New York-based asset management firm GPB Capital Holdings allegedly defrauded more than 17,000 retail investors in a Ponzi-like scheme, then attempted to impede an employee from blowing the whistle on the illegal practices, according to a Securities and Exchange Commission (SEC) complaint filed Thursday.
The SEC said GPB Capital; its CEO David Gentile; and Jeffry Schneider, the owner of GPB Capital’s placement agent Ascendant Capital and affiliated firm Ascendant Alternative Strategies, raised over $1.7 billion from investors with promises their investments would generate an 8 percent annualized distribution. But GPB Capital lied to investors that the distributions came from profits generated from their investments, instead using investor funds to pay the distribution, according to the SEC.
The firm also issued manipulated financial statements showing the funds were performing better than they actually were, a scheme that was aided by former GPB Capital Managing Partner Jeffrey Lash, the SEC added. Lastly, GPB Capital allegedly misrepresented millions of dollars in fees and other compensation paid to Gentile and Schneider.
The alleged scheme lasted from April 2014 to October 2018, aided in part by the fact the firm failed to file annual audited financial statements on several funds for three years, as required by the SEC. GPB Capital also failed to register two funds with the agency.
The SEC’s complaint, filed in U.S. District Court for the Eastern District of New York, charges Gentile, Schneider, GPB Capital, Ascendant Alternative Strategies, and Ascendant Capital with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Lash was charged with aiding and abetting certain of those violations.
The complaint also charges GPB Capital and Gentile with violating the antifraud provisions of the Investment Advisers Act of 1940 and charges GPB Capital with violating the registration and whistleblower provisions of the Exchange Act and the Advisers Act’s custody and compliance rules.
The SEC is seeking disgorgement of ill-gotten gains plus prejudgment interest and penalties.
Compliance takeaways: According to the complaint, GPB Capital negotiated transition or separation agreements with three employees that violated whistleblower provisions of the Exchange Act, and in one case, violated the act’s rules against retaliation, the SEC said.
An employee reported GPB Capital’s practice of using investor funds to cover annual distribution payments to both the firm’s board and its outside auditor. The board later limited the employee’s authority, held meetings about the fund he oversaw without his knowledge, and eventually fired him. All of these actions were in retaliation for the employee’s blowing the whistle on the firm’s illegal practices, the SEC said.
Separation agreements with two other employees also violated the Exchange Act, the SEC said.
One transition agreement with a senior manager stated the former GPB Capital employee “shall not, without the prior written consent of [GPB Capital] or as required by law, use or disclose or enable anyone else to use or disclose any confidential information of [GPB Capital].”
A separation agreement with a second senior manager stated if the employee was “contracted by any regulatory agency or authority, including, but not limited to, the Securities and Exchange Commission or Financial Industry Regulatory Authority,” the employee had to “immediately notify GPB.”
Gentile and Schneider also allegedly hid conflicts of interest regarding acquisition fees. Together, the two set the price of the entities the firm purchased, and they received acquisition fees based on that price. In disclosures for several acquisitions, GPB Capital claimed it would pay part of the acquisition fees to “qualified third parties,” but all the fees were instead paid to Gentile and Schneider. As a result, the two men had a conflict of interest in these transactions, because they “were incentivized to overpay for an acquisition, so that the acquisition fee they would ultimately receive would be a larger amount,” the SEC said.
Key quote: “Nearly all of the $1.7 billion raised is still at risk: in 2018 GPB Capital suspended all redemptions and distributions and, according to a recent regulatory filing, GPB Capital’s assets are far below its obligations to the investors,” the SEC stated in its complaint.
Related case?: GPB Capital drew the SEC’s ire in October 2019 when its former chief compliance officer, Michael Cohn, was indicted on allegations he accessed information about an SEC investigation into the firm while he was employed by the SEC, then used that information to land a job as the firm’s CCO. The SEC’s complaint does not mention whether the information Cohn accessed related to the charges filed Thursday.
In September 2020, Cohn pleaded guilty to one count of theft of government property in federal court. His sentencing is currently set for March.