Securities and Exchange Commission v. Brendan Matthew Ross

COMPLAINT
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AMY J. LONGO (Cal. Bar No. 198304)
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.
BRENDAN MATTHEW ROSS,
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
Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C. §§ 80b-9(d), 80b-

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9(e)(1) & 90b-14.
2. Defendant Brendan Matthew Ross (“Defendant” or “Ross”) 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 Ross resides in this district.
SUMMARY
4. This civil enforcement action concerns an intricate, multi-year effort by
Ross, the former chief executive officer and the 100% owner of registered investment
adviser Direct Lending Investments, LLC (“DLI”), to fraudulently inflate the value
and returns for an investment position held by the investment funds that DLI advised
(the “Funds”), which resulted in misstatements to investors and at least $5-6 million
in over-charges of management and performance fees to the Funds.
5. DLI advised a private fund structure with over $865 million in assets
under management that invested in various lending platforms.  DLI’s Funds’
investments included loans made by QuarterSpot, Inc. (“QuarterSpot”), an online
small business lender.  Under the terms of this investment, the Funds funded
thousands of QuarterSpot loans and were entitled to the principal and interest
payments made by the underlying borrowers, subject to QuarterSpot taking a
servicing fee that was a set percentage of the loan interest collected each month.
6. Starting in or around early 2014, Ross orchestrated a scheme whereby he
secretly directed QuarterSpot, as part of its monthly reporting to DLI, to “rebate” a
portion of its servicing fees by making payments to the Funds, which gave the false

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impression that borrowers were making principal payments on seriously delinquent
loans.
7. Under DLI’s valuation policy, many of these non-performing loans
should have been marked down 50% or 100% and reserved against the Funds’
interest income, but instead were valued at par because of the false payments Ross
engineered.
8. As a result, between spring 2014 and fall 2017, DLI cumulatively
overstated the valuation of the Funds’ QuarterSpot position by approximately $53
million and materially misrepresented the Funds’ returns.   DLI collected at least $5-6
million in extra management and performance fees from the Funds that it would not
have otherwise been able to collect.  DLI’s asset values were also materially
overstated in its required Forms ADV filed with the SEC.
9. To conceal his scheme, Ross hid information from others in DLI
management, from the Funds’ auditors, and from other third parties, and when
irregularities in the QuarterSpot portfolio came to light, he lied to others in DLI
management about his knowledge of, and his role in, the “rebate” payments.
10. In March 2019, upon discovering Ross’s misconduct with respect to
QuarterSpot after an internal investigation, a committee of senior DLI executives
demanded that Ross formally resign and relinquish control of DLI, to which he
acquiesced.
11. By engaging in this conduct, Ross violated Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder, Section 17(a) of the
Securities Act, and Sections 206(1), 206(2), and 207 of the Advisers Act.
12. With this complaint, the SEC seeks a permanent injunction prohibiting
future violations of the federal securities laws and an order requiring Ross to disgorge
his ill-gotten gains with prejudgment interest thereon, and imposing civil penalties.
THE DEFENDANT
13. Defendant Ross, age 47, resides in La Canada, California.  Ross founded

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DLI in 2012, and from DLI’s founding until March 2019, he was the adviser’s 100%
owner, chief executive officer, and managing member.  Ross resigned as CEO and
managing member of DLI in March 2019.
OTHER PERSONS AND ENTITIES
14. Direct Lending Investments, LLC is an SEC registered investment
adviser with its principal place of business in Glendale, California.  It advised 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”).  Prior to October 2016, DLI was the sole
manager and general partner of a single fund, Direct Lending Income Fund, L.P.,
which then became the domestic feeder fund when DLI adopted the master-feeder
fund structure.  DLI controlled the Funds and was solely responsible for their
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.
15. On March 22, 2019, the Commission filed a civil action in federal
district court against DLI alleging violations of the antifraud provisions of the
Advisers Act, the Securities Act, and the Exchange Act, and seeking a preliminary
injunction and the appointment of a receiver, relief to which DLI stipulated.  SEC v.
Direct Lending Investments, LLC, Case No. 2:19-cv-02188-DSF-MRW (C.D. Cal.).
On April 1, 2019, the Court entered the preliminary injunction and appointed a
permanent receiver over DLI, the Funds, and the Funds’ holding subsidiaries.
16. QuarterSpot, Inc. is a corporation based in New York, New York that
makes online loans to small businesses.  The DLI Funds invested in loans originated
by QuarterSpot starting in or around August 2013.
THE ALLEGATIONS
A. DLI’s Advisory Business
17. Ross founded DLI in 2012, and in February 2016, registered it with the

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SEC as an investment adviser.
18. From 2012 until March 2019, Ross was DLI’s 100% owner, managing
member, and chief executive officer.
19. Ross had ultimate authority over all aspects of DLI’s business.
20. DLI’s investment focus was on buying loans, participating in loans, and
owning credit facilities and other structures where loans and other assets served as
collateral.
21. In its Form ADV Part 2A brochure provided to its clients, DLI described
its Funds’ “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.”
22. DLI charged clients both a management fee and a performance fee on
the Funds’ assets.  The management fee was calculated as 1% of the master fund’s
gross asset value plus beginning of month subscriptions less redemptions.  The
performance fee was incurred when the master fund’s net asset value exceeded its
prior high net asset value and was calculated as 20% of these earnings before interest
and taxes.
23. The number of investors in the Funds fluctuated over time, but there
were roughly 1,000 investors as of February 1, 2019, shortly before DLI and the
Funds were placed into receivership.  The investors in DLI’s Funds were generally
accredited individual and institutional investors.
24. During the relevant period, DLI used a fund administrator that, among
other things, aggregated the monthly financial information for the Funds’ various
investments and provided the Funds’ investors with monthly account statements that
detailed the value of their accounts and their monthly interest income.
25. During the relevant period, DLI’s Funds were audited by three different
auditing firms that, among other things, purported to audit the Funds’ financial

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statements in accordance with generally accepted accounting principles and auditing
standards, and that issued annual audit reports for the Funds.
B. DLI’s Regular Communications with the Funds’ Investors
26. During the relevant period, DLI regularly communicated with the Funds’
investors through monthly investor letters, which it distributed through its fund
administrator.
27. Ross drafted the monthly investor letters.
28. Ross signed the monthly investor letters on behalf of DLI.
29. The monthly investor letters typically included, among other things,
statements regarding the amount of DLI’s assets under management and the Funds’
historical returns broken out by month.
30. During the relevant period, DLI provided prospective and current
investors in the Funds with monthly fact sheets that, among other things, detailed the
amount of the Funds’ assets and broke out the Funds’ historical returns by month.
31. Ross drafted and ultimately approved the content of the monthly fact
sheets that DLI provided to prospective and current investors in the Funds.
32. Ross was often involved in directly distributing the monthly fact sheets
to prospective and current investors in the Funds.
33. During the relevant period, DLI also provided prospective and current
investors in the Funds with investor presentation documents that, among other things,
detailed the amount of the Funds’ assets and broke out the Funds’ historical returns
by month.
34. Ross drafted and ultimately approved the content of the monthly investor
presentation documents that DLI provided to prospective and current investors in the
Funds.
35. Ross was often involved in directly distributing the monthly investor
presentation documents to prospective and current investors in the Funds.
36. During the relevant period, DLI’s fund administrator provided the

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Funds’ investors with monthly account statements that included account balance and
net profit/loss figures for each investor that were derived from the Funds’ net asset
value, net interest income, and each investor’s percentage allocation.
37. DLI and the Funds, under Ross’s ultimate supervision, provided the
underlying data regarding DLI’s investment positions that the fund administrator used
to create the monthly account statements for investors.
38. During the relevant period, DLI maintained an online investor portal that
provided investors with access to detailed information regarding the Funds’ 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, including as to the QuarterSpot
position.
39. During the relevant period, Ross and others at DLI also provided or
made available to the Funds’ prospective and current investors “default sensitivity
analysis” spreadsheets that detailed the amount of the Funds’ historical write downs
and included graphs showing defaults as a percentage of the Funds’ assets under
management.
40. In some cases, DLI representatives, including Ross himself, directly
emailed certain documents to prospective and current investors that provided
extensive detail regarding DLI’s individual investment positions like QuarterSpot,
including returns and performance information, as well as the monthly loss reserves
data for those investments.
41. The Funds’ audited financial statements, which DLI made available to
investors each year, contained information regarding the aggregate value of the
Funds’ investments as well as values for the Funds’ individual investments, including
QuarterSpot.  The audited financial statements also included income information for
the Funds, including information concerning the Funds’ “net realized gain (loss) on

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investments” and “net change in unrealized appreciation (depreciation) on
investments,” which were impacted directly by the nonperforming loans that the
Funds took reserves against and wrote off.  These audited financial statements also
included a “Financial Highlights” section that calculated a percentage “Total return”
for the Funds based on this underlying financial data.
42. DLI included information regarding its regulatory assets under
management, as well as the Funds’ gross asset value, in the Forms ADV it filed with
the SEC, most of which were signed by Ross.
43. For instance, during the relevant period, Ross signed DLI’s Forms ADV
Part 1A that were filed with the SEC in 2016 and 2017.
44. As 100% owner, chief executive officer, and sole manager of DLI, Ross
had ultimate authority and control over the content of DLI’s Forms ADV.
C. Ross’s Consistent Emphasis on the Funds’ Returns
45. DLI, and Ross in particular, had a history of touting the Funds’ strong,
consistent returns to investors.
46. Each month, the DLI monthly investor letters that Ross prepared and
signed included charts of the Funds’ historical monthly returns over time.  The letters
also contained headings like “Consistent Performance” and for years articulated one
of the Funds’ principal objectives as being to “[m]aintain unlevered, double-digit,
investment returns.”
47. DLI’s monthly investor letters and fact sheets consistently marketed the
Funds’ 10-12% returns, no lock-up, and monthly (35-day) liquidity.
48. Ross routinely emphasized the Funds’ returns in individualized written
communications with potential and actual investors in the Funds.
49. For instance, on October 7, 2015, Ross emailed a prospective investor a
series of “highlights of the Fund,” emphasizing that Direct Lending Income Fund (at
that time the sole fund) “produces consistent, non-market-correlated returns.”  Ross
further explained that the Fund has achieved “10-12% returns net to investors with no

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down months.”  In this same October 2015 email, Ross continued, “Defaults trending
down, now at 4% and could be as high as 20% without loss of principal,” and he
noted the Funds’ “[f]ull transparency.”
50. In another email dated February 15, 2016, Ross sent a prospective
investor one of the Fund’s investor presentations, directing him to “[n]ote the
historical returns on p3 of the Presentation.”  Ross also represented that “[o]ur
investors receive double-digit unlevered returns, and we have had no down months,
and the Fund is suitable for regular and IRA accounts.”  Ross also included the same
“highlights of the Fund” that he included in his October 7, 2015 email, again
emphasizing the Fund’s strong and stable returns, low default rate, and full
transparency.
51. In other communications dated April 19, 2016 and June 24, 2016, Ross
sent prospective investors the same “Fund highlights,” again attaching investor
presentations and specifically stating, “Our investors have received 10-12%
unlevered returns, and we have had no down months, and the Fund is suitable for on-
and offshore accounts.”
52. Ross also routinely highlighted the Funds’ historically high and stable
returns in his oral conversations with prospective and current investors in the Funds,
as well as in presentations he gave to them.
53. In multiple communications with prospective and existing investors up
into at least spring 2017, including in emails dated October 21, 2016, February 23,
2017, and March 13, 2017, DLI’s investor relations representative emphasized in the
“Fund Highlights” that DLI “continues to deliver very stable, unlevered, double
digit returns with no down months since the Fund’s inception in 2012 [bold in
original].”
54. Investors considered information about the Funds’ returns and net asset
value to be important, particularly insofar as DLI charged the Funds fees based on
those figures.

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55. Related to the Funds’ returns, Ross and DLI’s representatives also
routinely highlighted the low default rates for the Funds’ positions.
56. For example, on January 12, 2016, Ross sent an email to investors with
the subject line “Loan Loss Reserves + other files” that attached a spreadsheet titled
“DLIF – Default Sensitivity Analysis.”  This spreadsheet detailed Direct Lending
Income Fund’s historical monthly write downs and expressed those write downs as a
very small percentage of the Fund’s assets under management for each month,
arriving at an average monthly write down percentage. The same spreadsheet
included a tab with a graph that tracked the default rate each month over time.
57. Again, on August 21, 2016, in an email with the subject line “AUM and
Defaults,” Ross sent an investor representative an updated default sensitivity analysis
with the same sort of historical write down information that showed Direct Lending
Income Fund write downs as a percentage of assets under management and included
a graph tracking default rates over time.
58. Up into mid-2017, DLI representatives at Ross’s direction continued to
provide to prospective and current investors in the Funds “default sensitivity
analysis” documents that showed the historical default rates for the Funds’ assets.
59. DLI’s fact sheets for the months of January 2015 to July 2016, which it
provided to prospective and current investors, emphasized the Funds’ high returns
relative to defaults, boldly directing investors, “But don’t focus on the bad loans; we
write plenty of loans off but still achieve excellent returns.”
60. In three distinct emails, one dated July 5, 2016 and two dated September
17, 2016, Ross circulated a document titled “Private Credit Investing Portfolio
Summary” to investors and their representatives.  Among other things, this document
included specific information about the historical returns for the Funds’ QuarterSpot
position, including the historical loss reserves taken on that position, while touting the
QuarterSpot position’s consistently strong performance.
61. The Funds’ investor presentations from April 2017 to at least June 2017

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touted the performance of the Funds’ QuarterSpot position and specifically its low
default rate.  A graph in that presentation purported to quantify QuarterSpot’s rate of
loan “charge-offs” (loan defaults) and compare that rate favorably as being lower
than the default rate for loans originated by a well-known public company small
business lender.  The same presentation explained, “DLI’s small business lending
partner QuarterSpot outperforms by mitigating charge-offs, not just attempting to
offset them with higher pricing.”
D. DLI’s Relationship with QuarterSpot
62. One of the Funds’ earliest investments was with QuarterSpot, an online
lending company that makes small business loans.
63. In or around August 2013, DLI caused Direct Lending Income Fund to
enter into an agreement with QuarterSpot where Direct Lending Income Fund agreed
to purchase “unsecured payment dependent promissory notes (‘Spots’) from
QuarterSpot.”
64. Subsequently, in or around December 2015, the Direct Lending Income
Fund and QuarterSpot entered into amended agreements that recast Direct Lending
Income Fund’s interest as a participation interest in the underlying loans that
QuarterSpot originated.
65. The Funds funded loans that QuarterSpot originated, giving the Funds a
participation interest that entitled them to the economic benefits flowing from the
loans, namely the repaid principal and the interest on the loans.
66. Under the agreements, QuarterSpot continued to hold legal title to the
loans in which the Funds invested.
67. Under the agreements, QuarterSpot continued to service the loans in
which the Funds invested, allowing it to keep a servicing fee, or “investor fee.”
68. The QuarterSpot servicing fee varied over time but was set at 17.5% of
interest received in a December 2015 agreement and generally was at or around
17.5% each month during the relevant period.

