On Advice

A crisis of confidence surrounds GPB Capital

The latest setback is a lawsuit from an auto dealer who sold a majority stake in his company to GPB and accuses the firm of 'a massive securities fraud.'

Jul 30, 2019 @ 5:39 pm

By Bruce Kelly

The silence emanating from GPB Capital is both maddening and infuriating to the broker-dealers and advisers that sold $1.8 billion in high-risk private placements created by GPB.

The red alert is flashing; GPB recently reported the value of those funds have been decimated, and currently are being valued at $1.1 billion, a decline of almost 40%.

Brokers want answers now, and, according to one executive at a broker-dealer that sold the alternative investment funds, GPB management is not giving any. Instead, GPB is telling the 60 or so firms that sold the private placement and the clients who bought them to wait until September when an audit will be completed for more information about the pricing of their funds.

Until then, brokers and clients can mull over allegations made in a lawsuit this month by a business partner of GPB Capital who claimed that GPB engaged in "serious financial misconduct" and tried to push him out after he complained to the Securities and Exchange Commission, according to a published report.

But first, a quick recap of the host of problems sitting in GPB's lap.

Launched in 2013, GPB's focus has been to buy auto dealerships and waste management businesses with the intent of generating high, single digit returns for investors. It was an overnight sensation among the 60 or so independent broker-dealers that sold the GPB funds, but it has rapidly fallen on hard times.

The company said last summer 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.

Also, last September, the SEC hit the company with a subpoena requesting information. And at the end of February, the FBI dropped by GPB's offices in Manhattan with a search warrant and collected information.

The problems at GPB continue to blossom.

The latest was revealed in a complaint filed in Norfolk Superior Court in Massachusetts on July 19 by David Rosenberg, chief executive of Prime Automotive Group. He accused GPB of engaging in "a massive securities fraud," in which it used money from investors to prop up the performance of auto dealerships it owns, as well as to finance payments to other investors.

Mr. Rosenberg sold a majority stake in Prime for $235 million to GPB in 2017, according to the complaint, which claims breach of contract because GPB failed to make a $5.9 million payment to Mr. Rosenberg at the start of July.

According to the complaint, GPB's alleged misconduct took many forms, including: "the fabrication of revenue through the use of fictitious contracts, self-dealing transactions on the part of GPB principals, and undisclosed related party transactions."

GPB Capital and its founder, David Gentile, engaged in this alleged conduct for two reasons, according to the complaint. First to allegedly "make it appear to investors that profits from the automotive investments were higher than they actually were," and next, to "misappropriate the investor funds for their own personal purpose," Mr. Rosenberg's complaint alleges.

And, in several instances, "vehicles belonging to dealerships were provided to third parties, including professional athletes and an investor in the GPB funds," the complaint alleges. In one instance, GPB Capital bought a Ferrari for $355,000 from one of its auto dealerships in 2014; three years later, the car was transferred to another GPB dealership and sold for a loss of $183,000, according to the complaint.

GPB disputes Mr. Rosenberg's claims. "While none of these assertions have any relevance to the breach of contract claim, we take this matter very seriously," a GPB spokeswoman, Kelly Whitten, wrote in an email. "GPB strongly denies Mr. Rosenberg's accusations and intends to vigorously defend against them."

GPB has hired an outside law firm to independently investigate these accusations, she added.

"This lawsuit peels back the layers of the alleged fraud because the plaintiff put eyes on false agreements and fabricated financial records, according to the lawsuit," said one securities attorney, Brandon S. Reif, who is not connected to the case. "The noisy withdrawal by GPB's auditors in 2018, by resignation and retraction of prior audits, leaves the investment world clueless about the whereabouts of their $1.8 billion in capital."

With these fresh allegations, there is a true crisis of confidence surrounding GPB Capital. Where did investors' money go? Although they are not talking right now, let's hope that GPB and Mr. Gentile have some kind of answer in the coming months.

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