The State of Massachusetts Securities Division Has Filed An Enforcement Action Against GPB Capital Holdings, LLC, Alleging, Fraud And Undisclosed Conflicts Of Interest
On May 27, 2020, William Galvin, the Commissioner of the State of Massachusetts Securities Division, filed an enforcement action against GPB Capital Holdings, LLC. A copy of the Complaint can be accessed by clicking https://www.sec.state.ma.us/sct/current/sctgpb/2020-5-27-MSD-GPB-Complaint-E-2018-0100.pdf.
The Complaint is a scathing commentary on the business practices of GPB, which have been well documented by the Wolper Law Firm over the last year. The Wolper Law Firm is currently representing myriad clients around the country in arbitration proceedings against brokerage firms that recommended that their retail clients invest in one of the GPB Capital Holdings’ various private placement offerings.
GPB Capital Holdings is a New York based investment company that serves as the general partner for various privately held investment funds, including:
-GPB Automotive Portfolio, LP
-GPB Cold Storage, LP
-GPB Eurobond Finance PLC
-GPB Holdings II, LP
-GPB Holdings, III, LP
-GPB Holdings Qualified, LP
-GPB Holdings, LP
-GPB NYC Development
-GPB Scientific, LLC
-GPB Waste Management, LP formerly: GPB Waste Management Fund, LP.
The three largest GPB funds are GPB Automotive Portfolio, LP, GPB Holdings II, LP and GPB Waste Management, LP a/k/a Armada Waste Management Fund, LP. The total amount of capital raised by GPB across its funds is estimated to be more than $1.5 billion. GPB was able to raise capital quickly through a network of brokerage firms across the country by offering selling commissions of 8% to Financial Advisors and additional placement fees available to the brokerage firm.
According to the Massachusetts Complaint, GPB made material misrepresentations to investors by promising them 8% investment returns paid solely from operational capital and revenue. These representations were reinforced in private placement memoranda and marketing materials. However, as GPB continued to aquire new investors, it failed to deploy the capital into new business ventures. Instead of suspending investor dividends until such time as the capital could be deployed in order to generate revenue for the various GPB funds, GPB continued to pay dividends to investors. Because the revenue of the GPB funds was less than their distribution requirements, the dividends were paid with investor capital. Consequently, without a rapid appreciation of profits and revenue, GPB was completely reliant on new investor capital to meet its dividend requirements.
All along, GPB continued to represent in marketing materials and financial reports that it was paying dividends from operational capital and revenue. In 2018, GPB casually changed language within a revised private placement memorandum to reflect that it may elect to use investor contributions to pay dividends without disclosing that it had been doing it all along.
As set forth in the Massachusetts Complaint, between 50% and 100% of investor distributions were paid by GPB’s three largest funds by using investor contributions. These statistics reinforce the conclusion that GPB is nothing more than a ponzi scheme.
Specific allegations within the Complaint reveal:
GPB Capital Holdings II
“GPB Capital has used investor funds to pay distributions, contrary to the disclosures in most of GPB Holdings II PPMs and marketing materials.”
“The GPB Holdings II financials provide additional insight into its distribution practices. The GPB Holdings II consolidated financial statements from inception (April 13, 2015) to December 31, 2015, report a net income of $645,632, and total distributions of$197,056. 102. The GPB Holdings II consolidated financial statements for year ended December 31, 2016 report a net loss of$6,607,000, but total distributions of $8,089,000.”
“Taking the two financial statements together, from inception to year end 2016, GPB Holdings II had a net loss of $5,961,368, yet still paid out $8,286,056 in distributions to limited partners.”
“Per GPB Capital’s own definition, this means that since inception to year end 2017, GPB Holdings II had a coverage ratio of 48.46%, meaning 51.54% of distributions were paid using investor contributions.”
“This means that in the third quarter of 2017, GPB Automotive paid out more in distributions than it earned. In order to compensate for paying out more in distributions than earnings, GPB Capital utilized investor funds. For the calendar year of 2017, GPB Automotive’s coverage ratio was 60%, meaning that 40% of distributions were paid using investor funds, directly contrary to all of the GPB Automotive PPMs and GPB Automotive marketing materials.”
GPB Waste Management/Armada Waste Management
“According to the 2017 unaudited financials for GPB Waste Management, the fund reported a total investment income of $5,658,000 and total expenses of $3,541,000, and therefore a net investment income of $2,117,000. The fund reported a net income of $4,468,000.”
“The unaudited financials also reported total distributions to limited partners of $4,411,000. 184. Per the audited financials, the fund reported a total net loss of $8,456,000, which includes a net loss to limited partners of $578,000.”
“Despite the reported net loss, the fund paid $4,411,000 in distributions to limited partners. 186. For 2017 GPB Waste Management had a coverage ratio of less than 0%, which meant that all distributions were made using investor contributions.”
“According to GPB Waste Management’s audited financials from inception to year end 2017, the fund had a total net loss of $1,562,880, yet paid distributions to limited partners totaling $4,630,170, putting the fund’s coverage ratio from inception to year end 201 7 well below 0%.”
In addition, myriad undisclosed conflicts of interest within GPB are illuminated in the Massachusetts Complaint. Many of the automotbile dealerships owned by GPB Automotive are, in fact, owned by individuals within GPB Capital Holdings. The payment of fees, borrowing of capital and other remuneration was not at arm’s-length.
These new revelations provide further support for the conclusion that GPB operated a ponzi scheme and will inevitably be forced into receivership or bankruptcy. GPB has not provided audited financials since 2018.
The time for investors to recoup their losses is closing. Many of the brokerage firms that sold GPB to investors are small operations with minimal revenues and may become insolvent, rendering them unable to pay an arbitration award.
The Wolper Law Firm represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at 800.931.8452 or by email at firstname.lastname@example.org.
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