Author Topic: Direct Lending Fund Sued for Allegedly Inflating Returns  (Read 2968 times)

AnilG

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Direct Lending Fund Sued for Allegedly Inflating Returns
« on: March 26, 2019, 01:44:21 AM »
I didn't see much discussion about DLI blowing up. It doesn't look good for the fund. Those who invested in DLI, what kind of communications are you getting from the fund, if any?

Direct Lending Fund Sued for Allegedly Inflating Returns
https://www.bloomberg.com/news/articles/2019-03-25/direct-lending-fund-sued-by-sec-for-allegedly-inflating-returns

Direct Lending Fund Founder Resigns Amid SEC Investigation
https://www.bloomberg.com/news/articles/2019-03-20/direct-lending-fund-founder-resigns-amid-sec-investigation
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lascott

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Re: Direct Lending Fund Sued for Allegedly Inflating Returns
« Reply #1 on: March 26, 2019, 03:24:23 PM »
Some information provide here:

Direct Lending Investments Suspends Investor Withdrawals
Leading fund manager suspends withdrawals after a large holding defaults
FEBRUARY 27, 2019 BY PETER RENTON
https://www.lendacademy.com/direct-lending-investments-suspends-investor-withdrawals/

From the investor letter:
Quote
VOIP Guardianís amounts due from these delinquent obligors is now $160 million, with the result that VOIP Guardian in turn remains unable to make its payments due to the Funds. We now suspect that the cessation of payments is the likely result of misconduct (although we have not yet determined by whom) and that a substantial portion of the $160 million may not be recoverable.
Again, here is what Brendan says in the investor letter:
Quote
The General Partner and the Board took this action because they determined in good faith that such a suspension is advisable to protect the Funds, including because it would be inappropriate to use the Fundsí liquid assets to redeem some investors ahead of other investors. The General Partner and the Board currently expect that the suspension will be in effect for an extended period of time. The Funds may make distributions and payments during this period if they determine that it is appropriate and if the Fundsí liquidity so permits.
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AnilG

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Re: Direct Lending Fund Sued for Allegedly Inflating Returns
« Reply #2 on: March 28, 2019, 03:30:59 AM »
Thanks Scott. Interesting comments on LA post. Some people seem to be defending actions of DLI and Brandon and have rosy expectations. The SEC complaint has some interesting tidbits.

https://www.sec.gov/litigation/complaints/2019/comp24432.pdf

  • approximately $11 million in over-charges of management and performance fees to fund investors
  • for years, Ross, DLIís 100% owner and then-chief executive officer, arranged with QuarterSpot to falsify borrower payment information for QuarterSpotís loans and to falsely report to DLI that borrowers made hundreds of monthly payments when, in fact, they had not.
  • 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 approximately $53 million and misrepresented the Fundsí performance by approximately two to three percent annually.
  • In multiple written communications with potential and actual investors
    spanning at least October 2015 to June 2016, Ross highlighted the Fundsí ď10-12% returns net to investors with no down months,Ē as well as the fact that defaults could be as high as 20% without any loss of principal to investors.
  • QuarterSpot is one of DLIís longest standing Fund investments, and its principals are close business associates of Ross.
  • Between August 2013 and June 2017, DLIís QuarterSpot position (loan principal plus cash value) increased significantly from $427,333 to $149,608,733.
  • Between 2014 and at least February 2018, Ross knew of problems with the quality of DLIís QuarterSpot loan portfolio and actively took steps to conceal these issues.
  • The total value of the falsified payment figures in a given month ranged from just under $20,000 to just under $100,000.
  • On February 11, 2019, DLI announced to Fund investors that the Funds had suspended withdrawals and redemptions because one of DLIís largest counterparties, VOIP Guardian Partners I, LLC (ďVOIP GuardianĒ), 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.
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lascott

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Re: Direct Lending Fund Sued for Allegedly Inflating Returns
« Reply #3 on: March 29, 2019, 07:53:46 PM »
for years, Ross, DLIís 100% owner and then-chief executive officer, arranged with QuarterSpot to falsify borrower payment information for QuarterSpotís loans and to falsely report to DLI that borrowers made hundreds of monthly payments when, in fact, they had not.

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 approximately $53 million and misrepresented the Fundsí performance by approximately two to three percent annually.
Wowzer!  If the SEC investigation proves all that this is pretty bad and ridiculous for audit/transparency of DLI.
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Fred93

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Re: Direct Lending Fund Sued for Allegedly Inflating Returns
« Reply #4 on: March 29, 2019, 10:04:51 PM »
I've believed for a long time that DLI was failing to "mark" loans (that is show them at less value when payments were late, etc).  I believed this just because I looked at his monthly reports (which he would email to anyone who asked) and knew a tiny bit about some of the things he invested in.  The numbers were too good to be true.  Of course I never had the data to prove anything.  I'm so glad the regulators who have the power to examine the details have finally jumped in.

AnilG

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Re: Direct Lending Fund Sued for Allegedly Inflating Returns
« Reply #5 on: March 30, 2019, 07:47:13 AM »
Yeah, in hindsight, there were lot of little yellow (if not red) flags with DLI. I was surprised with the consistency of monthly returns too. I think once when debt markets were doing really bad and most debt funds were reporting much lower returns except DLI, it made me go "huh...really". But I didn't think of it much further.  I had no interest in DLI as I tend to not get involved financially/with money, with people who come across slick and with the gift of gab.

I've believed for a long time that DLI was failing to "mark" loans (that is show them at less value when payments were late, etc).  I believed this just because I looked at his monthly reports (which he would email to anyone who asked) and knew a tiny bit about some of the things he invested in.  The numbers were too good to be true.  Of course I never had the data to prove anything.  I'm so glad the regulators who have the power to examine the details have finally jumped in.

I think as an investor bigger issue is as investor how do you spot and avoid such situations. The past audit failures and reduced transparency with p2p lending is a major reasons for decline in investor interest in my opinion.

Wowzer!  If the SEC investigation proves all that this is pretty bad and ridiculous for audit/transparency of DLI.
« Last Edit: March 30, 2019, 07:49:25 AM by AnilG »
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