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69. Under the terms of the agreements, the Funds’ right to receive payments
was entirely dependent on the underlying borrowers making payments on the loans.
70. The Funds eventually became QuarterSpot’s largest investor and
ultimately funded hundreds of millions of dollars in QuarterSpot loans.
71. Between August 2013 and June 2017, the Funds’ QuarterSpot position
grew from $427,333 to $149,608,733.
72. The Funds retained a roughly $140 million position in the QuarterSpot
platform until September 2017, when they sold $55 million of the QuarterSpot loans
to a third-party fund that raised money from overseas investors.
E. DLI’s Valuation Policy for the QuarterSpot Position
73. DLI had a written valuation policy for its small business whole loan
investments like its QuarterSpot position, which it first expressly articulated in its
January 2015 private placement memorandum that it provided to prospective
investors.
74. This valuation policy required that the QuarterSpot loans generally were
to be valued at par, i.e., the amount of their remaining principal balances, with certain
exceptions for non-performing loans.
75. Loans that had not received any payment in the last 30 days were valued
at 50% of their remaining principal balances, and loans that had not received a
payment in the last 60 days were valued at 0% of their remaining principal balances.
76. The valuation policy provided that DLI could deviate from this stated
valuation rule on a case-by-case basis based on the individual facts of each loan.
77. Between January 2015 and mid-2017, DLI detailed this valuation policy
for its QuarterSpot position in a number of different documents that it provided to
investors and others.
78. DLI’s January 2015 private placement memorandum stated that under
DLI’s valuation policy, loans that had not received payments in the last 30 days
would be “[v]alued at 50% of remaining principal balance, and no accrual of

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interest.”  Loans that had not received a payment in the last 60 days would be
“[v]alued at 0% of remaining principal balance, and no accrual of interest.”
79. Likewise, DLI’s December 2015 private placement memorandum
expressed DLI’s valuation policy in the same manner: Loans that had not received
payments in the last 30 days would be “[v]alued at 50% of remaining principal
balance, and no accrual of interest,” while loans that had not received a payment in
the last 60 days would be “[v]alued at 0% of remaining principal balance, and no
accrual of interest.”
80. DLI provided its auditors with a document titled “Fair Valuation
Methodology, Direct Lending Income Fund, For the Calendar Year Ended 2015,”
which was noted as having been revised on June 18, 2016.  In this document, DLI
described its valuation policy as follows: “Valuation is conducted monthly at the
individual investment level per the Fund’s Private Placement Memorandum, which is
essentially historical cost accounting.  Management holds each asset at its amortized
cost, or outstanding principal balance less any un-accrued discount, and also less any
required loan loss reserves.  In general, but subject to the facts of each loan, loss
reserves are created and reversed when payments have not been made on a loan
within 30 or 60 days (50% and 100% markdown, respectively) prior to the end of the
accounting period.  An asset is very quickly written down when it experiences non-
payment, and it is impossible to be overvalued after Day 60.”
81. In an October 11, 2016 email to an investor asking about DLI’s
valuation processes and how it calculates its loan loss reserves, Ross stated, “For the
two remaining platforms where we continue to buy whole loans, Biz2Credit and
Quarterspot, we reserve 50% if loans are 30 days late and 100% if they are 60 days
late.  There are some limited exceptions, but it’s generally according to that formula.”
82. The Funds’ January 2017 “Due Diligence Questionnaire” described
DLI’s valuation methodology, stating that “small business loan pricing methodology
is based on the payments history of the loans with a general valuation rule that assets

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late in making payments for 30 days will be valued at 50% and those delinquent 60
days or more will be marked to 0%.”
83. The Ross-signed investor letter for the month ending February 28, 2017
summarized DLI’s January 2015 PPM valuation policy for its whole loan positions,
explaining that “[l]oans 30 days late in payment are marked at 50% of their principal
balance” and “[l]oans without a payment in 60 days are written down to 0%,” noting
that “[a]djustments can be made based upon the facts and circumstances of the
individual notes.”  This investor letter further explained that “[b]ased on these rules,
we would then make necessary loss reserves and produce the Fund’s returns based on
interest income net of new loan loss reserves and fund expenses.”  This same investor
letter indicated that even for its non-QuarterSpot investments structured as credit
facilities, “our goal in valuing positions is to remain consistent with the original,
granular approach,” explaining that “[w]e generally apply borrowing base eligibility
rules consistent with our original loan by loan valuation policy.”
84. In or around spring 2017, DLI provided a document dated March 1,
2017 and titled “Direct Lending Investments Valuation Policy Background and
Timeline” to both its outside auditor and to SEC staff conducting an examination of
DLI as an SEC registrant.  In this document, DLI described its then current valuation
process for small business loans: “Generally, if a loan has gone 30 days without a
payment, it is reserved at 50%.  If a loan has gone 60 days without a payment, it is
reserved at 100%.”
85. Both DLI’s chief financial officer and fund controller understood that
DLI’s valuation policy for its QuarterSpot position up until at least August 2017 was
to mark down loans that had not received a payment in 30 days by 50% and loans that
had not received a payment in 60 days by 100%.
86. While not explicit in its statement of its valuation policy, in practice DLI
applied the policy for its QuarterSpot position so that any payment whatsoever within
the last 30 days, even a payment of $1, sufficed to keep a loan from being marked

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down, regardless of how far the loan was behind its amortization schedule.
87. Ross routinely touted DLI’s valuation policies as being conservative.
88. For example, in his investor letter for the month ending November 30,
2016, Ross listed various factors that affect DLI’s returns, which included having to
write down bad loans.   Ross emphasized that DLI writes down bad loans as soon as
it becomes aware of any impairment, contrasting DLI with other funds that failed to
be “conservative” in this respect and stating that “[b]ecause we at DLI intend to build
a private credit firm that will endure for decades to come, we take our responsibility
to properly mark assets very seriously.”
89. As another example, in his investor letter for the month ending
December 31, 2016, Ross claimed that “[o]ne of the hallmarks of DLIF [the domestic
fund] has always been, in our opinion, its conservative approach to taking reserves
against late loans.”
90. Similarly, in his investor letter for the month ending February 28, 2017,
under a section titled “Valuation: Common Sense at the Core,” Ross discussed DLI’s
valuation policies at length and explained the 30 days/50% markdown and 60
days/100% markdown policy for its whole loan positions like QuarterSpot.   In this
letter he also stated that “[f]undamental to understanding our approach is knowing
that regardless of how we gain exposures, we always value positions as if we held the
collateral directly on our books, and for good reason: if any of our borrowers fail, we
expect to take over the collateral.”
91. DLI’s fact sheets provided to investors consistently described DLI as
being “ultra-conservative” in its practice of writing down bad loans to zero.
92. More specifically, for each of its monthly fact sheets from January 2015
to July 2016, DLI included a “frequently asked questions” section that contained the
question, “What happens to the defaulted loans?”   The response stated, “We write
them down to $0, then we work with our lending partners to pursue all defaulted
borrowers in a traditional collections process.  Although we expect to collect 20 cents

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on the dollar based on history, we take the ultra-conservative approach of writing bad
loans down to $0.  Any collections we receive are windfalls for fund investors.”
93. Ross fully understood the significant default risk for loans that had
missed payments.
94. For example, on August 6, 2017 Ross emailed QuarterSpot saying, “The
question is: When a loan is 5% or 10% behind, what is the likelihood of recovery.  Of
course 25% behind matters too, but I suspect that even 5% behind means the loan is
done for.  Doesn’t matter percent principal paid already.  Matters % likely to be
collected AFTER it’s gone 5% behind.”
95. In its work papers, one of the Funds’ auditors noted that DLI
management had explained that DLI’s valuation policy was “determined through
[DLI’s] observations of the historical behavior of borrowers,” which showed that “if
a borrower defaults on a scheduled payment, there is a relatively high risk that he will
continue to default,” such that “[DLI] believe[s] the 50%/100% at 30/60 days
delinquent approximates the fair value of non-performing loans during these
respective periods.”
96. Ross also knew that DLI bore the direct risk of default on the
QuarterSpot position.
97. For instance, Ross noted in his investor letter for the month ending
November 30, 2016 that DLI bore “direct default risk” in its non-facility whole loan
deals like its QuarterSpot investment.
98. Again, in the investor letter for the month ending July 31, 2017 Ross
explained DLI’s movement away from whole loan deals to a facility lending structure
by saying that whole loan deals “less adequately align incentives between DLI and its
counterparties than do Facility Deals” because in those whole loan deals DLI bears “a
‘first loss’ position.”
99. DLI’s former chief financial officer testified that for the Funds’
QuarterSpot position, where the Funds owned direct interests in the underlying loans,

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every single dollar paid (or not paid) on a given loan impacted the Funds’ financials.
F. Ross’s Multi-Year Manipulation of QuarterSpot’s Payment Data
100. During the relevant period, DLI required that QuarterSpot provide it
with loan-level data, including payment information for each loan, as part of a
monthly closeout process.  QuarterSpot provided this data to DLI in various reports.
101. These reports, which included a cash history report and a daily payments
report reflecting all payments during the month, were available on QuarterSpot’s
investor portal, to which DLI representatives had access.
102. Further, at Ross’s direction, each month QuarterSpot emailed DLI a
“late loans report” that was not available on the investor portal.
103. This late loans report included various pieces of data for each loan,
including the remaining principal balance and a “LastPosted” date that reflected the
last payment received on the loan. The late loans report also included a “Status”
column that keyed off the LastPosted date.  The underlying loans were typically on
weekly or daily repayment schedules.  While the terminology varied over time,
generally loans that received payments within the last 30 days were marked “current”
or “late,” while those that had not received any payments in the last 30 days had a
“default” status.
104. At the very end of 2013, Ross requested from QuarterSpot’s chief
executive officer that QuarterSpot begin rebating part of its servicing fee, purportedly
as a form of credit enhancement to help DLI improve its returns.
105. QuarterSpot agreed to Ross’s request to rebate part of its fees.
106. At Ross’s direction, in or around spring 2014, QuarterSpot began
making monthly “rebate” payments to the Funds that took the form of individual
“principal payments” against particular delinquent loans that Ross specified each
month.
107. Ross and QuarterSpot would generally agree on parameters for the total
amount of “rebate” payments that QuarterSpot would provide each month, which was

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either a percentage of the total servicing fee or a maximum dollar amount.  Ross then
directed QuarterSpot how the agreed upon total “rebate” amount would be applied
across multiple individual loans as supposed principal payments.
108. The money for these payments came from QuarterSpot’s operating
account, i.e., they were not payments made by the underlying borrowers.
109. From 2014 to September 2017, Ross followed a consistent pattern in
directing the “rebate” payments.
110. At the beginning of each month, QuarterSpot sent Ross a “late loans
report” spreadsheet for the month that had just ended.  The spreadsheet showed
various metrics for the DLI-funded loans, including the LastPosted date for each loan
and the loan’s status keyed off this date, as well as the remaining principal balance
for each loan.
111. Typically within days of receiving the late loans report, Ross responded
by sending back to QuarterSpot a revised spreadsheet, usually with some variation of
“BR” or “BRpays” in the title, indicating that [Brendan] Ross himself had revised the
spreadsheet to direct the “rebate” payments.  The revised spreadsheet that Ross sent
to QuarterSpot included a column directing whether “rebate” payments should be
made against particular loans (“Make Payment”) and another column specifying the
payment amounts (“Payment Amount”).  The loans for which Ross directed payments
were always loans marked as “default” in the initial report Ross received from
QuarterSpot because they had not received payments in the last 30 days.
112. Ross generally directed a monthly “rebate” payment amount that was
only a fraction of what the borrower owed on a weekly basis or, if the payment
schedule called for daily payments, equivalent to a single daily payment.
113. Ross’s spreadsheet typically included columns where he calculated what
reserves he would be taking on other “default” loans for which he was not directing
that QuarterSpot make “rebate” payments that month.
114. Ross initially only directed payments across a dozen or so loans each

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month, but over time this grew to hundreds of loans each month that together had
outstanding principal balances of many millions of dollars.
115. For example, on December 10, 2016, Ross sent QuarterSpot an email
and spreadsheet in connection with DLI’s November 2016 close process for its
QuarterSpot position.  In the email, Ross stated, “Lmk when you have applied and the
reports are ready, and then you can send the package with Late Loans and Balance
Sheet to [the DLI fund controller].”  In the spreadsheet attachment, Ross directed
QuarterSpot to apply $71,436 in “rebate” payments against 274 distinct “default”
loans that had not received payments within the last 30 days, with a total outstanding
principal balance of $15,625,524.
116. As another example, on July 10, 2017, Ross sent QuarterSpot an email
and spreadsheet in connection with DLI’s June 2017 close process for its QuarterSpot
position.  In the email, Ross directed QuarterSpot, ““Hi [QuarterSpot representative]
– see payments. Note that there are three little sections of payments – they are not all
contiguous in column Q – there is some row spacing between them. Please double-
check before finalizing.”  In the attached spreadsheet, Ross directed QuarterSpot to
apply $97,213 in “rebate” payments across 381 distinct “default” loans that had not
received payments within the last 30 days, with a total outstanding principal balance
of $22,939,150.
117. QuarterSpot generally made tens of thousands of dollars in “rebate”
payments each month, getting near $100,000 in a few months in mid-2017.
118. Ross never copied others at DLI on his emails directing QuarterSpot to
make “rebate” payments.
119. After receiving Ross’s directions, QuarterSpot applied his specified
payment amount for each loan as a principal payment against the loan before sending
a new, revised spreadsheet back to DLI that contained Ross’s payments.
120. The spreadsheet that QuarterSpot sent back to DLI generally included
tabs titled “Balance Statement” and “Late Loans.”

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121. In December 2014, Ross directed QuarterSpot to randomize the “rebate”
payments on weekdays throughout the month, which QuarterSpot did going forward.
122. In the revised balance statement and late loans spreadsheet that
QuarterSpot sent back to DLI, the LastPosted date for a loan that received a Ross-
directed payment was changed to reflect a payment against that loan on a completely
random date during the month, even though no borrower had made any payment on
that loan, and in fact QuarterSpot had not even made a “rebate” payment on that
specific date.
123. Nothing in the revised late loans report differentiated between payments
made by borrowers and “rebate” payments made by QuarterSpot at Ross’s direction.
124. The adjustment of the LastPosted dates for the loans that received
“rebate” payments changed their status designations from “default” to “current” (or in
some cases “late”), even though no borrowers had made payments.
125. The principal balance for each loan that received a “rebate” payment was
reduced by the amount of the payment.
126. The daily transactions report pulled from QuarterSpot’s website by Ross
and later others in DLI management as part of DLI’s monthly close process reflected
the “rebate” payments as individual principal payments against specific loans, with
the same random payment dates assigned.
127. The cash history report pulled from QuarterSpot’s website by Ross and
later others in DLI management as part of DLI’s monthly close process, which
included a column for QuarterSpot’s servicing fees, included only a gross servicing
fee amount not reduced by the Ross-directed payments, which were instead lumped
into the principal repaid category.
128. Neither the daily transactions report nor the cash history report
differentiated between “rebate” payments and actual borrower payments.
129. The scope of Ross’s manipulation grew over time and peaked by the
close process for the month of August 2017, when Ross directed nearly $100,000 in

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payments against 455 “default” loans that had not received a payment within the last
30 days, with a total outstanding principal balance of $26,267,428.  The Ross-
directed “rebate” payments led these “default” loans to be marked “current” in the
revised reports QuarterSpot sent back to DLI.
130. In total, between April 2014 and September 2017, at Ross’s direction,
QuarterSpot made over $1.9 million in “rebate” payments to the Funds, which took
the form of thousands of principal payments across over 1,000 different loans.
131. Ross concealed his direction of the “rebate” payments from others in
DLI management.
G. DLI’s Use of Ross’s Manipulated QuarterSpot Data
132. DLI used the revised late loans report with the Ross-directed “rebate”
payments to determine what reserves to take on the QuarterSpot loans each month.
133. Ross was personally responsible for closing the QuarterSpot position up
until fall 2016, but thereafter DLI’s fund controller began managing the QuarterSpot
close process at Ross’s direction.
134. The fund controller received the manipulated, “final” monthly late loans
report and balance statement directly from QuarterSpot, with Ross usually copied.
135. The fund controller also accessed the other documents that included the
Ross-directed payments, such as the cash history and daily payments reports, directly
from the QuarterSpot investor portal.
136. While each of these reports incorporated the Ross-directed “rebate”
payments, none indicated that the purported principal payments (the rebates) were not
in fact payments made by borrowers.
137. Ross excluded the fund controller from the process by which he directed
QuarterSpot to make the payments.
138. For example, on November 9, 2016, after directing QuarterSpot to first
send him the October 2016 late loans report with his payments applied so he could
check it, Ross told QuarterSpot it was okay to send the revised report on to DLI’s

