On Feb. 4, 2021, the Securities and Exchange Commission (SEC) filed an enforcement action against GPB Capital Holdings, its principals, and related individuals/entities, for engaging in securities fraud. State securities regulators in Massachusetts, Alabama, New Jersey, New York, Georgia, Illinois, Missouri, and South Carolina have also initiated enforcement proceedings and/or investigations into GPB.
Wolper Law Firm is currently representing clients across the country in arbitration proceedings against brokerage firms and financial advisors who violated due diligence requirements when recommending private placement funds issued by GPB Capital Holdings, including GPB Capital Holdings, LP, GPB Capital Holdings II, LP GPB Automotive Portfolio, LP, GPB Waste Management, LP n/k/a Armada Waste Management, LP and GPB Cold Storage, LP.
History of GPB’s Misconduct
GPB Capital Holdings was founded in 2013 by David Gentile. Between 2013 and 2018, GPB raised nearly $1.8 billion from investors through a network of 60+ brokerage firms across the country.
GPB incentivized brokerages and financial advisors to sell its funds by offering commissions of 8 percent to the financial advisor and additional commissions of 3 to 4 percent to the brokerage for marketing and so-called due diligence fees. GPB’s largest private placement funds were GPB Capital Holdings, II, GPB Automotive Portfolio, LP, and GPB Waste Management, LP. GPB distributed its private placement offerings through Ascendant Capital and AAS, which interacted with the 60+ brokerage firms.
Problems with GPB arose because it promised investors an annual dividend of 8 percent. However, GPB was unable to deploy investor assets efficiently in order to generate operational returns sufficient to support the dividend payments.
Consequently, GPB began paying investor dividends with new investor capital while misrepresenting that the dividends were exclusively paid from operational income. This created a massive shortfall in assets over time and is classic Ponzi scheme activity.
The fraud is summarized as follows:
- GPB raised nearly $1.8 billion in investor capital between 2013 and 2018 but did not deploy all of that capital into its operations.
- GPB represented that investor dividends were paid with operational revenue when, in actuality, they were paid with new capital from investors. This is a classic Ponzi scheme.
- GPB and its principals manipulated financial statements for various private placements to give the false appearance of profitability.
- GPB has not produced audited financials since mid-2018, allowing the fraud to perpetuate.
- GPB’s principals siphoned funds for their personal benefit while knowing all along that they were engaging in Ponzi scheme activity.
Brokerage Firm’s Obligations
GPB sold its private placement funds through a network of 60+ brokerage firms by offering sales commissions of 8 percent to the financial advisor and upwards of 3 to 4 percent to the brokerage firm for marketing and due diligence.
However, brokerage firms did not conduct adequate due diligence and relied almost exclusively on third-party due diligence reports paid for and provided by GPB. FINRA Notice to Members 10-22 imposes robust due diligence requirements on brokerage firms that sell alternative investments, which include due diligence of, among other things, the issuer (i.e., GPB), its principals (i.e., David Gentile), affiliates (i.e., Ascendant Capital and AAS), and business associates (i.e., Jeffrey Lash).
Brokerage firms failed to conduct meaningful due diligence of GPB or any of its principals, affiliates or business associates. Brokerage firms also failed to review any of the financials.
Consequently, financial advisors were permitted to freely sell GPB to unsuspecting customers who were led to believe that they were investing in a profitable enterprise that was paying 8 percent returns from operational income.
As a result of the failed due diligence, brokerage firms and financial advisors failed to uncover numerous red flags and, consequently, made material misrepresentations and omissions to investors.
This misconduct is actionable and investors have recovery options through the arbitration process.
The Enforcement Proceedings
In 2017, former GPB partners filed a business dispute against the company, alleging improprieties. These allegations were followed by the commencement of investigations by the FBI and state and federal securities regulators.
On May 27, 2020, the State of Massachusetts filed the first enforcement action against GPB, alleging it was engaged in Ponzi scheme activity.
On Feb. 4, 2021, the SEC followed suit, filing a 37-page complaint, alleging securities fraud. The SEC specifically alleged:
“This case concerns a long-running and multi-faceted fraudulent scheme perpetrated by GPB Capital, a registered investment adviser; its owner and CEO, Gentile; AAS, a registered broker-dealer, and its branch office, Ascendant Capital; Schneider, the owner and CEO of Ascendant Capital; and Lash, a former managing partner of GPB Capital.”
State securities regulators in Alabama, New Jersey, New York, Georgia, Illinois, Missouri, and South Carolina have also initiated enforcement proceedings and/or investigations into GPB.