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Direct Lending Fund Sued for Allegedly Inflating Returns

Started by Peter, March 25, 2019, 11:00:00 PM

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AnilG

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" class="bbc_link" target="_blank">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" class="bbc_link" target="_blank">https://www.bloomberg.com/news/articles/2019-03-20/direct-lending-fund-founder-resigns-amid-sec-investigation

lascott

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/" class="bbc_link" target="_blank">https://www.lendacademy.com/direct-lending-investments-suspends-investor-withdrawals/

From the investor letter:
Quote

TravelingPennies

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" class="bbc_link" target="_blank">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, 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.
  • 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 Funds' 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 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.
  • QuarterSpot is one of DLI's longest standing Fund investments, and its principals are close business associates of Ross.
  • Between August 2013 and June 2017, DLI's 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 DLI's 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 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.


Fred93

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.

TravelingPennies

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.

https://forum.lendacademy.com/index.php?topic=5110.msg44500#msg88888888Quote"> from: Fred93 on March 29, 2019, 10:04:51 PM

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