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fund controller, saying, “[y]ou can remove the version number is [sic] its [sic]
effectively v1 for her.”
139. The fund controller did not know that any of the supposed principal
payments in the late loans report were not in fact borrower payments but rather
“rebate” payments that Ross had directed QuarterSpot to make.
140. Per Ross’s specific instructions, the fund controller relied entirely on the
loan “status” designations in the late loans report to determine whether to take
reserves on particular QuarterSpot loans.
141. As such, the fund controller, who understood the late loans report
reflected only borrower payment data for the underlying loans, valued the loans
receiving “rebate” payments at par (remaining principal balance) because the late
loans report misleadingly showed they had received payments within the last 30 days,
making them “current.”
142. The fund controller incorporated this reserves’ information and the
reports she received from QuarterSpot into DLI’s official monthly close file for the
QuarterSpot position, and she then reported the information to DLI’s fund
administrator, which used this data to prepare the Fund’s monthly income statement
and balance sheet, which were in turn used to arrive at the Funds’ net asset value and
the monthly returns that it reported.
H. The Material Consequences of Ross’s Fraudulent Conduct
143. The consequences of Ross’s fraud were significant and material.
144. Over a three and a half year period, Ross directed that QuarterSpot make
“rebate” payments against at least 1,081 distinct loans, each of which was generally
30 or more days delinquent at the time of the rebate.
145. The total principal balance of these loans for which Ross directed
payments was approximately $53 million, which counts only a single time the
balance of each loan that received a rebate payment.
146. The great majority of these loans received payments for many

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consecutive months, keeping them “current” long after they should have been
reserved and written off under DLI’s valuation policy.
147. While Ross eventually allowed some of these loans to be written off,
usually several months after directing payments be made against them, his fraud
allowed him to artificially inflate the Funds’ returns and overcharge fees over the
months where he delayed taking reserves.
148. Even though the Funds were still receiving money from QuarterSpot in
the form of “rebate” payments, the false payment data inaccurately designated the
affected loans as “current,” undermining DLI’s ability to properly assess the loans’
performance and apply its valuation policy.
149. Ross’s data manipulation led DLI to artificially inflate the Funds’
heavily marketed returns that it reported to investors each month in a meaningful and
material way.
150. Under DLI’s valuation policy and practice, DLI should have reserved the
principal balances of the non-performing QuarterSpot loans against the Funds’
monthly QuarterSpot gross interest income, which would have reduced the monthly
net interest income for the QuarterSpot position, as well as for the Funds’ full
portfolio.
151. The net interest income was the key input into the Funds’ monthly
returns calculations.  Consequently, the net interest income amounts, which were
artificially high because DLI did not take reserves for delinquent QuarterSpot loans,
led to consistently inflated returns.
152. An internal DLI pre-receivership analysis of Ross’s fraud concluded that
Ross’s fraud led DLI to overstate its returns by two to three percent on an annual
basis.
153. In sworn testimony, DLI’s former CFO described the effect of Ross’s
fraud on the Funds’ reported returns as being “substantial” and “significant” even at
the “fund level.”

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154. Ross’s fraud also led DLI to overcharge the Funds millions of dollars in
management and performance fees.
155. DLI’s performance fee was calculated as 20% of the Funds’ monthly net
interest income.
156. Ross’s data manipulation led DLI to apply the performance fee against a
net interest income figure that was inflated because reserves were not taken for the
non-performing QuarterSpot loans.  As a result, DLI overcharged the Funds its
performance fees.
157. DLI likewise overcharged management fees because those fees were tied
to the Funds’ net asset value, which was artificially high because the delinquent
QuarterSpot loans were not written off the balance sheet when they should have been.
158. A pre-receivership DLI internal analysis conducted in or about March
2019 concluded that, in total, Ross’s fraud led DLI to overcharge the Funds roughly
$11 million in fees.
159. Accounting for the fact that Ross ultimately wrote off certain of the
loans to which he directed payments (usually many months after they should have
been written off), and excluding certain loans for which Ross directed payments that
may have later re-commenced paying in some way, Ross’s fraud led DLI to
overcharge the Funds at least $5-6 million in performance and management fees
between spring 2014 and the end of 2017.
160. During this same period, DLI charged the Funds tens of millions of
dollars in fees, and Ross as 100% owner of DLI, and various limited liability
companies he controlled, received nearly $30 million in transfers from DLI.
161. At least some of this money that Ross received from DLI is derived
directly from the inflated fees that DLI collected from the Funds as a result of Ross’s
fraud with respect to the QuarterSpot position.
I. Ross’s Knowledge and Motivation
162. Ross knew that the payments he directed made delinquent QuarterSpot

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loans appear “current,” which delayed or prevented them from being marked down
under DLI’s valuation policy.
163. Each month, Ross personally received back from QuarterSpot the late
loans report that showed that the non-paying loans for which he had directed
“rebates” were now marked “current” or “late” with payment dates within the last 30
days.
164. Ross then either used that spreadsheet himself, or directed the fund
controller to use it, to determine what reserves to take on the QuarterSpot loans and
then close the monthly file for the QuarterSpot position.
165. Ross routinely directed QuarterSpot to be sure to adjust the LastPosted
dates for the loans that received “rebate” payments so those loans reflected payments
within the last 30 days, which would make them “current.”
166. On October 8, 2014, when addressing the application of his “rebate”
payments for the September 2014 close, Ross lectured QuarterSpot, “This is wrong.
Frustrating!  This has Last Posted dates in August and has none of the full payments
in them.  Please fix and look before you hit send.”
167. On May 11, 2015, in reference to the late loans report for April 2015,
Ross vented, “Last Posted is not accurate.  It doesn’t reflect your payments.  Please
do sanity checks on these files before sending to me.  Please fix as soon as possible.”
168. On October 8, 2015, Ross emailed QuarterSpot saying, “I can’t use the
report you attached which just says ‘Current’ but has the old LastPosted (which wont’
[sic] make sense to [DLI’s third party fund administrator]).”  Earlier that same day in
a distinct email, Ross directed QuarterSpot, “Please check that the Last Posted dates
reflect your payments before sending to me.”
169. On February 9, 2017, Ross directed QuarterSpot how to apply his
“rebate” payments in a way that prevented loans from showing up as more than 60
days late, which would require them to be marked down to zero under DLI’s
valuation policy, saying, “I got the math wrong last time: please avoid payments on

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the first and second of each month. This avoids a loan with a payment on 12/1 or 12/2
from being 61 or 62 days late on 1/31.  Last time I’d said to avoid payments at the
end of the month, but of course it is the beginning that is the problem!”  Ross
continued, “Thanks and OK to send [the reports with Ross’s “rebate” payments] to
[the DLI fund controller] when you are 100% on the payments. Please cc: me.”
170. Ross’s motivation in directing the payments was to delay or avoid
marking down QuarterSpot loans that were not performing so that those loans would
not lower the Funds’ returns, allowing him to in effect smooth the Funds’ returns.
171. On January 13, 2015, Ross told QuarterSpot, “I need to decide what
reserves I’m creating for the full month based on my return targets, etc.,” expressly
acknowledging that he was basing his decisions about taking reserves on return
targets rather than loan performance.
172. On February 8, 2015, Ross expressed concern to QuarterSpot 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 he then requested “a
version of the Late Loans report that has their true, non-quarterspot Last Posted date.”
173. On October 8, 2015, when asking QuarterSpot for the late loans report
with his “rebate” payments applied, Ross stated, “I will use that to close the month.  I
plan on booking $300K in reserves for a 1.33% return for the month.  I will do that
regardless of whether or not there are ‘enough’ late loans, so we will continue to
catch up as normal.”
174. Throughout the relevant time period, Ross routinely calculated the
reserves he would be taking on certain “default” loans in the late loans report
spreadsheet columns adjacent to those columns where he directed QuarterSpot to
make “rebate” payments on other, distinct “default” loans, further indicating that he
was using the “rebate” payments to avoid taking reserves on delinquent loans after he
hit whatever reserves cap he had set for the month.

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J. The QuarterSpot Side Pocket and Sale of Delinquent Loans
175. Ross’s monthly manipulation of the QuarterSpot loan-level data
continued unabated for over three years.
176. DLI hired a new CFO in or around July 2017.
177. DLI’s new CFO began exploring changes to DLI’s valuation policy.
178. As part of this process, in or around August 2017, DLI’s vice president
of research analyzed the QuarterSpot portfolio using a different valuation
methodology that compared actual payments for the loans against expected payments
under the loans’ amortization schedules.
179. This August 2017 analysis revealed that a significant number of
QuarterSpot loans had been receiving small partial payments and were far behind
their amortization schedules.
180. This internal study further concluded that the Funds’ QuarterSpot
position was impaired by approximately $35 million.
181. Ross was informed of the study’s findings by the vice president of
research and discussed the findings and their implications extensively with senior
DLI executives throughout August 2017.
182. During these conversations with senior DLI executives, Ross did not
disclose that identified partial payments on many delinquent loans were not in fact
borrower payments but rather “rebate” payments he had directed QuarterSpot to
make.
183. Shortly thereafter in August 2017, DLI management decided to
segregate the Funds’ QuarterSpot investment into a side pocket account.
184. The investor letter for the month ending July 31, 2017, which was signed
by Ross, announced the side pocket, explaining that “[s]ide pockets are a tool used by
asset managers to hold any assets for which the estimated fair value cannot be
determined as of the measurement date, while still allowing the remainder of the
fund’s assets to be fair valued for financial reporting purposes.”

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185. That same investor letter indicated that DLI had learned of the issue with
QuarterSpot as part of its regular reassessment of its valuation policies and suggested
that the issue arose from lack of visibility into QuarterSpot’s loan-level data.
186. At the end of a long footnote, the investor letter disclosed that “[a]n
internal cash flow study was performed which indicated an impairment for a portion
of the QuarterSpot portfolio. We believe that additional information needs to be
considered and analyzed before the fair value of these assets can be determined.”
187. The investor letter did not disclose details of the impairment, nor that the
partial payments that led to many of the loans being impaired were “rebate” payments
that Ross had directed to make delinquent loans appear current.
188. Ross said nothing about the “rebate” payments he directed and their
connection to the impairment of the QuarterSpot position when he spoke with various
investors in the Funds about the side pocket after DLI announced it.
189. Almost immediately after the discovery of the potential impairment of
the Funds’ QuarterSpot position, DLI at Ross’s direction began exploring a sale of
the worst performing QuarterSpot loans.
190. In an agreement dated August 24, 2017, DLI restructured its agreement
with QuarterSpot so a holding subsidiary of the master fund took actual title to the
loans.
191. In September 2017, DLI entered into a transaction to sell participation
interests in approximately $55 million of QuarterSpot loans at par value (outstanding
principal balance) to a third-party entity backed by overseas investors.
192. This transaction involving the QuarterSpot assets was documented in
two distinct agreements dated September 25, 2017 and September 29, 2017.
193. This sale included hundreds of the worst performing QuarterSpot loans,
including the great majority of loans for which Ross had been directing “rebate”
payments.
194. The sale had the effect of removing these non-paying loans from the

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Funds’ balance sheet without the Funds ever having to take a loss on them.
195. As consideration for the transaction, Ross personally guaranteed the
performance of the collateral that the Funds sold to the third party, pledging his
equity interest in DLI.
196. Ross signed an investor letter for the month ending August 31, 2017 that
announced the sale of the QuarterSpot loans to the third party.
197. In this investor letter that announced the transaction, DLI did not
disclose to the Funds’ investors Ross’s personal guarantee or the pledging of his
equity interest in DLI.
198. The principals of the fund that purchased the QuarterSpot loans from the
DLI Funds have denied knowledge that any of the loans had stopped paying and that
the Ross-directed payments used to keep those loans “current” were not in fact
borrower payments.
199. The sale of the QuarterSpot loan participation interests to DL Global
resulted in the Funds’ position in QuarterSpot dropping from $139,756,336 to
$71,506,605 between August and September 2017.
200. DLI resolved the QuarterSpot side pocket in or around September 2017
and moved the QuarterSpot loans that it had not sold out of the segregated account
back into the account with its other investments.
201. Around the same August and September 2017 timeframe, DLI’s
valuation committee decided to revise DLI’s long-standing valuation policy
applicable to the QuarterSpot position.  The revised policy analyzed where a
borrower was at on its amortization schedule, rather than on whether the borrower
made a de minimis payment in a given month.
202. After the sale, DLI continued to be involved in the monthly close
process for the QuarterSpot participation interests that the Funds had sold to the third
party.
203. Ross took advantage of DLI’s involvement to continue directing

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QuarterSpot to make payments against delinquent loans that were not actually
receiving borrower payments.  These payments were then incorporated into the
official reporting data that QuarterSpot sent to DLI for transmission to the third party.
204. In or around August 2017, Ross began using his personal email account,
instead of his DLI email account, to direct QuarterSpot to make token payments each
month to purportedly repay portions of hundreds of loans that had been sold to the
third party, and also to some loans that the Funds continued to own, creating the
appearance that borrowers were making payments on these loans, when in fact they
were not.
205. The process was essentially the same as what Ross had done for years
for the Funds’ own QuarterSpot loans, though Ross began specifying smaller, round
numbers for the payments.
206. For example, on November 8, 2017, Ross from his personal email
address sent QuarterSpot a spreadsheet where he directed it to apply payments
totaling $53,551 across 388 “default” loans with a total outstanding principal balance
of approximately $23,500,000.  Nearly all of these loans for which Ross directed
payments were ones that the Funds had sold to the third party fund backed by
overseas investors, but the Funds still owned approximately 32 of the loans.  In this
email, Ross said, “[QuarterSpot representative]-here you go.  First tab has simplified
list.  OK to process and sent [sic] usual files to [DLI fund controller], etc.”
207. As another example, on February 2, 2018, Ross, again from his personal
email address, sent QuarterSpot a spreadsheet where he directed it to apply payments
totaling $18,018.54 across 332 distinct “default” loans with a total outstanding
principal balance of approximately $19,700,000.  Many of the Ross-specified
payments were small round numbers like $50 or $100.  In his email to QuarterSpot
Ross said, “See first tab for the short list. Down to just the [principal of third-party
fund backed by overseas investors] loans!”

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K. Ross’s Active Concealment of His Misconduct
208. During the relevant period, Ross actively concealed that he was directing
QuarterSpot to make “rebate” payments that made delinquent loans appear current.
209. Ross concealed his fraudulent scheme from others at DLI and was
always the only DLI employee involved in directing the “rebate” payments.
210. Even when the DLI fund controller began handling the monthly close
process for the QuarterSpot position in fall 2016, Ross continued to direct the
“rebate” payments without informing the fund controller, while directing her to use
the manipulated late loans report (which she did not know was manipulated) to
determine which loans should be marked down per DLI’s valuation policy.
211. DLI provided the Funds’ auditors and a third party valuation firm with
the spreadsheets that Ross manipulated that showed non-performing loans to be
“current” based on Ross-directed “rebate” payments, not because of actual borrower
payments.
212. The auditors and valuation firm then used as inputs in their valuation
analyses of the Funds’ QuarterSpot position inaccurate information about the loans’
status and payments histories, as well as incorrect historical default rate information.
213. None of the Funds’ audited financial statements mentioned or
incorporated any type of servicing fee rebate for the QuarterSpot position, as Ross
concealed the “rebate” payments from the Funds’ auditors.
214. Ross made or distributed a series of statements, including to investors,
falsely indicating that DLI did not receive fee rebates for its QuarterSpot position.
215. For example, on January 29, 2017, Ross explained by email to an
investor that DLI used a servicing fee rebate for a different whole loan platform and
contrasted that with QuarterSpot, for which he represented no such rebate
arrangement existed, citing QuarterSpot’s “good” and “stable” performance over
time.
216. Additionally, a June 2016 DLI “Private Credit Investing Portfolio

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Summary” document, which Ross and others at DLI circulated to investors, discussed
DLI’s practice of using servicing fee rebates in some cases but expressly stated that
“QuarterSpot does not have a servicing fee rebate arrangement with the Fund.”  That
same document included specific information about QuarterSpot’s historical returns,
including the historical loss reserves taken on the position, and it touted
QuarterSpot’s consistently strong performance.
217. In or around summer 2017, when others at DLI discovered the
impairment of the QuarterSpot position that led to the side pocket, Ross did not
disclose to executives at DLI or to investors that the partial principal payments at
issue were not borrower payments but instead “rebate” payments by QuarterSpot that
he had directed.
218. Instead, Ross arranged a quick sale to get the delinquent QuarterSpot
loans off the Funds’ books, failing to disclose key facts to the Funds’ investors.
219. Ross further concealed his rebate payments in his August and September
2017 communications with investors concerning QuarterSpot and the potential
impairment, side pocket, and sale to the third party fund.
220. Ross was evasive and lied when others at DLI began to uncover the
rebate payments at the end of 2018 and in early 2019.
221. In or around October 2018, a debt collector for DLI’s QuarterSpot loan
portfolio informed DLI’s chief financial officer and fund controller that certain
payment data in DLI’s records did not match data the collector had received directly
from QuarterSpot showing how much the underlying loan borrowers actually owed.
222. As some DLI representatives, including its chief financial officer and
fund controller, attempted to get more information from QuarterSpot’s
representatives to explain the discrepancies, Ross pressed them to back off their
inquiries.
223. For example, the fund controller, on or around October 2018, confronted
Ross in person regarding the payments.

