Direct Lending Fund Founder Resigns Amid SEC Investigation

(Bloomberg) -- Direct Lending Investments’ founder and chief executive officer Brendan Ross resigned amid an investigation by the Securities and Exchange Commission.

Ross quit March 18 after the company found evidence that valuations of one of its investments may have been materially overstated, Direct Lending said in a March 19 letter to investors. The company, which had $758 million in assets in November, said in another letter last month that a different borrower had defaulted on a loan that accounted for about a quarter of its capital. It suspended withdrawals at that time.

Ross said in an email on Wednesday that the decision to quit was difficult.

“I am committed to doing what is best for the investors and to preserve the value of the fund,” he wrote. He declined to answer other questions.

Founded in 2012, Direct Lending has been part of a boom in alternative asset managers that make loans to mid-size companies, filling a gap left by banks after the financial crisis. Direct Lending reported gains every month through at least November 2016, according to another investor letter seen by Bloomberg.

Its assets increased about 10-fold between 2014 and 2016, Ross said on a podcast hosted by Lend Academy in 2016. Ross initially focused on loans to small businesses and then branched out into making larger loans to companies in the business of lending themselves.

Direct Lending said in the March 19 letter that it may have overvalued its investment in a small-business lending platform called QuarterSpot Inc. The company said it reported the matter to the SEC. Judith Burns, a spokeswoman for the SEC, declined to comment, and Yasser Ahmad, Direct Lending’s head of investor relations, didn’t respond to a message seeking comment.

The borrower that defaulted, VOIP Guardian Partners I, has been in the business of advancing money to smaller telecoms against their accounts receivables. It filed for bankruptcy March 11. It owed Direct Lending $191.3 million, according to last month’s letter to investors.

Rodney Omanoff, one of VOIP’s founders, said in an interview last month that some telecoms that were long-time clients stopped paying their bills and that his company had done nothing wrong. He didn’t respond to messages seeking comment on the SEC investigation.

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