A History of Deception?
On May 27, 2020, the Commonwealth of Massachusetts Office of the Secretary of the Commonwealth, Securities Division filed an Administrative Complaint calling for an adjudicatory proceeding to be brought against GPB Capital Holdings, LLC. In February 2019, the FBI raided the New York headquarters of GPB as part of its investigation into whether GPB is a Ponzi scheme. The 47-page “fraud complaint” comes nearly 20 months after Massachusetts Secretary of State William Galvin, who also acts as the state’s securities commissioner, launched an investigation into the 63 broker-dealers that sold GPB. While this complaint does not focus on the broker-dealers that sold GPB, it does provide new detail about GPB’s operations, financials, and the alleged misrepresentations it made to investors. Over 180 Massachusetts investors contributed more than $14 million to GPB Capital. William Galvin alleges that they were misled by private placement memos and marketing materials, investing their hard-earned money under false pretenses because GPB Capital made false statements about its funds.
What is the history of GPB Capital Holdings? David Gentile founded GPB Capital Holdings in 2013 as an offshoot of his father’s accounting firm, Gentile, Pismeny & Brengel, LLP (now rebranded as Gentile Brengal & Lin, LLP). David Gentile is the managing member of GPB Capital and maintains full control over the company. GPB Capital launched the first fund, GPB Holdings, in 2013. Soon after, GPB Capital launched GPB Automotive Portfolio, LP. After GPB Automotive raised over $120 million from investors in 2015 alone, GPB Capital launched several other funds, including GPB Holdings II, LP; GPB Waste Management, LP; and GPB NYC Development, LP. Throughout this, David Gentile’s partner has been Jeffry Schneider, who owned broker-dealer Ascendant Capital LLC. GPB Capital used this broker-dealer to facilitate the sale of its funds. Ascendant Capital LLC then became a branch office of Gentile-owned broker-dealer Ascendant Alternative Strategies, LLC. According to Galvin’s report, the lines between Gentile, Schneider, Ascendant, and GPB Capital became blurred. GPB Capital wanted to give off the impression that they were separate, but they really were not. This is just the tip of the iceberg when it comes to GPB Capital’s allegedly deceptive practices, according to Galvin’s complaint.
GPB’s Aggressive Marketing Strategy
How did GPB Capital market their funds to broker-dealers and retail investors? GPB Capital used aggressive marketing strategies to entice retail investors, touting that investors would receive a yearly 8% return paid monthly, plus distributions paid from operating profits. GPB Capital marketed the funds as being much more stable than a risky private placement, guaranteeing a continuous stream of income—plus a big payout upon exiting.
GPB Capital also marketed the funds to broker-dealers, encouraging them to sell these securities to retail investors. From December 2018 to January 2020, Ascendant Capital made over 27,500 cold calls to broker-dealers. The marketing materials Ascendant Capital employed, including PowerPoint presentations and marketing decks, highlighted the 8% distribution the GPB Funds would pay out to investors, but there was no mention of the fact that these distributions could be paid out from investor funds. Emails about GPB Holdings II focused on a “targeted annualized yield, paid monthly, and 100% covered from operations.” GPB Capital stated that their goal would be to “pay distributions from Portfolio Company operations.” Year-end financial statements from 2016, however, state, “Cash Distributions have been, and may in the future continue to be, paid out of available working capital, including, but not limited to, investor contributions, Current Cash Distributions have, and may in the future, exceed operating income, if any, generated by the Partnership,” according to page 17 of Galvin’s complaint. These statements are at the heart of the case against GPB, which has been accused of being a Ponzi scheme (and indeed, paying investors with funds raised from later investors is one of the hallmarks of a Ponzi scheme).
Due to this aggressive (and misleading) marketing to retail investors and broker-dealers alike, GPB has raised over $1.5 billion to date. However, this has also meant that, according to Galvin’s complaint, GPB Capital made promises that they were ultimately unable to fulfill. At first, GPB was able to maintain its promises to investors, but things quickly fell apart. GPB continued to take on new investors. As investor contributions increased, GPB needed more capital. They could have suspended distributions, but they wanted to keep up appearances. As a result, GPB Holdings, GPB Holdings II, GPB Automotive, and GPB Waste Management used investor contributions to pay out the 8% distributions.
The complex structure of GPB funds and a history of accounting problems have only exacerbated GPB Capital’s problems. GPB Capital has many sub-funds and portfolio companies (like Prime Automotive Group) and oversees hundreds of bank accounts. In mid-2018, GPB finally suspended contributions and redemptions for GPB Automotive and GPB Holdings II. Since then, they have not filed the required financials with the SEC and have failed to complete required audits for two years. It is no surprise that these audits have not been completed because GPB’s financial picture is quite poor. From its inception (April 13, 2015) through December 31, 2016, GPB Holdings II had a net loss of $5,961,368 but still paid out $8,286,056 in distributions to its limited partners (investors). That means that, from its inception through December 31, 2017, 51.54% of distributions from GPB Holdings II were paid using investor contributions.
The use of investor contributions as distributions extended into GPB’s other holdings, including its well-known automotive holdings. GPB invested in many New England car dealerships, most notably the Prime Automotive Group network of dealerships, and Galvin’s complaint outlines that there were many conflicts of interest. For example, David Gentile had partial ownership in many of the dealerships. From its inception through December 31, 2016, GOB Automotive’s net income was $12,076, 979 but they paid out $19,901,719 in distributions to investors, meaning that 39.32% of distributions were paid out using investor funds. GPB Automotive stopped accepting new investments on August 17, 2018, and, as with the other funds, have not produced the required financial audits, leaving investors and other stakeholders in the dark.
William Galvin’s complaint states that GPB Capital violated the Massachusetts Securities Act on two counts: 1) making untrue statements and 2) engaging in fraud and deceit.
What relief is the Massachusetts Securities Division Enforcement Section requesting? The Division is requesting that:
- The allegations against GPB be found to be true
- Sanctions in the public interest be enacted
- GPB cease and desist from its violations
- GPB be censured
- GPB provide verified accounting statements
- GPB disgorge all ill-gotten gains
- GPB be barred from acting as an investment adviser, broker-dealer, issuer, or similar role
- GPB be fined
- Offers of rescission be extended to all defrauded Massachusetts investors
- Any other action be taken that is in the public interest
In total, over 180 Massachusetts residents invested over $14 million in GPB Funds. As such, Massachusetts Secretary of State William Galvin, the state’s securities commissioner and a staunch investor advocate, is determined to bring GPB Capital to justice.
If you invested in GPB Capital and have questions about your investments, don’t hesitate to contact the securities attorneys of Fitapelli Kurta to learn more about your options for investment loss recovery. Fitapelli Kurta already represents dozens of GPB investors and we would love to get to know you and your case as well. Call (877) 238-4175 or email firstname.lastname@example.org for your free case consultation with a securities attorney.