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224. At that time, Ross denied knowledge of the payments and instead
directed the fund controller to tell the debt collector that she should just collect on the
loan balances she had.
225. Others at DLI continually tried to determine the cause of the QuarterSpot
loan balance discrepancies between October 2018 and February 2019.
226. On or around early February 2019, when the fund controller told Ross
she needed to understand the cause of the discrepancies so she could explain them to
the Funds’ auditors, Ross told her she was not going to get further information from
QuarterSpot and that she should just “make something up” for DLI’s auditors.
227. Additionally, DLI’s chief financial officer asked Ross in person about
the QuarterSpot payment discrepancies in or around January 2019.
228. Ross denied knowing anything about the “rebate” payments when
confronted by the chief financial officer, but said he always suspected the payments
could be fake.
229. Ross also told the chief financial officer that because the fake payments
identified at that point only related to loans already sold to the third party fund, DLI
had no obligation to disclose them because DLI did not owe a fiduciary duty to the
third party fund.
L. Defendant Ross Was an Investment Adviser
230. DLI was an investment adviser registered with the SEC and was at all
relevant times acting as an adviser to the Funds.
231. At all relevant times, Ross was an “investment adviser” within the
meaning of Section 202(a)(11) of the Advisers Act, 15 U.S.C. §80b-2(a)(11), as he
was engaged in the business of providing investment advice as to the value of
securities and as to the advisability of investing in, purchasing and selling securities.
232. In the relevant period, Ross was also an investment adviser due to his
ownership, management, and control of DLI, including his ultimate authority over all
aspects of DLI’s business.

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233. Ross was ultimately responsible for the overall investment strategy of
the Funds.
234. Ross received compensation for making investment decisions on behalf
of the Funds because DLI received fees in the form of a percentage of assets managed
and a performance fee, millions of dollars of which went to Ross as the 100% owner
of DLI.
235. As an investment adviser, Ross owed the Funds a fiduciary duty and was
prohibited from making untrue statements of material fact or from omitting to state
material facts necessary to make his statements not misleading.
M. The Limited Partnership Interests in the Funds Are Securities
236. Investor funds were pooled in the Funds to finance various businesses
that DLI would choose to invest in.
237. The investors in the Funds were dependent on the success of the
underlying businesses to generate their returns, 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.
238. Ross, as 100% owner of DLI, in turn received money from DLI that was
derived from the fees DLI collected from the Funds.
239. The efforts of DLI and Ross in allocating capital and managing the
Funds’ investments were critical to the enterprise’s success, as the investors in the
Funds did not play any role in managing DLI’s investment decisions.
N. DLI’s Materially False Forms ADV
240. DLI filed required Forms ADV with the SEC starting in January 2016 up
until February 2019.
241. Ross had ultimate control over the content of DLI’s Forms ADV.
242. Ross personally signed many of DLI’s Forms ADV.
243. DLI’s Forms ADV filed in 2016 and 2017 were materially misleading in
multiple respects.

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244. For DLI’s Forms ADV filed in 2016 and 2017, DLI’s assets under
management figures were inflated because certain QuarterSpot loans should have
been written down but were not because of Ross’s data manipulation that created the
false appearance that the borrowers for the loans were continuing to pay.
245. For DLI’s Forms ADV filed in 2016 and 2017, the Funds’ gross asset
value figures were inflated because certain QuarterSpot loans should have been
written down but were not because of Ross’s data manipulation that created the false
appearance that the borrowers for the loans were continuing to pay.
246. Ross knew or was reckless in not knowing the Forms ADV were
misleading because he personally directed the data manipulation for the QuarterSpot
loans that led to the inflated figures.
247. Investors considered information about DLI’s assets under management
and the Funds’ gross asset value to be important and would have wanted to know if
such information was overstated.
O. Tolling Agreement
248. Ross entered into a tolling agreement with the SEC for the period July 7,
2019 through September 7, 2019.  This agreement tolls the running of any limitations
period or any other time-related defenses alleged in this Complaint for a period of 60
days.
FIRST CLAIM FOR RELIEF
Fraud by an Investment Adviser
Violations of Sections 206(1) and 206(2) of the Advisers Act
(against Defendant Ross)
249. The SEC realleges and incorporates by reference paragraphs 1 through
248 above.
250. Ross breached his fiduciary duties when he defrauded DLI’s clients, the
Funds, by directing “rebate” payments that made it look like underlying, delinquent
QuarterSpot loans were current under DLI’s valuation policy, which artificially

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inflated the Funds’ net asset value and reported returns and caused the Funds to pay
materially inflated management and performance fees to DLI.  Ross was fully aware
of the underlying manipulation of loan-level data because he directed that process,
seemingly for the very purpose of mismarking the Funds’ assets and artificially
increasing their performance numbers, which fraudulently inflated DLI’s fees,
resulting in DLI’s misappropriation of the Funds’ assets.  Ross also took multiple
steps to conceal his misconduct both while he was engaged in it and after others at
DLI began to discover what he had done
251. By engaging in the conduct described above, Defendant Ross, directly or
indirectly, by use of the mails or means and instrumentalities of interstate commerce,
(a) knowingly or recklessly employed devices, schemes or artifices to defraud clients
or prospective clients; and (b) knowingly, recklessly, or negligently engaged in
transactions, practices, or courses of business which operated as a fraud or deceit
upon clients or prospective clients.
252. By engaging in the conduct described above, Defendant Ross 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 Ross)
253. The SEC realleges and incorporates by reference paragraphs 1 through
248 above.
254. Ross made false and misleading statements and engaged in deceptive
conduct towards the investors in the DLI Funds.
255. Ross engaged in a multi-year effort to manipulate data by secretively
directing “rebate” payments to create the appearance that QuarterSpot loans were

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“current” when in fact they were seriously delinquent, which allowed the Funds to
delay or avoid recognizing losses on the QuarterSpot position.  This in turn inflated
the Funds’ net asset value and heavily marketed returns and allowed DLI to
substantially overcharge the Funds for its management and performance fees, which
inured to the benefit of Ross as DLI’s 100% owner.
256. Ross’s manipulation of the QuarterSpot loan payment data led him to
make multiple false and misleading statements to the Funds’ investors about DLI’s
assets under management and the Funds’ net asset value, heavily-marketed returns,
and loan default rate.  These misstatements were included in DLI’s monthly investor
letters, investor account statements, fact sheets, investor presentations, information
provided on DLI’s investor portal, and in various other documents provided to
investors, as well as in oral communications from Ross to investors.  DLI and Ross
likewise made false statements to the Funds’ investors about the management and
performance fees they owed.  Ross’s statements regarding DLI’s valuation policy
were false or misleading insofar as Ross was actively violating the stated policy, as
were Ross’s repeated statements that DLI was conservative or “ultra-conservative” in
how it marked down late loans.  Ross’s representations to investors regarding the
August 2017 QuarterSpot side pocket were misleading because he did not disclose
that a key reason for the impairment of the position was that a number of loans
marked “current” were in fact seriously delinquent because of payments that were not
borrower payments at all but rather “rebate” payments engineered by Ross.
Likewise, Ross’s statements to the Funds’ investors about the September 2017 sale of
QuarterSpot loans at par were misleading insofar as he failed to disclose that he had
to personally guarantee the transaction and pledge his equity interest in DLI to
effectuate that sale.
257. Ross’s false statements were made “in connection with” the sale of
securities because investors and prospective investors in the Funds who received
these false and misleading representations either invested for the first time,

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subsequently invested additional sums, or reinvested their monthly interest income.
258. Ross’s misrepresentations were material because investors in the Funds
considered it important to have accurate information concerning the value of their
investments and historical returns data, as that could directly impact their ability to
receive back their principal investments and achieve the high returns that DLI and
Ross advertised.  The misrepresentations were also material because they directly
impacted the management and performance fees that DLI charged the Funds,
inflating the fees and thereby diminishing the returns flowing to the investors.
259. Ross knew, or was reckless in not knowing, that the statements regarding
the Funds’ QuarterSpot position, including the valuation and performance of that
position, were false or misleading because he personally directed the manipulation of
the underlying borrower payment information, creating a situation where the
QuarterSpot position could not be properly valued or its performance assessed.
Ross’s efforts to conceal his misconduct, and his lies when confronted about it, are
further evidence of his fraudulent intent.
260. By engaging in the conduct described above, Defendant Ross, 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.
261. Defendant Ross, 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

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courses of conduct that operated as a fraud on the investing public by the conduct
described in detail above.
262. By engaging in the conduct described above, Defendant Ross 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).
THIRD CLAIM FOR RELIEF
Fraud in the Offer or Sale of Securities
Violations of Section 17(a) of the Securities Act
(against Defendant Ross)
263. The SEC realleges and incorporates by reference paragraphs 1 through
248 above.
264. Ross engaged in deceptive conduct and obtained money by means of
false and misleading statements to the investors in DLI’s Funds.
265. Ross engaged in a multi-year effort to manipulate data by secretively
directing rebate payments to create the appearance that QuarterSpot loans were
“current” when in fact they were seriously delinquent, which allowed the Funds to
delay or avoid recognizing losses on the QuarterSpot position.  This in turn inflated
the Funds’ net asset value and heavily marketed returns, and allowed DLI to
substantially overcharge the Funds for its management and performance fees, which
inured to the benefit of Ross as DLI’s 100% owner.
266. Ross’s manipulation of the QuarterSpot loan payment data led him to
make multiple false and misleading statements to the Funds’ investors about DLI’s
assets under management and the Funds’ net asset value, heavily-marketed returns,
and loan default rate.  These misstatements were included in DLI’s monthly investor
letters, investor account statements, fact sheets, investor presentations, information
provided on DLI’s investor portal, and in various other documents provided to
investors, as well as in oral communications from Ross to investors.  DLI and Ross

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likewise made false statements to the Funds’ investors about the management and
performance fees they owed.  Ross’s statements regarding DLI’s valuation policy
were false or misleading insofar as Ross was actively violating the stated policy, as
were Ross’s repeated statements that DLI was conservative or “ultra-conservative” in
how it marked down late loans.  Ross’s representations to investors regarding the
August 2017 QuarterSpot side pocket were misleading because he did not disclose
that a key reason for the impairment of the position was that a number of loans
marked “current” were in fact seriously delinquent because of payments that were not
borrower payments at all but rather “rebate” payments engineered by Ross.
Likewise, Ross’s statements to the Funds’ investors about the September 2017 sale of
QuarterSpot loans at par were misleading insofar as he failed to disclose that he had
to personally guarantee the transaction and pledge his equity interest in DLI to
effectuate that sale.
267. Ross’s false statements were made “in the offer or sale” of securities
because the investors and prospective investors in the Funds who received these false
and misleading representations either invested for the first time, subsequently
invested additional sums, or reinvested their monthly interest income.
268. Ross’s misrepresentations were material because investors in the Funds
considered it important to have accurate information concerning the value of their
investments and historical returns data, as that could directly impact their ability to
receive back their principal investments and achieve the high returns that DLI and
Ross 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.
269. Ross knew, or at a minimum was negligent in not knowing, that the
statements regarding DLI’s QuarterSpot position, including the valuation and
performance of that position, were false or misleading because he personally directed
the manipulation of the underlying borrower payment information, creating a

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situation where the QuarterSpot position could not be properly valued or its
performance assessed.  Ross’s efforts to conceal his misconduct, and his lies when
confronted about it, are further evidence of his fraudulent intent.
270. Ross’s statements regarding DLI’s assets under managements and the
Funds’ returns and net asset value were pillars of DLI’s marketing strategy that
brought investors to the Funds.  By inflating those key metrics through manipulation
of the QuarterSpot collateral figures, Ross was able to recruit and maintain investors
in the Funds on whose assets DLI could charge management and performance fees
from which Ross, as 100% owner of DLI, ultimately received tens of millions of
dollars, thereby obtaining money by means of the misrepresentations.
271. By engaging in the conduct described above, Defendant Ross, 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.
272. Defendant Ross 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.
273. By engaging in the conduct described above, Defendant Ross violated,
and unless restrained and enjoined will continue to violate, Sections 17(a)(1),

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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 of the Advisers Act
(against Defendant Ross)
274. The SEC realleges and incorporates by reference paragraphs 1 through
248 above.
275. During 2016 and 2017, the regulatory assets under management figures
and gross asset values for the Funds that DLI reported in its Forms ADV were
materially inflated because they were based on a valuation of the QuarterSpot
position that was false due to Ross’s manipulation of the underlying loan repayment
data through the QuarterSpot “rebate” payments he directed.
276. Ross, who personally signed many of DLI’s materially inaccurate Forms
ADV and had ultimate control over the content of all its Forms ADV, knew or was at
least reckless in not knowing that these figures were inflated.  He personally directed
the “rebate” payments that materially inflated DLI’s regulatory assets under
management and the Funds’ gross asset values and used those payments to delay and
avoid marking down non-performing loans under DLI’s valuation policy.
277. By engaging in the conduct described above, Defendant Ross, 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.
278. By engaging in the conduct described above, Defendant Ross 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.

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PRAYER FOR RELIEF
WHEREFORE, the SEC respectfully requests that the Court:
I.
Issue findings of fact and conclusions of law that Defendant committed the
alleged violations.
II.
Issue judgments, in forms consistent with Rule 65(d) of the Federal Rules of
Civil Procedure, permanently enjoining Defendant Ross, and his 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)].
III.
Order Defendant to disgorge all funds received from his 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)].
V.
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.

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

Dated:  August 11, 2020

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

COMPLAINT 1  

 

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AMY J. LONGO (Cal. Bar No. 198304) 
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. 

BRENDAN MATTHEW ROSS, 

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 

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

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COMPLAINT 2  

 

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

2. Defendant Brendan Matthew Ross (“Defendant” or “Ross”) 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 Ross resides in this district. 

SUMMARY 

4. This civil enforcement action concerns an intricate, multi-year effort by 

Ross, the former chief executive officer and the 100% owner of registered investment 

adviser Direct Lending Investments, LLC (“DLI”), to fraudulently inflate the value 

and returns for an investment position held by the investment funds that DLI advised 

(the “Funds”), which resulted in misstatements to investors and at least $5-6 million 

in over-charges of management and performance fees to the Funds.   

5. DLI advised a private fund structure with over $865 million in assets 

under management that invested in various lending platforms.  DLI’s Funds’ 

investments included loans made by QuarterSpot, Inc. (“QuarterSpot”), an online 

small business lender.  Under the terms of this investment, the Funds funded 

thousands of QuarterSpot loans and were entitled to the principal and interest 

payments made by the underlying borrowers, subject to QuarterSpot taking a 

servicing fee that was a set percentage of the loan interest collected each month.   

