SEC Charges Former Principal of Investment Adviser with Data Manipulation and Valuation Fraud
Litigation Release No. 24865 / August 11, 2020
Securities and Exchange Commission v. Brendan M. Ross, No. 2:20-cv-07202 (C.D. Cal. filed August 11, 2020)
The Securities and Exchange Commission today announced charges against Brendan Matthew Ross of California, the owner and former CEO of registered investment adviser Direct Lending Investments, LLC (DLI), for directing an intricate, multi-year effort to fraudulently inflate the value and returns for an investment position held by the funds that DLI advised.
The SEC's complaint alleges that from early 2014 through late 2017, Ross manipulated payment data for the funds' investment in loans made by QuarterSpot, Inc., an online small business lender. Ross allegedly directed QuarterSpot to make payments to the funds, which gave the false impression that underlying borrowers were making principal payments on what were actually delinquent loans. As alleged, under DLI's valuation policy, many of these non-performing loans should have been fully marked down but were not because of the payments Ross engineered. According to the complaint, as a result of the scheme, DLI's monthly returns reported to investors were materially inflated. DLI allegedly collected at least $5-6 million in extra management and performance fees from the funds, and Ross personally received millions of dollars from DLI. The SEC previously charged DLI in 2019, which resulted in DLI and its affiliates being placed in receivership.
The SEC's complaint, which was filed in the Central District of California, charges Ross with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, and Sections 206(1), 206(2), and 207 of the Investment Advisers Act of 1940. The complaint seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties.
In a parallel action, the U.S. Attorney's Office for the Central District of California filed criminal charges against Ross.
The SEC's investigation was conducted by Christopher Nowlin and supervised by Marc Blau of the Los Angeles Regional Office. The litigation will be led by Amy Longo. The examination that led to the investigation was conducted by William Maldonado, Monique Robinson and Joshua Bauder, and supervised by Christopher Martinez and Tamara Heller from the Office of Compliance Inspections and Examinations. The SEC appreciates the assistance of the U.S. Attorney's Office for the Central District of California and the Federal Bureau of Investigation.