Business Development Companies (“BDCs), Non-traded Real Estate Investment Trusts (“REITs), and most other alternative or direct investments are illiquid investments, not listed on public exchanges and with little to no secondary market trading.
In February 2021, GPB Automotive Portfolio, LP, was found to be a massive $1.8 billion 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.
It was also disclosed that 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.
There was limited disclosure with respect to the company and its business activities. Yet, many stockbroker and investment professionals, ostensibly because of the compensation associated with the sale of these securities, exclusive of due diligence fees and marketing expenses, sold these securities anyway.
As the US Securities & Exchange Commission, in its approval of the consolidated FINRA Suitability Rule observed:
Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.
In general, what constitutes reasonable diligence will vary depending on, among other things, the complexity of and risks associated with the security or investment strategy and the firm’s or associated person’s familiarity with the security or investment strategy.
A firm’s or associated person’s reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy.
See Securities Exchange Act Release No. 63325 (November 17, 2010).
Any meaningful due diligence with respect to the information that was available, it was disclosed that:
a) GPB was not a conservative investment, but instead presented a high degree of risk;
b) that the stated 8% yield was not income, but a distribution of principal;
c) those distributions were paid out of working capital which could include investor contributions or funds flowing from new investors;
d) the company was highly leveraged, and its continuing financial viability was dependent on its ability to continue raise capital;
e) 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;
f) 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 any event, 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.
In connection with the sale of GPB Automotive, stockbrokers and their firms realized as much as 13% in commissions and due diligence fees.
As of even date, a Trustee has been appointed. Third party auctions suggest that these securities may be substantially worthless. Investors in GPB Automotive, and its related companies, including GPB Holdings I or GPB Holdings II, should consult with qualified counsel to determine their legal rights.
Guiliano Law Group
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