6. Starting in or around early 2014, Ross orchestrated a scheme whereby he 

secretly directed QuarterSpot, as part of its monthly reporting to DLI, to “rebate” a 

portion of its servicing fees by making payments to the Funds, which gave the false 

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COMPLAINT 3  

 

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impression that borrowers were making principal payments on seriously delinquent 

loans.   

7. Under DLI’s valuation policy, many of these non-performing loans 

should have been marked down 50% or 100% and reserved against the Funds’ 

interest income, but instead were valued at par because of the false payments Ross 

engineered. 

8. As a result, between spring 2014 and fall 2017, DLI cumulatively 

overstated the valuation of the Funds’ QuarterSpot position by approximately $53 

million and materially misrepresented the Funds’ returns.   DLI collected at least $5-6 

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

have otherwise been able to collect.  DLI’s asset values were also materially 

overstated in its required Forms ADV filed with the SEC. 

9. To conceal his scheme, Ross hid information from others in DLI 

management, from the Funds’ auditors, and from other third parties, and when 

irregularities in the QuarterSpot portfolio came to light, he lied to others in DLI 

management about his knowledge of, and his role in, the “rebate” payments. 

10. In March 2019, upon discovering Ross’s misconduct with respect to 

QuarterSpot after an internal investigation, a committee of senior DLI executives 

demanded that Ross formally resign and relinquish control of DLI, to which he 

acquiesced.   

11. By engaging in this conduct, Ross violated Section 10(b) of the 

Exchange Act and Rule 10b-5 promulgated thereunder, Section 17(a) of the 

Securities Act, and Sections 206(1), 206(2), and 207 of the Advisers Act. 

12. With this complaint, the SEC seeks a permanent injunction prohibiting 

future violations of the federal securities laws and an order requiring Ross to disgorge 

his ill-gotten gains with prejudgment interest thereon, and imposing civil penalties.  

THE DEFENDANT 

13. Defendant Ross, age 47, resides in La Canada, California.  Ross founded 

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DLI in 2012, and from DLI’s founding until March 2019, he was the adviser’s 100% 

owner, chief executive officer, and managing member.  Ross resigned as CEO and 

managing member of DLI in March 2019. 

OTHER PERSONS AND ENTITIES 

14. Direct Lending Investments, LLC is an SEC registered investment 

adviser with its principal place of business in Glendale, California.  It advised 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”).  Prior to October 2016, DLI was the sole 

manager and general partner of a single fund, Direct Lending Income Fund, L.P., 

which then became the domestic feeder fund when DLI adopted the master-feeder 

fund structure.  DLI controlled the Funds and was solely responsible for their 

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.   

15. On March 22, 2019, the Commission filed a civil action in federal 

district court against DLI alleging violations of the antifraud provisions of the 

Advisers Act, the Securities Act, and the Exchange Act, and seeking a preliminary 

injunction and the appointment of a receiver, relief to which DLI stipulated.  SEC v. 

Direct Lending Investments, LLC, Case No. 2:19-cv-02188-DSF-MRW (C.D. Cal.).  

On April 1, 2019, the Court entered the preliminary injunction and appointed a 

permanent receiver over DLI, the Funds, and the Funds’ holding subsidiaries.   

16. QuarterSpot, Inc. is a corporation based in New York, New York that 

makes online loans to small businesses.  The DLI Funds invested in loans originated 

by QuarterSpot starting in or around August 2013. 

THE ALLEGATIONS 

A. DLI’s Advisory Business  

17. Ross founded DLI in 2012, and in February 2016, registered it with the 

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COMPLAINT 5  

 

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SEC as an investment adviser.   

18. From 2012 until March 2019, Ross was DLI’s 100% owner, managing 

member, and chief executive officer.   

19. Ross had ultimate authority over all aspects of DLI’s business. 

20. DLI’s investment focus was on buying loans, participating in loans, and 

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

collateral.   

21. In its Form ADV Part 2A brochure provided to its clients, DLI described 

its Funds’ “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.”   

22. DLI charged clients both a management fee and a performance fee on 

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

gross asset value plus beginning of month subscriptions less redemptions.  The 

performance fee was incurred when the master fund’s net asset value exceeded its 

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

and taxes. 

23. The number of investors in the Funds fluctuated over time, but there 

were roughly 1,000 investors as of February 1, 2019, shortly before DLI and the 

Funds were placed into receivership.  The investors in DLI’s Funds were generally 

accredited individual and institutional investors. 

24. During the relevant period, DLI used a fund administrator that, among 

other things, aggregated the monthly financial information for the Funds’ various 

investments and provided the Funds’ investors with monthly account statements that 

detailed the value of their accounts and their monthly interest income.    

25. During the relevant period, DLI’s Funds were audited by three different 

auditing firms that, among other things, purported to audit the Funds’ financial 

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COMPLAINT 6  

 

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statements in accordance with generally accepted accounting principles and auditing 

standards, and that issued annual audit reports for the Funds. 

B. DLI’s Regular Communications with the Funds’ Investors 

26. During the relevant period, DLI regularly communicated with the Funds’ 

investors through monthly investor letters, which it distributed through its fund 

administrator. 

27. Ross drafted the monthly investor letters. 

28. Ross signed the monthly investor letters on behalf of DLI. 

29. The monthly investor letters typically included, among other things, 

statements regarding the amount of DLI’s assets under management and the Funds’ 

historical returns broken out by month. 

30. During the relevant period, DLI provided prospective and current 

investors in the Funds with monthly fact sheets that, among other things, detailed the 

amount of the Funds’ assets and broke out the Funds’ historical returns by month.  

31. Ross drafted and ultimately approved the content of the monthly fact 

sheets that DLI provided to prospective and current investors in the Funds. 

32. Ross was often involved in directly distributing the monthly fact sheets 

to prospective and current investors in the Funds. 

33. During the relevant period, DLI also provided prospective and current 

investors in the Funds with investor presentation documents that, among other things, 

detailed the amount of the Funds’ assets and broke out the Funds’ historical returns 

by month. 

34. Ross drafted and ultimately approved the content of the monthly investor 

presentation documents that DLI provided to prospective and current investors in the 

Funds. 

35. Ross was often involved in directly distributing the monthly investor 

presentation documents to prospective and current investors in the Funds. 

36. During the relevant period, DLI’s fund administrator provided the 

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COMPLAINT 7  

 

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Funds’ investors with monthly account statements that included account balance and 

net profit/loss figures for each investor that were derived from the Funds’ net asset 

value, net interest income, and each investor’s percentage allocation. 

37. DLI and the Funds, under Ross’s ultimate supervision, provided the 

underlying data regarding DLI’s investment positions that the fund administrator used 

to create the monthly account statements for investors.    

38. During the relevant period, DLI maintained an online investor portal that 

provided investors with access to detailed information regarding the Funds’ 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, including as to the QuarterSpot 

position.  

39. During the relevant period, Ross and others at DLI also provided or 

made available to the Funds’ prospective and current investors “default sensitivity 

analysis” spreadsheets that detailed the amount of the Funds’ historical write downs 

and included graphs showing defaults as a percentage of the Funds’ assets under 

management.  

40. In some cases, DLI representatives, including Ross himself, directly 

emailed certain documents to prospective and current investors that provided 

extensive detail regarding DLI’s individual investment positions like QuarterSpot, 

including returns and performance information, as well as the monthly loss reserves 

data for those investments. 

41. The Funds’ audited financial statements, which DLI made available to 

investors each year, contained information regarding the aggregate value of the 

Funds’ investments as well as values for the Funds’ individual investments, including 

QuarterSpot.  The audited financial statements also included income information for 

the Funds, including information concerning the Funds’ “net realized gain (loss) on 

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COMPLAINT 8  

 

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investments” and “net change in unrealized appreciation (depreciation) on 

investments,” which were impacted directly by the nonperforming loans that the 

Funds took reserves against and wrote off.  These audited financial statements also 

included a “Financial Highlights” section that calculated a percentage “Total return” 

for the Funds based on this underlying financial data. 

42. DLI included information regarding its regulatory assets under 

management, as well as the Funds’ gross asset value, in the Forms ADV it filed with 

the SEC, most of which were signed by Ross.  

43. For instance, during the relevant period, Ross signed DLI’s Forms ADV 

Part 1A that were filed with the SEC in 2016 and 2017. 

44. As 100% owner, chief executive officer, and sole manager of DLI, Ross 

had ultimate authority and control over the content of DLI’s Forms ADV.  

C. Ross’s Consistent Emphasis on the Funds’ Returns 

45. DLI, and Ross in particular, had a history of touting the Funds’ strong, 

consistent returns to investors. 

46. Each month, the DLI monthly investor letters that Ross prepared and 

signed included charts of the Funds’ historical monthly returns over time.  The letters 

also contained headings like “Consistent Performance” and for years articulated one 

of the Funds’ principal objectives as being to “[m]aintain unlevered, double-digit, 

investment returns.”   

47. DLI’s monthly investor letters and fact sheets consistently marketed the 

Funds’ 10-12% returns, no lock-up, and monthly (35-day) liquidity.   

48. Ross routinely emphasized the Funds’ returns in individualized written 

communications with potential and actual investors in the Funds. 

49. For instance, on October 7, 2015, Ross emailed a prospective investor a 

series of “highlights of the Fund,” emphasizing that Direct Lending Income Fund (at 

that time the sole fund) “produces consistent, non-market-correlated returns.”  Ross  

further explained that the Fund has achieved “10-12% returns net to investors with no 

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COMPLAINT 9  

 

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down months.”  In this same October 2015 email, Ross continued, “Defaults trending 

down, now at 4% and could be as high as 20% without loss of principal,” and he 

noted the Funds’ “[f]ull transparency.” 

50. In another email dated February 15, 2016, Ross sent a prospective 

investor one of the Fund’s investor presentations, directing him to “[n]ote the 

historical returns on p3 of the Presentation.”  Ross also represented that “[o]ur 

investors receive double-digit unlevered returns, and we have had no down months, 

and the Fund is suitable for regular and IRA accounts.”  Ross also included the same 

“highlights of the Fund” that he included in his October 7, 2015 email, again 

emphasizing the Fund’s strong and stable returns, low default rate, and full 

transparency. 

51. In other communications dated April 19, 2016 and June 24, 2016, Ross 

sent prospective investors the same “Fund highlights,” again attaching investor 

presentations and specifically stating, “Our investors have received 10-12% 

unlevered returns, and we have had no down months, and the Fund is suitable for on- 

and offshore accounts.” 

52. Ross also routinely highlighted the Funds’ historically high and stable 

returns in his oral conversations with prospective and current investors in the Funds, 

as well as in presentations he gave to them.  

53. In multiple communications with prospective and existing investors up 

into at least spring 2017, including in emails dated October 21, 2016, February 23, 

2017, and March 13, 2017, DLI’s investor relations representative emphasized in the 

“Fund Highlights” that DLI “continues to deliver very stable, unlevered, double 

digit returns with no down months since the Fund’s inception in 2012 [bold in 

original].” 

54. Investors considered information about the Funds’ returns and net asset 

value to be important, particularly insofar as DLI charged the Funds fees based on 

those figures. 

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COMPLAINT 10  

 

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55. Related to the Funds’ returns, Ross and DLI’s representatives also 

routinely highlighted the low default rates for the Funds’ positions. 

56. For example, on January 12, 2016, Ross sent an email to investors with 

the subject line “Loan Loss Reserves + other files” that attached a spreadsheet titled 

“DLIF – Default Sensitivity Analysis.”  This spreadsheet detailed Direct Lending 

Income Fund’s historical monthly write downs and expressed those write downs as a 

very small percentage of the Fund’s assets under management for each month, 

arriving at an average monthly write down percentage. The same spreadsheet 

included a tab with a graph that tracked the default rate each month over time.    

57. Again, on August 21, 2016, in an email with the subject line “AUM and 

Defaults,” Ross sent an investor representative an updated default sensitivity analysis 

with the same sort of historical write down information that showed Direct Lending 

Income Fund write downs as a percentage of assets under management and included 

a graph tracking default rates over time. 

58. Up into mid-2017, DLI representatives at Ross’s direction continued to 

provide to prospective and current investors in the Funds “default sensitivity 

analysis” documents that showed the historical default rates for the Funds’ assets. 

59. DLI’s fact sheets for the months of January 2015 to July 2016, which it 

provided to prospective and current investors, emphasized the Funds’ high returns 

relative to defaults, boldly directing investors, “But don’t focus on the bad loans; we 

write plenty of loans off but still achieve excellent returns.” 

60. In three distinct emails, one dated July 5, 2016 and two dated September 

17, 2016, Ross circulated a document titled “Private Credit Investing Portfolio 

Summary” to investors and their representatives.  Among other things, this document 

included specific information about the historical returns for the Funds’ QuarterSpot 

position, including the historical loss reserves taken on that position, while touting the 

QuarterSpot position’s consistently strong performance. 

61. The Funds’ investor presentations from April 2017 to at least June 2017 

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touted the performance of the Funds’ QuarterSpot position and specifically its low 

default rate.  A graph in that presentation purported to quantify QuarterSpot’s rate of 

loan “charge-offs” (loan defaults) and compare that rate favorably as being lower 

than the default rate for loans originated by a well-known public company small 

business lender.  The same presentation explained, “DLI’s small business lending 

partner QuarterSpot outperforms by mitigating charge-offs, not just attempting to 

offset them with higher pricing.”  

D. DLI’s Relationship with QuarterSpot 

62. One of the Funds’ earliest investments was with QuarterSpot, an online 

lending company that makes small business loans.    

63. In or around August 2013, DLI caused Direct Lending Income Fund to 

enter into an agreement with QuarterSpot where Direct Lending Income Fund agreed 

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

QuarterSpot.” 

64. Subsequently, in or around December 2015, the Direct Lending Income 

Fund and QuarterSpot entered into amended agreements that recast Direct Lending 

Income Fund’s interest as a participation interest in the underlying loans that 

QuarterSpot originated.   

65. The Funds funded loans that QuarterSpot originated, giving the Funds a 

participation interest that entitled them to the economic benefits flowing from the 

loans, namely the repaid principal and the interest on the loans. 

66. Under the agreements, QuarterSpot continued to hold legal title to the 

loans in which the Funds invested. 

67. Under the agreements, QuarterSpot continued to service the loans in 

which the Funds invested, allowing it to keep a servicing fee, or “investor fee.”  

68. The QuarterSpot servicing fee varied over time but was set at 17.5% of 

interest received in a December 2015 agreement and generally was at or around 

17.5% each month during the relevant period.  

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COMPLAINT 12  

 

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69. Under the terms of the agreements, the Funds’ right to receive payments 

was entirely dependent on the underlying borrowers making payments on the loans.   

70. The Funds eventually became QuarterSpot’s largest investor and 

ultimately funded hundreds of millions of dollars in QuarterSpot loans. 

71. Between August 2013 and June 2017, the Funds’ QuarterSpot position 

grew from $427,333 to $149,608,733.   

72. The Funds retained a roughly $140 million position in the QuarterSpot 

platform until September 2017, when they sold $55 million of the QuarterSpot loans 

to a third-party fund that raised money from overseas investors.   

E. DLI’s Valuation Policy for the QuarterSpot Position 

73. DLI had a written valuation policy for its small business whole loan 

investments like its QuarterSpot position, which it first expressly articulated in its 

January 2015 private placement memorandum that it provided to prospective 

investors. 

74. This valuation policy required that the QuarterSpot loans generally were 

to be valued at par, i.e., the amount of their remaining principal balances, with certain 

exceptions for non-performing loans.   

75. Loans that had not received any payment in the last 30 days were valued 

at 50% of their remaining principal balances, and loans that had not received a 

payment in the last 60 days were valued at 0% of their remaining principal balances.   

76. The valuation policy provided that DLI could deviate from this stated 

valuation rule on a case-by-case basis based on the individual facts of each loan.   

77. Between January 2015 and mid-2017, DLI detailed this valuation policy 

for its QuarterSpot position in a number of different documents that it provided to 

investors and others. 

78. DLI’s January 2015 private placement memorandum stated that under 

DLI’s valuation policy, loans that had not received payments in the last 30 days 

would be “[v]alued at 50% of remaining principal balance, and no accrual of 

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interest.”  Loans that had not received a payment in the last 60 days would be 

“[v]alued at 0% of remaining principal balance, and no accrual of interest.” 

