(3) of the Exchange Act [15 U.S.C. §

78u(d)(3)]; and Section 209(e)(1) of the Advisers Act [15 U.S.C. § 80b-9(e)(1)].

Retain jurisdiction of this action in accordance with the principles of equity and

the Federal Rules of Civil Procedure in order to implement and carry out the terms of

all orders and decrees that may be entered, or to entertain any suitable application or

motion for additional relief within the jurisdiction of this Court.

VI.

Grant such other and further relief as this Court may determine to be just and

necessary.

COMPLAINT 19

Dated: March 22, 2019

/s/ Amy Jane Longo
Amy Jane Longo
Lynn M. Dean
Christopher A. Nowlin
Attorneys for Plaintiff
Securities and Exchange Commission

OCR text (38,215c · textlayer · 95% conf)

COMPLAINT 1

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE
COMMISSION,

Plaintiff,

vs.

DIRECT LENDING INVESTMENTS,
LLC,

Defendant.

Case No.

COMPLAINT

Plaintiff Securities and Exchange Commission (“SEC”) alleges:

JURISDICTION AND VENUE

1. The Court has jurisdiction over this action pursuant to Sections 20(b),

20(d)(1) and 22(a) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. §§

77t(b), 77t(d)(1) & 77v(a), and Sections 21(d)(1), 21(d)(3)(A), 21(e) and 27(a) of the

Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78u(d)(1),

78u(d)(3)(A), 78u(e) & 78aa(a), and Sections 209(d), 209(e)(1) and 214 of the

2:19-cv-2188

Case 2:19-cv-02188 Document 1 Filed 03/22/19 Page 1 of 19 Page ID #:1