California private debt fund manager charged by U.S. prosecutors with fraud

[August 12, 2020]  By Jonathan Stempel and Lawrence Delevingne

(Reuters) - A Los Angeles-area money manager who became a prominent advocate for direct lending to businesses has been criminally charged with defrauding clients into thinking he invested their money successfully, enabling him to collect millions of dollars in illegal fees.

Brendan Ross, 47, who once oversaw more than $1 billion of assets at Direct Lending Investments LLC, was arrested on Tuesday and charged with 10 counts of wire fraud, U.S. Attorney Nicola Hanna in Los Angeles said.

The U.S. Securities and Exchange Commission filed related civil charges.

A lawyer for Ross did not immediately respond to a request for comment.

The SEC had sued Direct Lending Investments in March 2019, and the firm was later put into receivership.

In a July 10 court filing, the receiver said investors might recover only 27% to 34% of the $789.6 million of assets on the firm's books as of March 31, 2019.

Prosecutors said Ross had directed his funds to invest in a company that made loans to small businesses and retailers, and the funds would make money when borrowers made timely payments.

But according to the indictment, Ross falsified monthly reports to make it appear that borrowers who had fallen behind on payments were actually current, and concealed how "payments" actually came from fee rebates from the borrowers' lender.

 Brendan Ross, President and CEO of Direct Lending Investments, speaks during the Milken Institute Global Conference in Beverly Hills, California, U.S., May 3, 2017. REUTERS/Mike Blake

Prosecutors said this let Ross inflate his funds' value by more than $300 million over four years, and collect higher performance and management fees.

Authorities said Ross' improper conduct occurred from roughly 2014 to early 2019.

Ross, of La Canada Flintridge, California, became a familiar direct lending advocate through appearances on CNBC, Fox Business and the Milken Institute's Global Conference.

The SEC built its earlier case against Ross as part of a broader scrutiny of private funds that make higher-risk loans, but which are subject to less oversight and less stringent capital requirements than banks.

(Reporting by Lawrence Delevingne and Jonathan Stempel in New York; Editing by David Gregorio)

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