Forget about GameStop and Redditt. This week, the Securities and Exchange Commission (SEC) charged three individuals and their affiliated entities with running a Ponzi-like scheme that raised over $1.7 billion from securities issued by a New York-based asset management firm and registered investment adviser, GPB Capital. The SEC also charged GPB Capital with violating the whistleblower protection laws.
How do Ponzi schemes work?
Ponzi schemes work when investors forget the old adage, “If it sounds too good to be true…It is!”
According to the SEC’s complaint, David Gentile, the owner and CEO of GPB Capital, and Jeffry Schneider, the owner of GPB Capital’s placement agent Ascendant Capital, are alleged to have lied to investors about the source of money used to make an 8% annualized distribution payment to investors.
The complaint notes that the defendants, along with Ascendant Alternative Strategies, which marketed GPB Capital’s investments, told investors that the distribution payments were paid exclusively with monies generated by GPB Capital’s portfolio companies. However, as the SEC complaint alleges, GPB Capital used investor money to pay portions of the annualized 8% distribution payments. GPB Capital and Gentile, assisted by Jeffrey Lash, a former managing partner at GPB Capital, also are reported to have manipulated the financial statements of certain limited partnership funds managed by GPB Capital. Their goal? To perpetuate the deception, giving the appearance that the funds’ income was closer to generating sufficient income to cover the distribution payments than it was.
Moreover, the SEC contends that GPB Capital and Ascendant Capital made misrepresentations to investors about millions of dollars in fees and other compensation received by Gentile and Schneider. Because GPB was able to keep its investors in the dark about the limited partnership funds’ real financial condition, the firm and its owners were able to remain active for more than four.
“As alleged in our complaint,” says Richard Best, Director of the SEC’s New York Regional Office, the defendants told investors that they would be paid distributions from profits of the portfolio companies when, in reality, many of the payments were drawn from the investors’ own funds.”
All parties also failed to deliver audited financial statements or register two of the funds with the SEC. GPB Capital is alleged to have violated the securities laws’ whistleblower provisions. It included language in termination and separation agreements that impeded individuals from coming forward to the SEC and retaliating against a known whistleblower.
Jane Norberg, Chief of the SEC’s Office of the Whistleblower, concurs, adding, “The charges filed today reinforce the Commission’s commitment to protecting whistleblowers from retaliation and attempts to stifle the free flow of information to the Commission about possible securities law violations.”
How did this Ponzi scheme work?
From April 2014 through December 2018, GPB Capital served as the general partner and/or manager for the following limited partnership funds:
The principal purpose of each Fund is to acquire interests, whether equity, debt, or otherwise, in income-producing, middle-market private companies (the Portfolio Companies) and to provide managerial and operations assistance to the Portfolio Companies.
Typically, investments in the Funds (in the form of limited partnership interests) are primarily governed by two documents:
Since 2014, GPB Capital regularly revised the PPMs and LPAs for each Fund.
GPB Capital marketed its investments exclusively through Ascendant Capital and AAS (and, before March 2017, Broker-Dealer 1), which, in turn, promoted the investments to dozens of broker-dealers nationwide –the downstream broker-dealers.
Fund investors paid substantial fees and expenses, specifically, 11% in selling fees (i.e., commissions, due diligence fees, placement fees, wholesaling fees), and annual fees including a 2% management fee, 1.25% in organizational expenses, a 1.75% – 2.875% acquisition fee, and an undisclosed amount of partnership expenses.
In total, from August 2013 to March 2019:
Investor returns followed typical Ponzi scheme forms.
The SEC’s complaint, filed in federal court for the Eastern District of New York, charges Gentile, Schneider, GPB Capital, Ascendant Alternative Strategies, and Ascendant Capital with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. It also charges Lash with aiding and abetting specific violations. The complaint also charges GPB Capital and Gentile with violating the antifraud provisions of the Investment Advisers Act of 1940 and charges GPB Capital with violating the registration and whistleblower provisions of the Exchange Act and the Advisers Act’s custody and compliance rules. The complaint seeks disgorgement of ill-gotten gains plus prejudgment interest and penalties.
Where was compliance?
What compliance? Nowhere to be found. But that’s not you or your company, right? Because compliance professionals like you and your team rely on the cloud-based compliance solutions, Patrina delivers. For more than 25 years, Patrina has been helping compliance professionals like you stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, comprehensive, 8-module compliance solution, compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.