GPB's 8% yield as real as the Easter Bunny

GPB's 8% yield as real as the Easter Bunny
GPB clients needed "that 8% to live and buy medicine," says one industry executive.
AUG 05, 2024

Broker-dealers for almost two decades have sold high-risk private investments like GPB Capital Holdings to retail investors for one reason: yield.

In the end, GPB is the story of how that 8% promise turned into the Easter Bunny.

The broker-dealers that sell high-commission, private investments like nontraded real estate investment trusts often pitch to client that these funds, which buy hard assets like real estate or auto dealerships in the case of GPB, will perform better the better than a boring old savings account or a certificate of deposit.

It's an alluring pitch, but fraught with risk for investors. Returns on cash have been near zero since the 2008 credit crisis sent the Fed Funds rate crashing.

Investors were lucky to see a return of 10 to 15 basis points on cash for almost a decade; then, interest rates began creeping up again in 2017. After another fall due to Covid, interest rates are above 5% right now, and the market this week opened expecting the Federal Reserve to cut interest rates soon.

And into this interest rate void walked GPB Capital Holdings, led by CEO and founder David Gentile and broker-dealer chief Jeff Schneider. GPB launched in 2013, a barren year for CD investors.

(It didn't work out well for them. Both Gentile and Schneider were found guilty of several fraud charges last week in federal court in downtown Brooklyn and face up to 20 years in jail when sentenced in October.)

Investors who bought GPB private placements were promised 8% annual returns, or $8,000 for every $100,000 invested. Ten basis points on $100,000 is $100.

The 8% annual return was an enormous advantage for GPB in the marketplace for brokers to drum up sales, which hit $1.8 billion after five years. Many of the clients who bought GPB private placements were older or elderly investors, looking for a reasonably safe way to supplement their incomes.

The problem was, the 8% distribution, think dividend, to investors was a chimera. When GPB's funds lagged in performance, Gentile, Schneider and another partner played fast and loose with the books, back-dating documents, moving money internally and using investor capital to cover the 8% distribution to investors, according to federal prosecutors.

The GPB executives' motivation was clear: if the funds missed the 8% mark, sales would plummet, endangering tens of millions of dollars of fees.

Another problem is that private placement investments are supposed to be sold to sophisticated, accredited investors with a net worth of $1 million. But the brokerage industry has a history at times of doing creative math to raise a client's net worth to that threshold.

"You’re talking about a 65 year old schoolteacher who invested $100,000 into GPB," said one senior industry executive who asked to speak confidentially. "She needs that 8% to live and buy her medicine. People like that didn’t care what they were investing in as long as they got that dividend."

Private investments like GPB, which is in receivership, also often promise investors a bump on the back end, when the car dealerships were to be sold. So, the brokers' points to two pots of gold: an 8% yield today and an excess return tomorrow.

GPB first started ringing alarm bells six years ago, when it came to light that the company and its largest funds had failed to make timely required filings, including audited financial statements, with the Securities and Exchange Commission.

In February 2019, the FBI raided GPB offices in Manhattan. Two year later, the Justice Department, along with the SEC charged Gentile, Schneider and another senior executive, Jeffrey Lash with a number of fraud charges, including creating a Ponzi-like scheme and securities fraud, wire fraud and conspiracy.

Meanwhile, investors have not seen a distribution payment since 2018.

Next time an investment manager sings a song about a private investment with a slam dunk, 8% yield and two pots of gold at the end of the rainbow, broker-dealers and reps close their ears, do some math and worry about their clients instead of the amount of commission dollars at stake.

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