79. Likewise, DLI’s December 2015 private placement memorandum 

expressed DLI’s valuation policy in the same manner: Loans that had not received 

payments in the last 30 days would be “[v]alued at 50% of remaining principal 

balance, and no accrual of interest,” while loans that had not received a payment in 

the last 60 days would be “[v]alued at 0% of remaining principal balance, and no 

accrual of interest.” 

80. DLI provided its auditors with a document titled “Fair Valuation 

Methodology, Direct Lending Income Fund, For the Calendar Year Ended 2015,” 

which was noted as having been revised on June 18, 2016.  In this document, DLI 

described its valuation policy as follows: “Valuation is conducted monthly at the 

individual investment level per the Fund’s Private Placement Memorandum, which is 

essentially historical cost accounting.  Management holds each asset at its amortized 

cost, or outstanding principal balance less any un-accrued discount, and also less any 

required loan loss reserves.  In general, but subject to the facts of each loan, loss 

reserves are created and reversed when payments have not been made on a loan 

within 30 or 60 days (50% and 100% markdown, respectively) prior to the end of the 

accounting period.  An asset is very quickly written down when it experiences non-

payment, and it is impossible to be overvalued after Day 60.” 

81. In an October 11, 2016 email to an investor asking about DLI’s 

valuation processes and how it calculates its loan loss reserves, Ross stated, “For the 

two remaining platforms where we continue to buy whole loans, Biz2Credit and 

Quarterspot, we reserve 50% if loans are 30 days late and 100% if they are 60 days 

late.  There are some limited exceptions, but it’s generally according to that formula.” 

82. The Funds’ January 2017 “Due Diligence Questionnaire” described 

DLI’s valuation methodology, stating that “small business loan pricing methodology 

is based on the payments history of the loans with a general valuation rule that assets 

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late in making payments for 30 days will be valued at 50% and those delinquent 60 

days or more will be marked to 0%.” 

83. The Ross-signed investor letter for the month ending February 28, 2017 

summarized DLI’s January 2015 PPM valuation policy for its whole loan positions, 

explaining that “[l]oans 30 days late in payment are marked at 50% of their principal 

balance” and “[l]oans without a payment in 60 days are written down to 0%,” noting 

that “[a]djustments can be made based upon the facts and circumstances of the 

individual notes.”  This investor letter further explained that “[b]ased on these rules, 

we would then make necessary loss reserves and produce the Fund’s returns based on 

interest income net of new loan loss reserves and fund expenses.”  This same investor 

letter indicated that even for its non-QuarterSpot investments structured as credit 

facilities, “our goal in valuing positions is to remain consistent with the original, 

granular approach,” explaining that “[w]e generally apply borrowing base eligibility 

rules consistent with our original loan by loan valuation policy.” 

84. In or around spring 2017, DLI provided a document dated March 1, 

2017 and titled “Direct Lending Investments Valuation Policy Background and 

Timeline” to both its outside auditor and to SEC staff conducting an examination of 

DLI as an SEC registrant.  In this document, DLI described its then current valuation 

process for small business loans: “Generally, if a loan has gone 30 days without a 

payment, it is reserved at 50%.  If a loan has gone 60 days without a payment, it is 

reserved at 100%.”  

85. Both DLI’s chief financial officer and fund controller understood that 

DLI’s valuation policy for its QuarterSpot position up until at least August 2017 was 

to mark down loans that had not received a payment in 30 days by 50% and loans that 

had not received a payment in 60 days by 100%. 

86. While not explicit in its statement of its valuation policy, in practice DLI 

applied the policy for its QuarterSpot position so that any payment whatsoever within 

the last 30 days, even a payment of $1, sufficed to keep a loan from being marked 

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COMPLAINT 15  

 

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down, regardless of how far the loan was behind its amortization schedule. 

87. Ross routinely touted DLI’s valuation policies as being conservative. 

88. For example, in his investor letter for the month ending November 30, 

2016, Ross listed various factors that affect DLI’s returns, which included having to 

write down bad loans.   Ross emphasized that DLI writes down bad loans as soon as 

it becomes aware of any impairment, contrasting DLI with other funds that failed to 

be “conservative” in this respect and stating that “[b]ecause we at DLI intend to build 

a private credit firm that will endure for decades to come, we take our responsibility 

to properly mark assets very seriously.”   

89. As another example, in his investor letter for the month ending 

December 31, 2016, Ross claimed that “[o]ne of the hallmarks of DLIF [the domestic 

fund] has always been, in our opinion, its conservative approach to taking reserves 

against late loans.” 

90. Similarly, in his investor letter for the month ending February 28, 2017, 

under a section titled “Valuation: Common Sense at the Core,” Ross discussed DLI’s 

valuation policies at length and explained the 30 days/50% markdown and 60 

days/100% markdown policy for its whole loan positions like QuarterSpot.   In this 

letter he also stated that “[f]undamental to understanding our approach is knowing 

that regardless of how we gain exposures, we always value positions as if we held the 

collateral directly on our books, and for good reason: if any of our borrowers fail, we 

expect to take over the collateral.” 

91. DLI’s fact sheets provided to investors consistently described DLI as 

being “ultra-conservative” in its practice of writing down bad loans to zero. 

92. More specifically, for each of its monthly fact sheets from January 2015 

to July 2016, DLI included a “frequently asked questions” section that contained the 

question, “What happens to the defaulted loans?”   The response stated, “We write 

them down to $0, then we work with our lending partners to pursue all defaulted 

borrowers in a traditional collections process.  Although we expect to collect 20 cents 

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COMPLAINT 16  

 

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on the dollar based on history, we take the ultra-conservative approach of writing bad 

loans down to $0.  Any collections we receive are windfalls for fund investors.” 

93. Ross fully understood the significant default risk for loans that had 

missed payments.   

94. For example, on August 6, 2017 Ross emailed QuarterSpot saying, “The 

question is: When a loan is 5% or 10% behind, what is the likelihood of recovery.  Of 

course 25% behind matters too, but I suspect that even 5% behind means the loan is 

done for.  Doesn’t matter percent principal paid already.  Matters % likely to be 

collected AFTER it’s gone 5% behind.” 

95. In its work papers, one of the Funds’ auditors noted that DLI 

management had explained that DLI’s valuation policy was “determined through 

[DLI’s] observations of the historical behavior of borrowers,” which showed that “if 

a borrower defaults on a scheduled payment, there is a relatively high risk that he will 

continue to default,” such that “[DLI] believe[s] the 50%/100% at 30/60 days 

delinquent approximates the fair value of non-performing loans during these 

respective periods.”  

96. Ross also knew that DLI bore the direct risk of default on the 

QuarterSpot position. 

97. For instance, Ross noted in his investor letter for the month ending 

November 30, 2016 that DLI bore “direct default risk” in its non-facility whole loan 

deals like its QuarterSpot investment.  

98. Again, in the investor letter for the month ending July 31, 2017 Ross 

explained DLI’s movement away from whole loan deals to a facility lending structure 

by saying that whole loan deals “less adequately align incentives between DLI and its 

counterparties than do Facility Deals” because in those whole loan deals DLI bears “a 

‘first loss’ position.”  

99. DLI’s former chief financial officer testified that for the Funds’ 

QuarterSpot position, where the Funds owned direct interests in the underlying loans, 

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COMPLAINT 17  

 

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every single dollar paid (or not paid) on a given loan impacted the Funds’ financials.   

F. Ross’s Multi-Year Manipulation of QuarterSpot’s Payment Data 

100. During the relevant period, DLI required that QuarterSpot provide it 

with loan-level data, including payment information for each loan, as part of a 

monthly closeout process.  QuarterSpot provided this data to DLI in various reports. 

101. These reports, which included a cash history report and a daily payments 

report reflecting all payments during the month, were available on QuarterSpot’s 

investor portal, to which DLI representatives had access. 

102. Further, at Ross’s direction, each month QuarterSpot emailed DLI a 

“late loans report” that was not available on the investor portal.   

103. This late loans report included various pieces of data for each loan, 

including the remaining principal balance and a “LastPosted” date that reflected the 

last payment received on the loan. The late loans report also included a “Status” 

column that keyed off the LastPosted date.  The underlying loans were typically on 

weekly or daily repayment schedules.  While the terminology varied over time, 

generally loans that received payments within the last 30 days were marked “current” 

or “late,” while those that had not received any payments in the last 30 days had a 

“default” status.   

104. At the very end of 2013, Ross requested from QuarterSpot’s chief 

executive officer that QuarterSpot begin rebating part of its servicing fee, purportedly 

as a form of credit enhancement to help DLI improve its returns.   

105. QuarterSpot agreed to Ross’s request to rebate part of its fees. 

106. At Ross’s direction, in or around spring 2014, QuarterSpot began 

making monthly “rebate” payments to the Funds that took the form of individual 

“principal payments” against particular delinquent loans that Ross specified each 

month.   

107. Ross and QuarterSpot would generally agree on parameters for the total 

amount of “rebate” payments that QuarterSpot would provide each month, which was 

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COMPLAINT 18  

 

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either a percentage of the total servicing fee or a maximum dollar amount.  Ross then 

directed QuarterSpot how the agreed upon total “rebate” amount would be applied 

across multiple individual loans as supposed principal payments.   

108. The money for these payments came from QuarterSpot’s operating 

account, i.e., they were not payments made by the underlying borrowers.   

109. From 2014 to September 2017, Ross followed a consistent pattern in 

directing the “rebate” payments.   

110. At the beginning of each month, QuarterSpot sent Ross a “late loans 

report” spreadsheet for the month that had just ended.  The spreadsheet showed 

various metrics for the DLI-funded loans, including the LastPosted date for each loan 

and the loan’s status keyed off this date, as well as the remaining principal balance 

for each loan. 

111. Typically within days of receiving the late loans report, Ross responded 

by sending back to QuarterSpot a revised spreadsheet, usually with some variation of 

“BR” or “BRpays” in the title, indicating that [Brendan] Ross himself had revised the 

spreadsheet to direct the “rebate” payments.  The revised spreadsheet that Ross sent 

to QuarterSpot included a column directing whether “rebate” payments should be 

made against particular loans (“Make Payment”) and another column specifying the 

payment amounts (“Payment Amount”).  The loans for which Ross directed payments 

were always loans marked as “default” in the initial report Ross received from 

QuarterSpot because they had not received payments in the last 30 days.   

112. Ross generally directed a monthly “rebate” payment amount that was 

only a fraction of what the borrower owed on a weekly basis or, if the payment 

schedule called for daily payments, equivalent to a single daily payment. 

113. Ross’s spreadsheet typically included columns where he calculated what 

reserves he would be taking on other “default” loans for which he was not directing 

that QuarterSpot make “rebate” payments that month. 

114. Ross initially only directed payments across a dozen or so loans each 

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COMPLAINT 19  

 

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month, but over time this grew to hundreds of loans each month that together had 

outstanding principal balances of many millions of dollars.   

115. For example, on December 10, 2016, Ross sent QuarterSpot an email 

and spreadsheet in connection with DLI’s November 2016 close process for its 

QuarterSpot position.  In the email, Ross stated, “Lmk when you have applied and the 

reports are ready, and then you can send the package with Late Loans and Balance 

Sheet to [the DLI fund controller].”  In the spreadsheet attachment, Ross directed 

QuarterSpot to apply $71,436 in “rebate” payments against 274 distinct “default” 

loans that had not received payments within the last 30 days, with a total outstanding 

principal balance of $15,625,524.   

116. As another example, on July 10, 2017, Ross sent QuarterSpot an email 

and spreadsheet in connection with DLI’s June 2017 close process for its QuarterSpot 

position.  In the email, Ross directed QuarterSpot, ““Hi [QuarterSpot representative] 

– see payments. Note that there are three little sections of payments – they are not all 

contiguous in column Q – there is some row spacing between them. Please double-

check before finalizing.”  In the attached spreadsheet, Ross directed QuarterSpot to 

apply $97,213 in “rebate” payments across 381 distinct “default” loans that had not 

received payments within the last 30 days, with a total outstanding principal balance 

of $22,939,150. 

117. QuarterSpot generally made tens of thousands of dollars in “rebate” 

payments each month, getting near $100,000 in a few months in mid-2017. 

118. Ross never copied others at DLI on his emails directing QuarterSpot to 

make “rebate” payments. 

119. After receiving Ross’s directions, QuarterSpot applied his specified 

payment amount for each loan as a principal payment against the loan before sending 

a new, revised spreadsheet back to DLI that contained Ross’s payments. 

120. The spreadsheet that QuarterSpot sent back to DLI generally included 

tabs titled “Balance Statement” and “Late Loans.” 

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COMPLAINT 20  

 

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121. In December 2014, Ross directed QuarterSpot to randomize the “rebate” 

payments on weekdays throughout the month, which QuarterSpot did going forward. 

122. In the revised balance statement and late loans spreadsheet that 

QuarterSpot sent back to DLI, the LastPosted date for a loan that received a Ross-

directed payment was changed to reflect a payment against that loan on a completely 

random date during the month, even though no borrower had made any payment on 

that loan, and in fact QuarterSpot had not even made a “rebate” payment on that 

specific date. 

123. Nothing in the revised late loans report differentiated between payments 

made by borrowers and “rebate” payments made by QuarterSpot at Ross’s direction. 

124. The adjustment of the LastPosted dates for the loans that received 

“rebate” payments changed their status designations from “default” to “current” (or in 

some cases “late”), even though no borrowers had made payments.   

125. The principal balance for each loan that received a “rebate” payment was 

reduced by the amount of the payment.   

126. The daily transactions report pulled from QuarterSpot’s website by Ross 

and later others in DLI management as part of DLI’s monthly close process reflected 

the “rebate” payments as individual principal payments against specific loans, with 

the same random payment dates assigned. 

127. The cash history report pulled from QuarterSpot’s website by Ross and 

later others in DLI management as part of DLI’s monthly close process, which 

included a column for QuarterSpot’s servicing fees, included only a gross servicing 

fee amount not reduced by the Ross-directed payments, which were instead lumped 

into the principal repaid category.  

128. Neither the daily transactions report nor the cash history report 

differentiated between “rebate” payments and actual borrower payments. 

129. The scope of Ross’s manipulation grew over time and peaked by the 

close process for the month of August 2017, when Ross directed nearly $100,000 in 

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COMPLAINT 21  

 

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payments against 455 “default” loans that had not received a payment within the last 

30 days, with a total outstanding principal balance of $26,267,428.  The Ross-

directed “rebate” payments led these “default” loans to be marked “current” in the 

revised reports QuarterSpot sent back to DLI. 

130. In total, between April 2014 and September 2017, at Ross’s direction, 

QuarterSpot made over $1.9 million in “rebate” payments to the Funds, which took 

the form of thousands of principal payments across over 1,000 different loans. 

131. Ross concealed his direction of the “rebate” payments from others in 

DLI management. 

G. DLI’s Use of Ross’s Manipulated QuarterSpot Data 

132. DLI used the revised late loans report with the Ross-directed “rebate” 

payments to determine what reserves to take on the QuarterSpot loans each month.   

133. Ross was personally responsible for closing the QuarterSpot position up 

until fall 2016, but thereafter DLI’s fund controller began managing the QuarterSpot 

close process at Ross’s direction.   

134. The fund controller received the manipulated, “final” monthly late loans 

report and balance statement directly from QuarterSpot, with Ross usually copied.   

135. The fund controller also accessed the other documents that included the 

Ross-directed payments, such as the cash history and daily payments reports, directly 

from the QuarterSpot investor portal.   

136. While each of these reports incorporated the Ross-directed “rebate” 

payments, none indicated that the purported principal payments (the rebates) were not 

in fact payments made by borrowers.   

137. Ross excluded the fund controller from the process by which he directed 

QuarterSpot to make the payments. 

