Brokerage firms who sold GPB funds, which it now appears were operated as a Ponzi scheme, face a class action lawsuit over improper conduct, seeking damages for investors who have been left with substantial losses.
A complaint (PDF) filed last month by Kinnie Ma, of California, names as defendants GPB Capital Holdings and other GPB funds, as well as a long list of brokerages and firms who sold the funds to investors. It also names GPB CEO David Gentile, co-founder Jeffrey Schneider and others involved in the operation of the funds.
GPB Capital Holdings focused on auto dealerships and waste management companies, but plaintiffs and critics say that it was using money from its investors to make the auto dealerships appear to be performing better than they actually were, and then using money from new investors to pay off prior investors, claiming the funds were a profit.
Troubles first began to appear when GPB Capital Holdings missed a filing with the Securities Exchange Commission (SEC) in April 2018. It stopped paying distributions in December 2018, and in March of this year the FBI raided its offices.
Amid allegations of a so-called “Ponzi” scheme, and claims that it had been falsifying its records, the value of the two biggest GPB Capital investment funds have sharply declined, with some investors claiming they have lost between 25% and 75%. GPB focused on private placement investments, which are generally considered suitable only for accredited investors.
A number of investors are now pursuing GPB Capital lawsuits, indicating that they were not informed of the actual risks associated with the private placement. However, some are going further and saying the entire company was a scam.
In the complaint filed by Ma, it is alleged that one part of that scam was Ascendant Capital, LLC, which was launched by Schneider for the specific purpose of selling GPB funds. As a co-founder, he helped both operate the funds and then acted as a broker in selling the funds. However, neither the funds nor Ascendant Capital informed investors of the relationship.
“These material conflicts of interest were never fully disclosed throughout the GPB Ponzi scheme,” the lawsuit states. “Thus, investors did not know when they invested that Schneider and Ascendant, the lead broker for GPB securities, were conflicted by Schneider’s financial interest in GPB or that Gentile and GPB were conflicted by their interest in the broker selling GPB limited partnership interests.”
The lawsuit accused the business model of being destined to fail, like all Ponzi schemes, designed to leave investors holding the bag.
Investigations are underway by the SEC, the FBI, the Financial Industry Regulatory Authority (FINRA), New Jersey, and Massachusetts. Of the 80 brokerage firms authorized to sell GPB investments, 60 are also under investigation by Massachusetts officials.
Brokers are responsible for conducting due diligence and making sure investments being sold to their clients are legitimate.
In Ponzi schemes, a firm or individual offers high rates of investment returns, claiming there is little risk for investors. It pays early investors from investments by new investors, claiming the funds came from business growth.
This makes it look extremely profitable at first, but eventually new investors stop signing on or there are too many investors to spread the money out to make the investments appear profitable.
Things also often break down after concerns become public, and then it is revealed that there are no liquid assets, and investors generally suffer major losses unless they got out early. It is considered the financial market’s version of a pyramid scheme.
Reports suggest that GPB has raised about $1.8 billion from investors since 2013.