Owner of La Cañada Investment Firm Arrested in Federal Case

The founder and former CEO of a La Cañada Flintridge investment firm that specializes in debt instruments was arrested Tuesday on federal charges alleging he falsified financial records to fraudulently inflate the value of the funds he managed, allowing him to charge investors millions of dollars in unauthorized fees, authorities said.

According to a press release issued by the U.S. Department of Justice, Brendan Ross who founded Direct Lending Investments, LLC in 2012, was taken into custody by special agents of the FBI.

In conjunction with the unsealing of the criminal case, the U.S. Securities and Exchange Commission on Tuesday filed a civil complaint against Ross, alleging he defrauded investors.

A grand jury indictment filed on July 30 charges Ross with 10 counts of wire fraud based on a scheme he executed between late 2013 and early 2019 to defraud investors in funds managed by DLI, a firm he still owns. Ross resigned as CEO in March 2019, soon after the SEC filed a civil complaint against DLI, which resulted in the appointment of a court-ordered receiver in early April 2019.

By 2017, just five years after Ross founded DLI, the firm had over $1 billion in assets under management. According to the indictment, Ross allegedly directed DLI to invest the funds’ assets in, among other things, a company that loaned money to small businesses and retailers.

The funds made money when the borrowers on the loans made timely payments. The indictment alleges that rather than disclose some of the loans were not performing, Ross falsified monthly reports to make it appear borrowers were making payments. The “payments” actually came from fee rebates given by the company originating the loans, authorities said.

“By lying about the true status of the loans, Ross caused DLI to overstate the value of these loans on the funds’ books and fraudulently inflate the funds’ value, according to the indictment. Specifically, Ross allegedly caused the monthly asset values of the funds to be cumulatively inflated by over $300 million over the course of about four years. By fraudulently inflating the value of the funds, Ross was able to collect millions of dollars in fees he otherwise would not have been able to charge to clients, “according to the indictment.

Prosecutors say Ross, to help conceal his scheme, allegedly arranged for the sale of approximately $55 million of the loans to a third-party in 2017, but once again inflated the value of these loans by lying about their status, falsely telling the buyer that borrowers had been making payments on many of these loans, according to the indictment.

Ross was expected to be arraigned on Tuesday afternoon in U.S. District Court in downtown Los Angeles.

Each of the 10 wire fraud counts in the indictment carries a statutory maximum sentence of 20 years in federal prison.