138. For example, on November 9, 2016, after directing QuarterSpot to first 

send him the October 2016 late loans report with his payments applied so he could 

check it, Ross told QuarterSpot it was okay to send the revised report on to DLI’s 

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COMPLAINT 22  

 

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fund controller, saying, “[y]ou can remove the version number is [sic] its [sic] 

effectively v1 for her.” 

139. The fund controller did not know that any of the supposed principal 

payments in the late loans report were not in fact borrower payments but rather 

“rebate” payments that Ross had directed QuarterSpot to make. 

140. Per Ross’s specific instructions, the fund controller relied entirely on the 

loan “status” designations in the late loans report to determine whether to take 

reserves on particular QuarterSpot loans.   

141. As such, the fund controller, who understood the late loans report 

reflected only borrower payment data for the underlying loans, valued the loans 

receiving “rebate” payments at par (remaining principal balance) because the late 

loans report misleadingly showed they had received payments within the last 30 days, 

making them “current.” 

142. The fund controller incorporated this reserves’ information and the 

reports she received from QuarterSpot into DLI’s official monthly close file for the 

QuarterSpot position, and she then reported the information to DLI’s fund 

administrator, which used this data to prepare the Fund’s monthly income statement 

and balance sheet, which were in turn used to arrive at the Funds’ net asset value and 

the monthly returns that it reported.   

H. The Material Consequences of Ross’s Fraudulent Conduct 

143. The consequences of Ross’s fraud were significant and material.   

144. Over a three and a half year period, Ross directed that QuarterSpot make 

“rebate” payments against at least 1,081 distinct loans, each of which was generally 

30 or more days delinquent at the time of the rebate. 

145. The total principal balance of these loans for which Ross directed 

payments was approximately $53 million, which counts only a single time the 

balance of each loan that received a rebate payment. 

146. The great majority of these loans received payments for many 

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COMPLAINT 23  

 

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consecutive months, keeping them “current” long after they should have been 

reserved and written off under DLI’s valuation policy.   

147. While Ross eventually allowed some of these loans to be written off, 

usually several months after directing payments be made against them, his fraud 

allowed him to artificially inflate the Funds’ returns and overcharge fees over the 

months where he delayed taking reserves.   

148. Even though the Funds were still receiving money from QuarterSpot in 

the form of “rebate” payments, the false payment data inaccurately designated the 

affected loans as “current,” undermining DLI’s ability to properly assess the loans’ 

performance and apply its valuation policy.    

149. Ross’s data manipulation led DLI to artificially inflate the Funds’ 

heavily marketed returns that it reported to investors each month in a meaningful and 

material way.   

150. Under DLI’s valuation policy and practice, DLI should have reserved the 

principal balances of the non-performing QuarterSpot loans against the Funds’ 

monthly QuarterSpot gross interest income, which would have reduced the monthly 

net interest income for the QuarterSpot position, as well as for the Funds’ full 

portfolio. 

151. The net interest income was the key input into the Funds’ monthly 

returns calculations.  Consequently, the net interest income amounts, which were 

artificially high because DLI did not take reserves for delinquent QuarterSpot loans, 

led to consistently inflated returns.   

152. An internal DLI pre-receivership analysis of Ross’s fraud concluded that 

Ross’s fraud led DLI to overstate its returns by two to three percent on an annual 

basis. 

153. In sworn testimony, DLI’s former CFO described the effect of Ross’s 

fraud on the Funds’ reported returns as being “substantial” and “significant” even at 

the “fund level.” 

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COMPLAINT 24  

 

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154. Ross’s fraud also led DLI to overcharge the Funds millions of dollars in 

management and performance fees. 

155. DLI’s performance fee was calculated as 20% of the Funds’ monthly net 

interest income. 

156. Ross’s data manipulation led DLI to apply the performance fee against a 

net interest income figure that was inflated because reserves were not taken for the 

non-performing QuarterSpot loans.  As a result, DLI overcharged the Funds its 

performance fees.   

157. DLI likewise overcharged management fees because those fees were tied 

to the Funds’ net asset value, which was artificially high because the delinquent 

QuarterSpot loans were not written off the balance sheet when they should have been. 

158. A pre-receivership DLI internal analysis conducted in or about March 

2019 concluded that, in total, Ross’s fraud led DLI to overcharge the Funds roughly 

$11 million in fees. 

159. Accounting for the fact that Ross ultimately wrote off certain of the 

loans to which he directed payments (usually many months after they should have 

been written off), and excluding certain loans for which Ross directed payments that 

may have later re-commenced paying in some way, Ross’s fraud led DLI to 

overcharge the Funds at least $5-6 million in performance and management fees 

between spring 2014 and the end of 2017.   

160. During this same period, DLI charged the Funds tens of millions of 

dollars in fees, and Ross as 100% owner of DLI, and various limited liability 

companies he controlled, received nearly $30 million in transfers from DLI. 

161. At least some of this money that Ross received from DLI is derived 

directly from the inflated fees that DLI collected from the Funds as a result of Ross’s 

fraud with respect to the QuarterSpot position.   

I. Ross’s Knowledge and Motivation 

162. Ross knew that the payments he directed made delinquent QuarterSpot 

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COMPLAINT 25  

 

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loans appear “current,” which delayed or prevented them from being marked down 

under DLI’s valuation policy. 

163. Each month, Ross personally received back from QuarterSpot the late 

loans report that showed that the non-paying loans for which he had directed 

“rebates” were now marked “current” or “late” with payment dates within the last 30 

days.   

164. Ross then either used that spreadsheet himself, or directed the fund 

controller to use it, to determine what reserves to take on the QuarterSpot loans and 

then close the monthly file for the QuarterSpot position. 

165. Ross routinely directed QuarterSpot to be sure to adjust the LastPosted 

dates for the loans that received “rebate” payments so those loans reflected payments 

within the last 30 days, which would make them “current.”  

166. On October 8, 2014, when addressing the application of his “rebate” 

payments for the September 2014 close, Ross lectured QuarterSpot, “This is wrong.  

Frustrating!  This has Last Posted dates in August and has none of the full payments 

in them.  Please fix and look before you hit send.”   

167. On May 11, 2015, in reference to the late loans report for April 2015, 

Ross vented, “Last Posted is not accurate.  It doesn’t reflect your payments.  Please 

do sanity checks on these files before sending to me.  Please fix as soon as possible.” 

168. On October 8, 2015, Ross emailed QuarterSpot saying, “I can’t use the 

report you attached which just says ‘Current’ but has the old LastPosted (which wont’ 

[sic] make sense to [DLI’s third party fund administrator]).”  Earlier that same day in 

a distinct email, Ross directed QuarterSpot, “Please check that the Last Posted dates 

reflect your payments before sending to me.” 

169. On February 9, 2017, Ross directed QuarterSpot how to apply his 

“rebate” payments in a way that prevented loans from showing up as more than 60 

days late, which would require them to be marked down to zero under DLI’s 

valuation policy, saying, “I got the math wrong last time: please avoid payments on 

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COMPLAINT 26  

 

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the first and second of each month. This avoids a loan with a payment on 12/1 or 12/2 

from being 61 or 62 days late on 1/31.  Last time I’d said to avoid payments at the 

end of the month, but of course it is the beginning that is the problem!”  Ross 

continued, “Thanks and OK to send [the reports with Ross’s “rebate” payments] to 

[the DLI fund controller] when you are 100% on the payments. Please cc: me.” 

170. Ross’s motivation in directing the payments was to delay or avoid 

marking down QuarterSpot loans that were not performing so that those loans would 

not lower the Funds’ returns, allowing him to in effect smooth the Funds’ returns. 

171. On January 13, 2015, Ross told QuarterSpot, “I need to decide what 

reserves I’m creating for the full month based on my return targets, etc.,” expressly 

acknowledging that he was basing his decisions about taking reserves on return 

targets rather than loan performance.   

172. On February 8, 2015, Ross expressed concern to QuarterSpot 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 he then requested “a 

version of the Late Loans report that has their true, non-quarterspot Last Posted date.” 

173. On October 8, 2015, when asking QuarterSpot for the late loans report 

with his “rebate” payments applied, Ross stated, “I will use that to close the month.  I 

plan on booking $300K in reserves for a 1.33% return for the month.  I will do that 

regardless of whether or not there are ‘enough’ late loans, so we will continue to 

catch up as normal.” 

174. Throughout the relevant time period, Ross routinely calculated the 

reserves he would be taking on certain “default” loans in the late loans report 

spreadsheet columns adjacent to those columns where he directed QuarterSpot to 

make “rebate” payments on other, distinct “default” loans, further indicating that he 

was using the “rebate” payments to avoid taking reserves on delinquent loans after he 

hit whatever reserves cap he had set for the month. 

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COMPLAINT 27  

 

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J. The QuarterSpot Side Pocket and Sale of Delinquent Loans 

175. Ross’s monthly manipulation of the QuarterSpot loan-level data 

continued unabated for over three years. 

176. DLI hired a new CFO in or around July 2017. 

177. DLI’s new CFO began exploring changes to DLI’s valuation policy.   

178. As part of this process, in or around August 2017, DLI’s vice president 

of research analyzed the QuarterSpot portfolio using a different valuation 

methodology that compared actual payments for the loans against expected payments 

under the loans’ amortization schedules.   

179. This August 2017 analysis revealed that a significant number of 

QuarterSpot loans had been receiving small partial payments and were far behind 

their amortization schedules. 

180. This internal study further concluded that the Funds’ QuarterSpot 

position was impaired by approximately $35 million. 

181. Ross was informed of the study’s findings by the vice president of 

research and discussed the findings and their implications extensively with senior 

DLI executives throughout August 2017.   

182. During these conversations with senior DLI executives, Ross did not 

disclose that identified partial payments on many delinquent loans were not in fact 

borrower payments but rather “rebate” payments he had directed QuarterSpot to 

make. 

183. Shortly thereafter in August 2017, DLI management decided to 

segregate the Funds’ QuarterSpot investment into a side pocket account.   

184. The investor letter for the month ending July 31, 2017, which was signed 

by Ross, announced the side pocket, explaining that “[s]ide pockets are a tool used by 

asset managers to hold any assets for which the estimated fair value cannot be 

determined as of the measurement date, while still allowing the remainder of the 

fund’s assets to be fair valued for financial reporting purposes.” 

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COMPLAINT 28  

 

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185. That same investor letter indicated that DLI had learned of the issue with 

QuarterSpot as part of its regular reassessment of its valuation policies and suggested 

that the issue arose from lack of visibility into QuarterSpot’s loan-level data.   

186. At the end of a long footnote, the investor letter disclosed that “[a]n 

internal cash flow study was performed which indicated an impairment for a portion 

of the QuarterSpot portfolio. We believe that additional information needs to be 

considered and analyzed before the fair value of these assets can be determined.”   

187. The investor letter did not disclose details of the impairment, nor that the 

partial payments that led to many of the loans being impaired were “rebate” payments 

that Ross had directed to make delinquent loans appear current.   

188. Ross said nothing about the “rebate” payments he directed and their 

connection to the impairment of the QuarterSpot position when he spoke with various 

investors in the Funds about the side pocket after DLI announced it. 

189. Almost immediately after the discovery of the potential impairment of 

the Funds’ QuarterSpot position, DLI at Ross’s direction began exploring a sale of 

the worst performing QuarterSpot loans.   

190. In an agreement dated August 24, 2017, DLI restructured its agreement 

with QuarterSpot so a holding subsidiary of the master fund took actual title to the 

loans. 

191. In September 2017, DLI entered into a transaction to sell participation 

interests in approximately $55 million of QuarterSpot loans at par value (outstanding 

principal balance) to a third-party entity backed by overseas investors.   

192. This transaction involving the QuarterSpot assets was documented in 

two distinct agreements dated September 25, 2017 and September 29, 2017. 

193. This sale included hundreds of the worst performing QuarterSpot loans, 

including the great majority of loans for which Ross had been directing “rebate” 

payments. 

194. The sale had the effect of removing these non-paying loans from the 

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COMPLAINT 29  

 

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Funds’ balance sheet without the Funds ever having to take a loss on them. 

195. As consideration for the transaction, Ross personally guaranteed the 

performance of the collateral that the Funds sold to the third party, pledging his 

equity interest in DLI. 

196. Ross signed an investor letter for the month ending August 31, 2017 that 

announced the sale of the QuarterSpot loans to the third party. 

197. In this investor letter that announced the transaction, DLI did not 

disclose to the Funds’ investors Ross’s personal guarantee or the pledging of his 

equity interest in DLI. 

198. The principals of the fund that purchased the QuarterSpot loans from the 

DLI Funds have denied knowledge that any of the loans had stopped paying and that 

the Ross-directed payments used to keep those loans “current” were not in fact 

borrower payments.  

199. The sale of the QuarterSpot loan participation interests to DL Global 

resulted in the Funds’ position in QuarterSpot dropping from $139,756,336 to 

$71,506,605 between August and September 2017. 

200. DLI resolved the QuarterSpot side pocket in or around September 2017 

and moved the QuarterSpot loans that it had not sold out of the segregated account 

back into the account with its other investments. 

201. Around the same August and September 2017 timeframe, DLI’s 

valuation committee decided to revise DLI’s long-standing valuation policy 

applicable to the QuarterSpot position.  The revised policy analyzed where a 

borrower was at on its amortization schedule, rather than on whether the borrower 

made a de minimis payment in a given month.   

202. After the sale, DLI continued to be involved in the monthly close 

process for the QuarterSpot participation interests that the Funds had sold to the third 

party. 

203. Ross took advantage of DLI’s involvement to continue directing 

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COMPLAINT 30  

 

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QuarterSpot to make payments against delinquent loans that were not actually 

receiving borrower payments.  These payments were then incorporated into the 

official reporting data that QuarterSpot sent to DLI for transmission to the third party. 

204. In or around August 2017, Ross began using his personal email account, 

instead of his DLI email account, to direct QuarterSpot to make token payments each 

month to purportedly repay portions of hundreds of loans that had been sold to the 

third party, and also to some loans that the Funds continued to own, creating the 

appearance that borrowers were making payments on these loans, when in fact they 

were not.   

205. The process was essentially the same as what Ross had done for years 

for the Funds’ own QuarterSpot loans, though Ross began specifying smaller, round 

numbers for the payments.     

206. For example, on November 8, 2017, Ross from his personal email 

address sent QuarterSpot a spreadsheet where he directed it to apply payments 

totaling $53,551 across 388 “default” loans with a total outstanding principal balance 

of approximately $23,500,000.  Nearly all of these loans for which Ross directed 

payments were ones that the Funds had sold to the third party fund backed by 

overseas investors, but the Funds still owned approximately 32 of the loans.  In this 

email, Ross said, “[QuarterSpot representative]-here you go.  First tab has simplified 

list.  OK to process and sent [sic] usual files to [DLI fund controller], etc.” 

207. As another example, on February 2, 2018, Ross, again from his personal 

email address, sent QuarterSpot a spreadsheet where he directed it to apply payments 

totaling $18,018.54 across 332 distinct “default” loans with a total outstanding 

principal balance of approximately $19,700,000.  Many of the Ross-specified 

payments were small round numbers like $50 or $100.  In his email to QuarterSpot 

Ross said, “See first tab for the short list. Down to just the [principal of third-party 

fund backed by overseas investors] loans!” 

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COMPLAINT 31  

 

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K. Ross’s Active Concealment of His Misconduct 

208. During the relevant period, Ross actively concealed that he was directing 

QuarterSpot to make “rebate” payments that made delinquent loans appear current. 

209. Ross concealed his fraudulent scheme from others at DLI and was 

always the only DLI employee involved in directing the “rebate” payments. 

210. Even when the DLI fund controller began handling the monthly close 

process for the QuarterSpot position in fall 2016, Ross continued to direct the 

“rebate” payments without informing the fund controller, while directing her to use 

the manipulated late loans report (which she did not know was manipulated) to 

determine which loans should be marked down per DLI’s valuation policy.   

211. DLI provided the Funds’ auditors and a third party valuation firm with 

the spreadsheets that Ross manipulated that showed non-performing loans to be 

“current” based on Ross-directed “rebate” payments, not because of actual borrower 

payments. 

