The Securities and Exchange Commission on Thursday charged senior executives at GPB Capital with fraud and running a Ponzi-like scheme that raised over $1.8 billion from 17,000.
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. More than 60 broker-dealers partnered with GPB to sell the private placements and charged customers charged clients commissions of up to 8%.
Also on Thursday, the Justice Department unsealed a criminal indictment in the Eastern District of New York charging three GPB executives, David Gentile, Jeffrey Schneider and Jeffrey Lash with securities fraud, wire fraud and conspiracy.
Several states, including Alabama, New Jersey, and New York said this morning that they filed parallel civil lawsuits to the SEC’s complaint.
“GPB has been cooperating with government investigations and is extremely disappointed by these developments,” the company said in a statement. “GPB denies these allegations and intends to vigorously defend itself in court where, for the first time, the firm will be able to present significant evidence in its favor.”
Gentile, the owner and CEO of GPB Capital, and Schneider, the owner of GPB Capital’s placement agent Ascendant Capital, lied to investors about the source of money used to make an 8% annualized distribution payment to investors, according to the SEC’s complaint. Lash was a former managing partner at GPB.
Those executives, using the marketing broker-dealer Ascendant Alternative Strategies, told investors that the distribution payments were paid exclusively with monies generated by GPB Capital’s portfolio companies, the SEC alleged.
As alleged, GPB Capital actually used investor money to pay portions of the annualized 8% distribution payments, fitting the definition of a Ponzi scheme.
Internal communications between Gentile, Schneider and Lash buttress that claim and allegedly reveal the extent to which they were aware of cash flow problems and shortfalls at the GPB funds, according to the federal indictment.
In one text message cited in the criminal indictment, Schneider wrote to Lash in 2016: “We have to man up and write checks which is simply giving back dollars we already received.”
According to the SEC, GPB Capital and Gentile, with assistance from Lash, also allegedly manipulated the financial statements of certain limited partnership funds managed by GPB Capital to perpetuate the deception. Those financial statements gave the false appearance that the funds’ income was closer to generating sufficient income to cover the distribution payments than it actually was, the complaint alleges.
The SEC’s complaint further alleges that GPB Capital and Ascendant Capital made misrepresentations to investors about millions of dollars in fees and other compensation received by Gentile and Schneider.
The scheme allegedly continued for more than four years in part because GPB Capital kept investors in the dark about the limited partnership funds’ true financial condition, according to the SEC, and failing to deliver audited financial statements and register two of its funds with the Commission.
In a first last week, a broker-dealer that sold private placements managed by GPB Capital lost a $515,000 arbitration claim to customers that included all client legal fees, an unusual distinction in such claims.
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