SEC Formally Charges GPB Capital and Related Defendants with Running a Ponzi-Like Scheme
Through a press release issued earlier today, the Securities and Exchange Commission (SEC) formally announced that it was charging “three individuals and their related entities with running a Ponzi-like scheme that raised over $1.7 billion from securities issued by a New York-based asset management firm and registered investment adviser, GPB Capital.” In sum and substance, the SEC charged Defendant GPB Capital Holdings, LLC (GPB) and related Defendants with violating the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, as well as certain whistleblower protection laws. The Complaint seeks disgorgement of ill-gotten gains, plus prejudgment interest and penalties.
As alleged in the SEC’s Complaint, filed in federal court in Brooklyn, NY: “To existing and prospective investors in the limited partnership funds, GPB Capital projected an aura of success, touting that it consistently made an 8% annualized distribution payment to investors….” However, according to the SEC, this aura of success was merely an illusion, because “In reality, GPB Capital used investor funds to cover the shortfall between funds from operations of the Portfolio Companies and the amount needed to make an annualized 8% distribution payment.”
GPB’s business commenced around 2013, and concerned raising investor capital across at least five limited partnership funds. These funds included (1) GPB Automotive Portfolio, LP, (2) GPB Holdings, LP (or, GPB Holdings Qualified, LP), (3) GPB Holdings II, LP, (4) GPB Waste Management, LP, and (5) GPB Cold Storage, LP. Ostensibly, the purpose of these funds was to acquire interests, equity, debt or otherwise, in income-producing, middle-market private companies and to provide managerial and operational assistance to these companies. Unfortunately for investors steered into investing in GPB by various financial advisors nationwide, GPB turned out to be a horrendous investment.
Investors in GPB acquired their interest in various GPB funds through private placement offerings. Private placements are very risky investments due to their nature as unregistered securities offerings. Unlike well-known stocks that are publicly traded, and therefore must meet stringent registration and reporting requirements as set forth by the SEC, private placements do not have the same regulatory requirements and oversight. Typically, private placements are sold through an exemption from registration pursuant to Regulation D (Reg D) of the Securities Act of 1933.
Investing in a Reg D private placement is risky because investors in such unregistered securities will usually only receive very limited information (often provided through a private placement memorandum, or similar offering document). In some instances, investors in private placements may receive unaudited financials, or an overly optimistic growth forecast, which may have been prepared by a third-party firm hired by the investment sponsor. Such lack of information and the potential for conflicts of interest make investing in private placements risky and complex. In addition, private placements are illiquid investments and cannot be readily resold. For all of these reasons, investing in private placements is very risky and complex.
Brokerage firms, and by extension their financial advisors, have a duty to perform adequate due diligence on any investment recommended to customers, including private placements offered under Reg D. Further, financial advisors have a duty to disclose the risks associated with such an investment, as well as conduct a suitability analysis to determine if the investment meets an investor’s stated investment objectives and risk profile.
If you have invested in any of the GPB funds and wish to learn more about your legal rights, you may contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, no-obligation consultation. The attorneys at Giarrusso Law Group LLC have significant experience working closely with investors in complex and illiquid investments, including private placement offerings, to recover their investment losses through securities arbitration before the Financial Industry Regulatory Authority (FINRA).