212. The auditors and valuation firm then used as inputs in their valuation 

analyses of the Funds’ QuarterSpot position inaccurate information about the loans’ 

status and payments histories, as well as incorrect historical default rate information. 

213. None of the Funds’ audited financial statements mentioned or 

incorporated any type of servicing fee rebate for the QuarterSpot position, as Ross 

concealed the “rebate” payments from the Funds’ auditors. 

214. Ross made or distributed a series of statements, including to investors, 

falsely indicating that DLI did not receive fee rebates for its QuarterSpot position.   

215. For example, on January 29, 2017, Ross explained by email to an 

investor that DLI used a servicing fee rebate for a different whole loan platform and 

contrasted that with QuarterSpot, for which he represented no such rebate 

arrangement existed, citing QuarterSpot’s “good” and “stable” performance over 

time.   

216. Additionally, a June 2016 DLI “Private Credit Investing Portfolio 

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COMPLAINT 32  

 

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Summary” document, which Ross and others at DLI circulated to investors, discussed 

DLI’s practice of using servicing fee rebates in some cases but expressly stated that 

“QuarterSpot does not have a servicing fee rebate arrangement with the Fund.”  That 

same document included specific information about QuarterSpot’s historical returns, 

including the historical loss reserves taken on the position, and it touted 

QuarterSpot’s consistently strong performance. 

217. In or around summer 2017, when others at DLI discovered the 

impairment of the QuarterSpot position that led to the side pocket, Ross did not 

disclose to executives at DLI or to investors that the partial principal payments at 

issue were not borrower payments but instead “rebate” payments by QuarterSpot that 

he had directed. 

218. Instead, Ross arranged a quick sale to get the delinquent QuarterSpot 

loans off the Funds’ books, failing to disclose key facts to the Funds’ investors.   

219. Ross further concealed his rebate payments in his August and September 

2017 communications with investors concerning QuarterSpot and the potential 

impairment, side pocket, and sale to the third party fund. 

220. Ross was evasive and lied when others at DLI began to uncover the 

rebate payments at the end of 2018 and in early 2019. 

221. In or around October 2018, a debt collector for DLI’s QuarterSpot loan 

portfolio informed DLI’s chief financial officer and fund controller that certain 

payment data in DLI’s records did not match data the collector had received directly 

from QuarterSpot showing how much the underlying loan borrowers actually owed.   

222. As some DLI representatives, including its chief financial officer and 

fund controller, attempted to get more information from QuarterSpot’s 

representatives to explain the discrepancies, Ross pressed them to back off their 

inquiries. 

223. For example, the fund controller, on or around October 2018, confronted 

Ross in person regarding the payments. 

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COMPLAINT 33  

 

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224. At that time, Ross denied knowledge of the payments and instead 

directed the fund controller to tell the debt collector that she should just collect on the 

loan balances she had.   

225. Others at DLI continually tried to determine the cause of the QuarterSpot 

loan balance discrepancies between October 2018 and February 2019. 

226. On or around early February 2019, when the fund controller told Ross 

she needed to understand the cause of the discrepancies so she could explain them to 

the Funds’ auditors, Ross told her she was not going to get further information from 

QuarterSpot and that she should just “make something up” for DLI’s auditors. 

227. Additionally, DLI’s chief financial officer asked Ross in person about 

the QuarterSpot payment discrepancies in or around January 2019. 

228. Ross denied knowing anything about the “rebate” payments when 

confronted by the chief financial officer, but said he always suspected the payments 

could be fake. 

229. Ross also told the chief financial officer that because the fake payments 

identified at that point only related to loans already sold to the third party fund, DLI 

had no obligation to disclose them because DLI did not owe a fiduciary duty to the 

third party fund. 

L. Defendant Ross Was an Investment Adviser  

230. DLI was an investment adviser registered with the SEC and was at all 

relevant times acting as an adviser to the Funds. 

231. At all relevant times, Ross was an “investment adviser” within the 

meaning of Section 202(a)(11) of the Advisers Act, 15 U.S.C. §80b-2(a)(11), as he 

was engaged in the business of providing investment advice as to the value of 

securities and as to the advisability of investing in, purchasing and selling securities. 

232. In the relevant period, Ross was also an investment adviser due to his 

ownership, management, and control of DLI, including his ultimate authority over all 

aspects of DLI’s business. 

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COMPLAINT 34  

 

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233. Ross was ultimately responsible for the overall investment strategy of 

the Funds. 

234. Ross received compensation for making investment decisions on behalf 

of the Funds because DLI received fees in the form of a percentage of assets managed 

and a performance fee, millions of dollars of which went to Ross as the 100% owner 

of DLI.   

235. As an investment adviser, Ross owed the Funds a fiduciary duty and was 

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

material facts necessary to make his statements not misleading.   

M. The Limited Partnership Interests in the Funds Are Securities 

236. Investor funds were pooled in the Funds to finance various businesses 

that DLI would choose to invest in. 

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

underlying businesses to generate their returns, 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. 

238. Ross, as 100% owner of DLI, in turn received money from DLI that was 

derived from the fees DLI collected from the Funds. 

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

Funds’ investments were critical to the enterprise’s success, as the investors in the 

Funds did not play any role in managing DLI’s investment decisions. 

N. DLI’s Materially False Forms ADV 

240. DLI filed required Forms ADV with the SEC starting in January 2016 up 

until February 2019. 

241. Ross had ultimate control over the content of DLI’s Forms ADV. 

242. Ross personally signed many of DLI’s Forms ADV. 

243. DLI’s Forms ADV filed in 2016 and 2017 were materially misleading in 

multiple respects. 

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COMPLAINT 35  

 

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244. For DLI’s Forms ADV filed in 2016 and 2017, DLI’s assets under 

management figures were inflated because certain QuarterSpot loans should have 

been written down but were not because of Ross’s data manipulation that created the 

false appearance that the borrowers for the loans were continuing to pay. 

245. For DLI’s Forms ADV filed in 2016 and 2017, the Funds’ gross asset 

value figures were inflated because certain QuarterSpot loans should have been 

written down but were not because of Ross’s data manipulation that created the false 

appearance that the borrowers for the loans were continuing to pay. 

246. Ross knew or was reckless in not knowing the Forms ADV were 

misleading because he personally directed the data manipulation for the QuarterSpot 

loans that led to the inflated figures. 

247. Investors considered information about DLI’s assets under management 

and the Funds’ gross asset value to be important and would have wanted to know if 

such information was overstated. 

O. Tolling Agreement 

248. Ross entered into a tolling agreement with the SEC for the period July 7, 

2019 through September 7, 2019.  This agreement tolls the running of any limitations 

period or any other time-related defenses alleged in this Complaint for a period of 60 

days. 

FIRST CLAIM FOR RELIEF 

Fraud by an Investment Adviser 

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

(against Defendant Ross) 

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

248 above.  

250. Ross breached his fiduciary duties when he defrauded DLI’s clients, the 

Funds, by directing “rebate” payments that made it look like underlying, delinquent 

QuarterSpot loans were current under DLI’s valuation policy, which artificially 

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COMPLAINT 36  

 

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inflated the Funds’ net asset value and reported returns and caused the Funds to pay 

materially inflated management and performance fees to DLI.  Ross was fully aware 

of the underlying manipulation of loan-level data because he directed that process, 

seemingly for the very purpose of mismarking the Funds’ assets and artificially 

increasing their performance numbers, which fraudulently inflated DLI’s fees, 

resulting in DLI’s misappropriation of the Funds’ assets.  Ross also took multiple 

steps to conceal his misconduct both while he was engaged in it and after others at 

DLI began to discover what he had done 

251. By engaging in the conduct described above, Defendant Ross, directly or 

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

(a) knowingly or recklessly employed devices, schemes or artifices to defraud clients 

or prospective clients; and (b) knowingly, recklessly, or negligently engaged in 

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

upon clients or prospective clients. 

252. By engaging in the conduct described above, Defendant Ross 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 Ross) 

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

248 above. 

254. Ross made false and misleading statements and engaged in deceptive 

conduct towards the investors in the DLI Funds.   

255. Ross engaged in a multi-year effort to manipulate data by secretively 

directing “rebate” payments to create the appearance that QuarterSpot loans were 

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COMPLAINT 37  

 

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“current” when in fact they were seriously delinquent, which allowed the Funds to 

delay or avoid recognizing losses on the QuarterSpot position.  This in turn inflated 

the Funds’ net asset value and heavily marketed returns and allowed DLI to 

substantially overcharge the Funds for its management and performance fees, which 

inured to the benefit of Ross as DLI’s 100% owner.   

256. Ross’s manipulation of the QuarterSpot loan payment data led him to 

make multiple false and misleading statements to the Funds’ investors about DLI’s 

assets under management and the Funds’ net asset value, heavily-marketed returns, 

and loan default rate.  These misstatements were included in DLI’s monthly investor 

letters, investor account statements, fact sheets, investor presentations, information 

provided on DLI’s investor portal, and in various other documents provided to 

investors, as well as in oral communications from Ross to investors.  DLI and Ross 

likewise made false statements to the Funds’ investors about the management and 

performance fees they owed.  Ross’s statements regarding DLI’s valuation policy 

were false or misleading insofar as Ross was actively violating the stated policy, as 

were Ross’s repeated statements that DLI was conservative or “ultra-conservative” in 

how it marked down late loans.  Ross’s representations to investors regarding the 

August 2017 QuarterSpot side pocket were misleading because he did not disclose 

that a key reason for the impairment of the position was that a number of loans 

marked “current” were in fact seriously delinquent because of payments that were not 

borrower payments at all but rather “rebate” payments engineered by Ross.  

Likewise, Ross’s statements to the Funds’ investors about the September 2017 sale of 

QuarterSpot loans at par were misleading insofar as he failed to disclose that he had 

to personally guarantee the transaction and pledge his equity interest in DLI to 

effectuate that sale. 

257. Ross’s false statements were made “in connection with” the sale of 

securities because investors and prospective investors in the Funds who received 

these false and misleading representations either invested for the first time, 

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COMPLAINT 38  

 

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subsequently invested additional sums, or reinvested their monthly interest income. 

258. Ross’s misrepresentations were material because investors in the Funds 

considered it important to have accurate information concerning the value of their 

investments and historical returns data, as that could directly impact their ability to 

receive back their principal investments and achieve the high returns that DLI and 

Ross advertised.  The misrepresentations were also material because they directly 

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

inflating the fees and thereby diminishing the returns flowing to the investors. 

259. Ross knew, or was reckless in not knowing, that the statements regarding 

the Funds’ QuarterSpot position, including the valuation and performance of that 

position, were false or misleading because he personally directed the manipulation of 

the underlying borrower payment information, creating a situation where the 

QuarterSpot position could not be properly valued or its performance assessed.  

Ross’s efforts to conceal his misconduct, and his lies when confronted about it, are 

further evidence of his fraudulent intent.   

260. By engaging in the conduct described above, Defendant Ross, 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. 

261. Defendant Ross, 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 

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

described in detail above. 

262. By engaging in the conduct described above, Defendant Ross 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). 

THIRD CLAIM FOR RELIEF 

Fraud in the Offer or Sale of Securities 

Violations of Section 17(a) of the Securities Act 

(against Defendant Ross) 

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

248 above. 

264. Ross engaged in deceptive conduct and obtained money by means of 

false and misleading statements to the investors in DLI’s Funds.   

265. Ross engaged in a multi-year effort to manipulate data by secretively 

directing rebate payments to create the appearance that QuarterSpot loans were 

“current” when in fact they were seriously delinquent, which allowed the Funds to 

delay or avoid recognizing losses on the QuarterSpot position.  This in turn inflated 

the Funds’ net asset value and heavily marketed returns, and allowed DLI to 

substantially overcharge the Funds for its management and performance fees, which 

inured to the benefit of Ross as DLI’s 100% owner.   

266. Ross’s manipulation of the QuarterSpot loan payment data led him to 

make multiple false and misleading statements to the Funds’ investors about DLI’s 

assets under management and the Funds’ net asset value, heavily-marketed returns, 

and loan default rate.  These misstatements were included in DLI’s monthly investor 

letters, investor account statements, fact sheets, investor presentations, information 

provided on DLI’s investor portal, and in various other documents provided to 

investors, as well as in oral communications from Ross to investors.  DLI and Ross 

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COMPLAINT 40  

 

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likewise made false statements to the Funds’ investors about the management and 

performance fees they owed.  Ross’s statements regarding DLI’s valuation policy 

were false or misleading insofar as Ross was actively violating the stated policy, as 

were Ross’s repeated statements that DLI was conservative or “ultra-conservative” in 

how it marked down late loans.  Ross’s representations to investors regarding the 

August 2017 QuarterSpot side pocket were misleading because he did not disclose 

that a key reason for the impairment of the position was that a number of loans 

marked “current” were in fact seriously delinquent because of payments that were not 

borrower payments at all but rather “rebate” payments engineered by Ross.  

Likewise, Ross’s statements to the Funds’ investors about the September 2017 sale of 

QuarterSpot loans at par were misleading insofar as he failed to disclose that he had 

to personally guarantee the transaction and pledge his equity interest in DLI to 

effectuate that sale. 

267. Ross’s false statements were made “in the offer or sale” of securities 

because the investors and prospective investors in the Funds who received these false 

and misleading representations either invested for the first time, subsequently 

invested additional sums, or reinvested their monthly interest income. 

268. Ross’s misrepresentations were material because investors in the Funds 

considered it important to have accurate information concerning the value of their 

investments and historical returns data, as that could directly impact their ability to 

receive back their principal investments and achieve the high returns that DLI and 

Ross 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. 

269. Ross knew, or at a minimum was negligent in not knowing, that the 

statements regarding DLI’s QuarterSpot position, including the valuation and 

performance of that position, were false or misleading because he personally directed 

the manipulation of the underlying borrower payment information, creating a 

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

performance assessed.  Ross’s efforts to conceal his misconduct, and his lies when 

confronted about it, are further evidence of his fraudulent intent.   

270. Ross’s statements regarding DLI’s assets under managements and the 

Funds’ returns and net asset value were pillars of DLI’s marketing strategy that 

brought investors to the Funds.  By inflating those key metrics through manipulation 

of the QuarterSpot collateral figures, Ross was able to recruit and maintain investors 

in the Funds on whose assets DLI could charge management and performance fees 

from which Ross, as 100% owner of DLI, ultimately received tens of millions of 

dollars, thereby obtaining money by means of the misrepresentations.   

271. By engaging in the conduct described above, Defendant Ross, 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. 

272. Defendant Ross 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. 

273. By engaging in the conduct described above, Defendant Ross violated, 

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

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COMPLAINT 42  

 

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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 of the Advisers Act 

(against Defendant Ross) 

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

248 above.  

275. During 2016 and 2017, the regulatory assets under management figures 

and gross asset values for the Funds that DLI reported in its Forms ADV were 

materially inflated because they were based on a valuation of the QuarterSpot 

position that was false due to Ross’s manipulation of the underlying loan repayment 

data through the QuarterSpot “rebate” payments he directed.    

276. Ross, who personally signed many of DLI’s materially inaccurate Forms 

ADV and had ultimate control over the content of all its Forms ADV, knew or was at 

least reckless in not knowing that these figures were inflated.  He personally directed 

the “rebate” payments that materially inflated DLI’s regulatory assets under 

management and the Funds’ gross asset values and used those payments to delay and 

avoid marking down non-performing loans under DLI’s valuation policy. 

277. By engaging in the conduct described above, Defendant Ross, 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. 

278. By engaging in the conduct described above, Defendant Ross 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. 

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COMPLAINT 43  

 

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PRAYER FOR RELIEF 

WHEREFORE, the SEC respectfully requests that the Court:  

I. 

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

alleged violations. 

II. 

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

Civil Procedure, permanently enjoining Defendant Ross, and his 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)]. 

III. 

Order Defendant to disgorge all funds received from his 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)]. 

V. 

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. 

  

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COMPLAINT 44  

 

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VI. 

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

necessary. 

 

Dated:  August 11, 2020  

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

 
 

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