IBN Financial Services Inc., a securities broker-dealer headquartered in Liverpool, New York, has been censured and fined $45,000.00 by Financial Industry Regulatory Authority (FINRA) supported by findings that IBN negligently omitted information to customers in connection with GPB Capital Offerings. Letter of Acceptance, Waiver, and Consent No. 2019061214401 (April 14, 2022).
According to the AWC, IBN authorized its stockbrokers to sell GPB Automotive Portfolio LP in April 2015 and GPB Holdings II LP in December 2016. The AWC states that GPB Capital, an alternative investment, is the general manager for those limited partnerships, and the partnerships were all geared towards purchasing income-producing properties. GPB Capital sold limited partnership interests to investors as a way of raising capital.
GPB Capital Holdings, LLC, and its related limited partnership or BDC, GPB Automotive Portfolio, L.P. was found to be a massive Ponzi Scheme. Securities and Exchange Commission v. GPB Capital Holdings, LLC, Case 1:21-cv-00583 (February 2, 2021).
In November 2018, GPB Capital’s accountant, Crowe LLP, resigned purportedly based on its determination that its internal risk-tolerance parameters were exceeded by the activity reflected in GPB Capital’s books and records, and in February 2019, the FBI raided the offices of GPB Capital. On February 4, 2021, three individuals affiliated with GPB Capital Holdings, were indicted on five counts of securities fraud, wire fraud and conspiracy.
According to the indictment, the Defendants engaged in a Ponzi-like scheme by using investor funds to pay distributions back to investors. United States v. Gentile, et al., Docket No. 21-CR-54 (DG)(E.D.N.Y. Feb. 2, 2021). It was also disclosed that GPB paid broker-dealers selling these securities more than $187 million in selling fees.
In any event, at the time of sale, GPB Automotive Portfolio, L.P. was not registered with the SEC. From inception, through April 2017, these securities were marketed and sold pursuant to Regulation D of the Securities Act of 1933, 17 C.F.R. § 230.500 et seq.
Accordingly, there was limited disclosure with respect to the company and its business activities. However, as of May 2017, GPB Automotive had more than 2,000 limited partners and assets in excess of $10 million. As a result, Regulation 12g-1 under the Securities Exchange Act of 1934 required each Fund to register its securities with the SEC and to file an audited financial statement by April 30, 2018. As set forth above, in November 2018, GPB Capital’s accountant, Crowe LLP, resigned and in February 2019, the FBI raided GPB’s offices.
Information that was available, including GPB’s offering materials, that:
- GPB was not a conservative investment, but instead presented a high degree of risk;
- the stated 8% yield was not income, but a distribution of principal;
- those distributions were paid out of working capital which could include investor contributions or funds flowing from new investors;
- the company was highly leveraged, and its continuing financial viability was dependent on its ability to continue raise capital;
- approximately 20 percent or more of the $1.8 billion raised by GPB was used to pay for marketing and commissions, including “due dilligence” fees paid to the underwriters, and retail brokers selling GPB to their customers;
- Officers and directors of GPB were utilizing investor funds to monetize personal business interests by selling these interests to the company at inflated prices.
In connection with the sale of GPB Automotive, securities broker-dealersrealized as much as 13% in commissions and due diligence fees.
FINRA states that on July 10, 2017, one of GPB’s operating partners had been sued by the company based upon allegations that the partner didn’t acquire dealership interests. That operating partner’s response included claims against the company of defrauding investors and falsifying financial statements.
The AWC states that on April 27, 2018, GPB Capital explained to broker-dealers, including IBN Financial Services, that classes of securities issued by GPB Automotive Portfolio and GPB Holdings II would be registered with SEC, and this required GPB to file audited financial statements. GPB Capital told the broker-dealers that the delivery of the financial statements to SEC would be delayed.
After GPB’s announcement relating to financial statements, IBN Financial Services sold limited partnership interests in GPB Automotive Portfolio and GPB Holdings II. The regulator notes that $466,500.00 in interests were sold through IBN from June 8, 2018, to June 29, 2018, allowing the securities broker-dealer to generate commissions.
At the time of making GPB investments, customers were not informed by IBN about the failure of GPB to timely file audited financial statements. Investors were not made aware of why the issuer delayed the filing of those statements. FINRA states that the company violated FINRA Rule 2010 for those omissions to investors.
