08 Nov Class Action Alleges GPB Operated as a Ponzi Scheme

GPB Class Action | The DI Wire| November 7, 2019

A class action lawsuit was filed in an Austin federal court against GPB Capital Holdings, its affiliates, company executives, and the 80 broker-dealers that purportedly sold the company’s investment products to retail investors.

A class action lawsuit was filed in a Texas federal court against GPB Capital Holdings, its affiliates, company executives, and the broker-dealers that purportedly sold the company’s investment products to retail investors. GPB’s auditor and fund administrator were also named as defendants.

The class action alleges improper conduct in selling securities at the direction of GPB Capital, Ascendant Capital (GPB’s primary distribution agent) and their respective principals David Gentile and Jeffry Schneider.

The plaintiff claims that GPB’s business model was “destined to fail,” and was fraught with “gross conflicts of interests, undisclosed prior bad acts, and registration failures.”

The plaintiff, Kinnie Ma Individual Retirement Account, purchased a $64,207 limited partnership interest in GPB Holdings II LP in September 2015.

Another class action lawsuit was filed yesterday on behalf of Plaintiff Millicent R. Barasch, alleging that GPB operated a “garden variety Ponzi scheme,” as reported by Investment News.

GPB Capital is a New York-based alternative asset management firm, that focuses on acquiring private companies in various industries, including the automotive retail and waste management sectors, and raised more than $1.8 billion in investor equity through various private placement offerings.

GPB suspended its fundraising efforts and redemptions in August 2018 to focus on accounting and financial reporting on two of its funds, the GPB Automotive Portfolio and the GPB Holdings II. The audited financial statements were expected at the end of September 2019 but were delayed until the end of the year due to “new challenges” facing the company.

The complaints states that “Defendants sold…securities through a series of massive improperly unregistered public offerings in which they paid themselves and a network of brokers exorbitant fees and falsely promised investors…prompt investment returns of 8 percent or more per [year].” The fees are estimated in the 17 to 20 percent range, with sales commissions topping 11 percent.

Lawyers for the plaintiffs allege that GPB was operating a Ponzi scheme and paid investors from their own or other investor accounts, while claiming the payments were investment returns from the underlying businesses that the funds owned.

“Simple math shows the nature of defendants’ scam. As only 80 percent of investor capital was actually invested (due to the exorbitant fees being paid), GPB would have had to earn a 35 percent return on this amount in order to return to investors their initial investment, plus an 8 percent annual return.”

GPB, Gentile, and Schneider allegedly failed to disclose conflicts of interests, including that GPB founder, Gentile, was part-owner of Ascendant, which served as the “lead” underwriter for the GPB funds and received sales commissions.

“GPB Capital, Axiom/Ascendant, Schneider, and Gentile, from the start commonly owned the entire revenue stream from organizing and operating the various limited partnership interests, and from brokering, selling, and underwriting them,” the complaint states.

The complaint also claims that Gentile and Schneider had an undisclosed agreement to split the profits of both GPB and Ascendant and that they had formed a company, DJ Partners LLC, to facilitate this.

In addition, Schneider was previously suspended by FINRA and by a state regulator, and Mark Martino, the CEO of broker-dealers Axiom and later Ascendant Strategies, which directed the offerings, was also previously suspended by FINRA.

The complaint claims that because of these prior suspensions, Schneider and Martino were considered “bad actors” under federal securities law. Because this was not fully disclosed to investors, they could not use the Rule 506 registration exemption under Regulation D.

In addition, GPB and its affiliates are accused of violating federal disclosure law and failing to properly register its funds, GPB Holdings II LP and GPB Automotive Portfolio LP, since the funds’ investments exceeded $10 million and had 2,000 investors.

This is not the first recent class action against GPB. In August, investors Victor Wade and Karen Loch filed a lawsuit against the company and senior executives seeking, among other things, that the company provide accurate financial statements to its investors.

Also, in March 2019, the Federal Bureau of Investigation and the New York City Business Integrity Commission made an unannounced “visit” to its headquarters in Manhattan. At the time, the company disclosed that the agencies obtained a search warrant to collect materials from the premises and believed the visit was a continuation of previous ongoing inquiries.

Specifically, the company said that in the summer of 2018 it received a subpoena from the U.S. Attorney’s Office – Eastern District of New York for documents related to a waste management fund in connection with the NYC Business Integrity Commission’s investigation.

Additionally, the firm received subpoenas from the Securities and Exchange Commission and the New Jersey Bureau of Securities. While GPB was not told the cause of the investigations, other than they are in connection with potential violations of general securities laws and regulations, the company pointed out that much of the information requests concern issues raised by former operating partner, Patrick Dibre.

GBP sued Dibre in July 2017 for allegedly reneging on the sale of multiple car dealerships in the New York metropolitan area, and the company is seeking the return of $42 million it had paid to the former business partner.

Another GPB business partner and car dealership owner, David Rosenberg, sued GPB in July 2019, alleging serious financial misconduct dating back to 2014.

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