Two related cases, Bradley D. Sharp v. Shinhan Bank Co., Ltd. (the “Shinhan Action”) and Sharp v. Daishin Securities Co., Ltd. (the “Daishin Action”), were filed in the United States District Court for the Central District of California on November 23, 2021 by the receivers for various businesses under the Direct Lending Investments, LLC umbrella of companies (“Direct Lending”).  Both actions allege that certain redemptions paid out to investors in a fraudulent investment scheme constitute constructive and actual fraudulent transfers under California’s Uniform Voidable Transactions Act, regardless of the investors’ knowledge of the underlying fraud.

Plaintiffs in both actions are receivers (the “Receivers”) appointed in the underlying SEC enforcement action against an investment manager entity that was used to carry out a fraudulent investment scheme (the “Receivership Entity”). Defendants in the Shinhan Action are investment funds (the “Defendant Funds”) that invested in the scheme, trustees (the “Defendant Trustees”) that entered into subscription agreements with the Receivership Entity on the Defendant Fund’s behalf, and fund managers (the “Defendant Managers,”) that sold the funds to investors.   Defendant in the Daishin Action is a South Korean investment company that invested in the scheme.

The Receivers allege that between 2014 to 2019, Brendan Ross (“Ross”), through a fund wholly owned by the Receivership Entity and indirectly owned by Ross (the “Receivership Entity Fund”), purported to offer investments in a portfolio of short-term loans, lines of credit, purchased receivables, and other non-traditional loans to high-risk businesses. Ross claimed that these assets would yield a return rate of up to 10 to 14% returns.  In fact, Ross maintained undisclosed ownership interests in a number of the delinquent borrowers, many of which were financially distressed, and grossly overstated the value of the non-performing debt obligations in communications to investors. He then extracted the fraudulently obtained investor funds for his own personal use by collecting exorbitant management fees and employing a sham family-owned business to provide fictitious administrative services for the Receivership Entity. To avoid detection, Ross used the funds from new investors to cover old investor’s redemption requests, including the principal from the initial investment and any fictitious profits purportedly earned thereon. On March 22, 2019, the SEC filed an enforcement action against the Receivership Entity, which resulted in the appointment of a permanent Receiver who has since been empowered to pursue avoidance actions against investors, as well as a federally appointed Receiver in the SEC action.

The Shinhan Action complaint alleges that the redemptions paid out to the Fund Defendants between December 2016 and November 2018 amounted to actual and constructive fraudulent transfers since: (1) the transfers were made by the Receivership Entity Fund to conceal and perpetuate a Ponzi scheme, i.e., with the intent to defraud, delay, and hinder other prior investor creditors; and (3) the Receivership Entity Fund was insolvent as of the dates of transfer. It also claims that subsequent transfers made by the Fund Defendants to the Trustee and Manager Defendants for trustee service fees, sales agent fees, and other expenses, likewise constitute fraudulent transfers under California’s Uniform Voidable Transactions Act.  The Daishin Action complaint also alleges claims for fraudulent transfer as Direct Lending had transferred funds to Defendant in furtherance of the Ponzi scheme, which were in excess of the Defendant’s principal.

Both complaints further assert claims for unjust enrichment, alleging that Defendants were enriched by the receipt of the fictitious profits at the expense of the Receivership Entity and its creditors. The Receivers seek to avoid and recover the initial and subsequent transfers and/or to obtain a judgment in the amount of those transfers.