08 Feb GPB Capital CEO, 2 Others Arrested in Scheme That Bilked 17,000 Investors

“The CEO of a New York-based RIA and two others were arrested Thursday on fraud charges tied to a massive scheme that bilked 17,000 investors across the U.S. out of more than $1.7 billion, according to the U.S. Attorney’s Office for the Eastern District of New York.

David Gentile, 54, of Manhasset, New York, the founder, owner and CEO of asset management firm and RIA GPB Capital; Jeffry Schneider, 52, of Austin, Texas, the owner and CEO of GPB placement agent Ascendant Capital; and Jeffrey Lash, 51, of Naples, Florida, a former managing partner of GPB, were charged with fraud, wire fraud and conspiracy.

The same defendants and their affiliated entities were named in a Securities and Exchange Commission complaint. And the North American Securities Administrators Association (NASAA) announced that seven state securities agencies filed regulatory actions against them.

They were charged with engaging in a scheme to defraud investors by misrepresenting the source of funds used to make monthly distribution payments to them and the amount of revenue generated by two of GPB’s investment funds, GPB Holdings and GPB Automotive Portfolio.

Gentile was to appear in federal court in Boston on Thursday, while Schneider was expected to appear in federal court in Austin, Texas, and Lash in federal court in Fort Myers, Florida.

SEC Complaint

In the SEC complaint filed Thursday in the U.S. District Court for the Eastern District of New York in Brooklyn, the regulator charged Gentile, Schneider, Lash and their affiliated entities with running a Ponzi-like scheme that allegedly raised over $1.7 billion from securities issued by GPB.

Gentile and Schneider lied to investors about the source of money used to make an 8% annualized distribution payment to investors, according to the SEC.

According to the complaint, the defendants, along with Ascendant Alternative Strategies, which marketed GPB’s investments, told investors the distribution payments were paid exclusively with funds generated by GPB’s portfolio companies.

However, as alleged, GPB actually used investor money to pay portions of the annualized 8% distribution payments.

In addition, GPB and Gentile, with the assistance of Lash, allegedly manipulated the financial statements of certain limited partnership funds managed by GPB to “perpetuate the deception by giving the false appearance that the funds’ income was closer to generating sufficient income to cover the distribution payments than it actually was,” the SEC alleged.

The SEC’s complaint further alleged that GPB and Ascendant Capital made “material misrepresentations and omissions to prospective investors and investors in offering and marketing materials concerning millions of dollars in fees and other compensation received” by Gentile, Schneider, and Ascendant Capital.

“The fraudulent scheme continued for more than four years in part because GPB kept investors in the dark about the limited partnership funds’ true financial condition,” according to the complaint.

As a result of their actions, the defendants violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, while Lash was charged with aiding and abetting certain of those violations, the SEC alleged.

The complaint also charged GPB and Gentile with violating the antifraud provisions of the Investment Advisers Act of 1940 and charged GPB with violating the registration and whistleblower provisions of the Exchange Act and the Advisers Act’s custody and compliance rules.

GPB allegedly violated the whistleblower provisions of the securities laws by including language in termination and separation agreements that the SEC said impeded individuals from coming forward to it and by retaliating against a known whistleblower.

The complaint seeks disgorgement of ill-gotten gains plus prejudgment interest and penalties.

The State Actions

With the state actions, civil complaints were filed in state courts Thursday by state securities regulators in Alabama, New Jersey and New York, alleging that the three defendants violated state securities laws in a scheme that defrauded investors who bought limited partnerships in various private equity funds controlled by GPB.

New York Attorney General Letitia James filed a complaint in the Supreme Court of the State of New York.

“New York investors alone invested more than $150 million” in the scheme and “thousands of investors across the nation invested more than $1.8 billion in GPB funds, including more than 1,400 New Yorkers who invested more than $150 million, on promises of profits on private equity investments in portfolio companies that included automotive dealerships and waste management companies,” James alleged Thursday.

In addition to the civil filings, Georgia, Illinois, Missouri and South Carolina initiated simultaneous administrative proceedings with investigative assistance from Texas.

GPB and Ascendant did not immediately respond to requests for comment on Thursday.

Background

In July, law firm Peiffer Wolf Carr Kane & Conway slammed GPB after the Small Business Administration disclosed GPB and its affiliated companies received $3 million to $7 million in Paycheck Protection Program loans despite being under investigation by multiple agencies.

Only a few days earlier, GPB, Ascendant Capital, their affiliates and several others were named as defendants in an amended class action complaint filed in U.S. District Court for the Western District of Texas in Austin. About 2,000 investors were scammed out of almost $1.8 billion by the defendants, the suit claimed.

In 2018, Massachusetts’ top securities regulator investigated 63 broker-dealers in the state that offered those investments. GPB Capital said at the time it had temporarily stopped bringing in new funds and suspended redemptions pending audits of some of its funds.

Former SEC enforcement staffer Michael Cohn was also indicted in 2019 for allegedly stealing confidential information about a pending investigation to secure a job at GPB. He was charged by the U.S. Attorney’s Office for the Eastern District of New York with obstruction of justice, unauthorized computer access and unauthorized disclosure of confidential information.”

Think Advisor | Jeff Berman | February 4, 2021

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