Promises of IPO riches tied to a legendary Wall Street bank. Fancy client appreciation dinners and a posh box at Madison Square Garden.
Those are just some of the tactics that brokers and financial advisers used to promote and sell $1.8 billion in private placements managed by GPB Capital Holdings, which the Justice Department this month claimed has been running a Ponzi-like scheme for years.
It’s the worst of Wall Street’s sales culture, the lowest rung on the financial advice ladder. And details of hard-sell tactics by brokers to push flimsy investment products inevitably merge once the product collapses or an investigation is disclosed.
First, a brief history of GPB. Launched in 2013, GPB Capital was the brainchild of David Gentile, its owner, and Jeff Schneider, a longtime wholesaler and promoter of securities and alternative investments.
Purportedly investing in yield-producing auto businesses, GPB quickly became a darling to dozens of small and mid-sized independent broker-dealers that sold $1.8 billion of GPB private placements from 2013 to 2018. Such alternative investments can carry some of the largest commissions for brokers, with the rep charging 7% and the house 1%.
Gentile, Schneider and another executive, Jeffrey Lash, have all pleaded not guilty to the fraud charges.
Selling GPB private placements was lucrative to reps and their broker-dealers. Back-of-the-envelope math shows that broker-dealers paid their reps and themselves roughly $144 million for a product that could very well be construed as a Ponzi scheme.
But the fun for GPB, investors and brokers stopped in 2018; that’s when the money manager failed to produce audited financial statements of its biggest funds, sounding alarm bells for brokers and clients.
A year later, the FBI raided the company’s headquarters in Manhattan. This month, the Justice Department charged Gentile, Schneider and Lash with securities fraud, wire fraud and conspiracy.
Behind the GPB curtain, there apparently was no shortage of advisers using plenty of hot air to push the product, which grabbed clients’ attention with promises of annual yields of 8%, plus special distributions. Turns out that a large part, if not all, of those returns paid out to investors was their own money, according to the FBI.
GPB lured “investors with promises of monthly distributions that would be covered by funds from the investments and not drawn from underlying invested capital,” according to a statement by the FBI on Feb. 4. “As we allege, however, this was all a lie.”
It appears that broker-dealers certainly bought GPB’s alleged lie, hook, line and sinker.
Brokers were claiming a connection between GPB and Merrill Lynch as a way to entice investors, according to materials provided by Scott Silver, a plaintiff’s attorney who is suing brokerage firms that sold the GPB private placements.
One firm, Triad Advisors, used a Bank of America/Merrill Lynch report from March 2015 on the auto business with “GPB Capital” on its cover and the GPB logo on each page as part of its marketing, according to the attorney.
One registered rep at another firm, Charlie Hall, used the supposed connection between Merrill Lynch and GPB to pitch an investor Silver is representing in an arbitration complaint.
“GPB is working closely with Merrill Lynch,” according to a 2016 email from Hall to the client, whose name was redacted in the copy of the communication Silver sent to InvestmentNews. “If GPB elects an [initial public offering] as its exit strategy, the Merrill Lynch [sic] would be the lead underwriter.”
Did Merrill Lynch ever have an investment banking relationship with GPB? Did Triad Advisors conduct due diligence that proved there was a real connection between the two?
“That was Hall’s pitch to clients, that he had visited with the principals of GPB and Ascendant [Alternative Investments, the broker-dealer controlled by Schneider,] in Texas,” Silver said. “Hall claimed GPB was cash-flow positive, it was buying auto dealerships and Merrill Lynch was the expert in the field. Take the 8% yield and get a pop on the IPO.”
Hall did not return calls this week to comment.
When asked about GPB, a Merrill Lynch spokesperson said the firm was not aware of any connection.
“As a matter of policy, we don’t publicly discuss legal matters,” a spokesperson for Advisor Group, which owns Triad Advisors, wrote in an email.
Meanwhile, another adviser’s firm, Gitterman Wealth Management, promoted events, according to marketing materials, including dinners and private suites at Madison Square Garden that were connected to Ascendant, Schneider’s broker-dealer and the lead wholesaler of GPB private placements.
“Please join us for an exclusive event where we will be discussing private equity investment opportunities,” reads one flyer, dated December 16, 2014. “Immediately following the presentation, we invite you and four guests to join us for the game,” between the New York Knicks and the Dallas Mavericks.
Client appreciation dinners, where an adviser spends $50 to $100 per person, are all well and good. Advisers and clients should have the opportunity to sit down informally once and a while, tie on the feed bag, and throw back a couple of beers or sip some Chardonnay.
But private suites at Madison Square Garden, which reportedly start at $8,000 and can cost three times that, are clearly beyond the pale, as is touting dubious connections to a leading investment bank.
Both gave sheen to GPB’s investment strategy, which obviously warranted much more examination, particularly in light of this month federal charges.
Advisers must tread carefully when receiving lucrative underwriting for client events.
Registered at the time with the same Triad Advisors mentioned above, Jeff Gitterman left Triad in 2017 for another broker-dealer. According to his BrokerCheck report, he is facing a $15 million arbitration claim for selling various alternative investments and has settled another involving GPB for $55,000.
“We were at Triad at the time, and Triad was really hot on GPB,” Gitterman said in an interview. He said he was “distraught” over the uncertainty facing his clients who bought GPB private placements.
“It’s the one thing I’ve sold that has had an issue and it literally kills me,” Gitterman said.
His firm had infrequent dinners with clients, not for prospecting but to say “thank you,” he added.
Different companies paid for the events, including Ascendant, GPB’s lead wholesaler.
Gitterman said he sold about $11 million of GPB private placements to clients. “After 2015, we stopped hosting those,” Gitterman said.
He never should have started.
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