In a first, a broker-dealer that sold high-risk private placements managed by GPB Capital Holdings lost a $515,000 arbitration claim to customers that included all client legal fees, an unusual distinction in such claims.
Arete Wealth Management Thursday was ordered to pay the award by three arbitrators operating under the brokerage industry’s Finra Dispute Resolution Services unit.
The first few investor arbitration claims involving broker-dealers’ sale of GPB private placements have been decided over the past few months. But the claim against Arete appears to be the first substantial win for investors against a broker-dealer that is up and running and open for business.
“Arete Wealth does not believe this ruling was supported by the facts or the law,” a company spokesperson wrote in an email. “The vast majority of the award cited in this ruling is not allocated to the investors but instead to the claimants’ attorney fees. These attorney fees were permitted by a wrongly applied state law.”
The firm has 140 advisers in 35 offices and is based in Chicago, according to its website. The firm focuses on alternative investments.
GPB raised $1.8 billion from investors starting in 2013 through sales of private partnerships, but it has not paid investors steady returns, called distributions, since 2018. Making matters worse, in 2019 the company, which has invested primarily in auto dealerships and trash hauling businesses, delivered a blow to investors when it reported significant declines in the values of its funds.
GPB and the 60 or so broker-dealers that sold the product have been sued by investors, in one lawsuit claiming the $1.8 billion investment manager was a Ponzi scheme. Executives and spokespeople for GPB have consistently claimed such claims are without merit and that the company is getting its financial matters in order. Broker-dealers have avoided the spotlight and settled some claims, attorneys have said.
Until this claim, according to attorneys. “We think it’s the first GPB award, and we pled it as a pure due diligence case — not about customer suitability,” said Jeffrey B. Kaplan, a partner at Dimond Kaplan & Rothstein Attorneys at Law and who represented the claimants, Howard Barron and related groups. “No customers, regardless of their net worth, should have ever been sold this product. We believe Arete may have misconstrued its due diligence obligation.”
According to the award, the claimants alleged that Arete Wealth “recommended and sold shares in a risky, high-commission, illiquid private placement, GPB Automotive Portfolio” and also charged Arete with negligence, negligent supervision and other charges standard in such disputes.
The investors also claimed the issuer and manager of the private placement, GPB Capital, “was alleged to have been involved in a possible Ponzi scheme and subject to multiple government investigations.”
As is customary to Finra arbitration awards, the three-person panel gave no explanation of its decision. The customers initially asked for $225,000 in damages, plus interest and attorney’s fees. The fact that the panel awarded that amount, along with $259,000 in attorneys’ fees, was an indication of the arbitrators’ severe displeasure with Arete, Kaplan said.
“This is the rare Finra arbitration award when panel awards every single penny requested,” Kaplan said. “To my mind, the three arbitrators were essentially saying, how could the firm ignore all the problems it identified.”
As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.