Fidelity's National Financial raises more questions about GPB private placements

No clear value to GPB securities puts them at odds with firm's policy over alternative investments

Jun 17, 2019 @ 2:57 pm

By Bruce Kelly

National Financial Services, the clearing and custody unit of Fidelity Investments, is telling broker-dealer clients they have 90 days to move private placements issued by beleaguered GPB Capital off its platform or work with the custodian as it tries to determine what the private placements are worth.

Fidelity spokesperson Nicole Abbott noted that the firm does not price alternative investments internally but relies on outside, third-party vendors for such work.

The step by National Financial to remove GPB Capital's securities from its platform is the latest setback for the firm, which has raised $1.5 billion from wealthy investors but is facing questions from the securities industry about the value of its private placements.

At the end of April 2018, the company missed a deadline to report financial information about two of its largest funds, GPB Automotive Portfolio and GPB Holdings II. The former has raised $622.1 million and the latter $645.8 million.

Even though the funds are private placements, because of the size of the limited partnerships they must make financial statements public.

Broker-dealers sold the securities to wealthy investors in chunks starting at $100,000.

GPB has repeatedly said over the past year that it has been working to produce audited financial statements and, once those are completed, will provide updated performance information.

National Financial began informing broker-dealers that sold the securities of its decision regarding GPB private placements at the end of last week, sources said.

It was not clear how much of the $1.5 billion of GPB securities in question are held at National Financial. It also was not clear whether other clearing firms were making similar moves.

"Fidelity has a policy for alternative investments on its platform, and GPB is not currently in adherence with that policy," said Ms. Abbott. "We are working with our clients to provide notice and reasonable time to make other arrangements."

"Fidelity does not take a position on the value of any third party alternative investment held on our platform, including GPB's private placements," Ms. Abbott added.

GPB declined to comment about National Financial's removal of its funds from the custodian's platform, according to spokeswoman Kelly Whitten.

According to its website, GPB has more than 160 companies in its portfolio. GPB invests primarily in auto dealerships and trash hauling businesses, with the intention of generating high returns for clients of financial advisers. Advisers typically receive commissions of 7% for selling the private placements, much higher than for mutual funds.

As many as 60 broker-dealers have sold GPB funds. While many were smaller IBDs, among the most prominent listed in Securities and Exchange Commission filings were four Advisor Group broker-dealers: Royal Alliance Associates Inc., Sagepoint Financial Inc., FSC Securities Corp. and Woodbury Financial Services Inc.

GPB has been awash in problems for more than a year. In large part, those problems are related to the lack of a clear understanding of the value of the GPB securities.

The company said last August it was overhauling and restating the 2015 and 2016 financial statements of certain funds as part of an accounting review. Then, in November, the company revealed that its accountant and auditor, Crowe LLP, had resigned.

In September, the SEC hit the company with a subpoena requesting information.

Most recently, at the end of February, the FBI dropped by GPB's offices in Manhattan with a search warrant and collected information.

GPB in the past has publicly said it has not been named in any action by any regulatory authority or, to management's knowledge, is it the target of an active investigation.

One brokerage executive was crossing his fingers on Friday afternoon when he was informed of National Financial's decision to remove GPB from the platform.

"Just because the custodian and clearing firm don't have a value doesn't mean there is no value in the security," said the executive, who asked not to be named. "But the custodians are clearly in a predicament when they don't have the data to show a value of the security."

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