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SEC Charges GPB With Running “Ponzi-Like Scheme,” Violating Whistleblower Laws

The Securities and Exchange Commission has charged three GPB Capital executives and their affiliated entities with running a “Ponzi-like scheme.”

The Securities and Exchange Commission has charged three GPB Capital executives and their affiliated entities with running a “Ponzi-like scheme” that raised more than $1.7 billion from securities issued by the New York-based asset management firm and registered investment adviser. The SEC also charged GPB with violating the whistleblower protection laws.

The charges follow years of investigations from various state and federal agencies, class action investor lawsuits, the resignation of the firm’s audit committee, and most recently, a misdemeanor guilty plea from GPB’s chief compliance officer Michael Cohn, a former SEC examiner accused of stealing government documents prior to joining the firm.

According to the SEC’s lawsuit, David Gentile, the owner and chief executive of GPB Capital, and Jeffry Schneider, the owner of GPB Capital’s placement agent Ascendant Capital, allegedly lied to investors about the source of money used to make an 8 percent annualized distribution payment to investors.

GPB and Gentile with assistance from Jeffrey Lash, a former GPB managing partner, are also accused of manipulating the financial statements of certain limited partnership funds to “perpetuate the deception by giving the false appearance that the funds’ income was closer to generating sufficient income to cover the distribution payments than it actually was.”

According to the complaint, the defendants along with Ascendant Alternative Strategies, which marketed GPB Capital’s investments, told investors that the distribution payments were paid exclusively with funds generated by GPB Capital’s portfolio companies. However, the SEC claims that GPB Capital bore the marks of a Ponzi scheme by using investor money to pay portions of the distribution payments.

GPB and Ascendant are also accused of making misrepresentations to investors about millions of dollars in fees and other compensation received by Gentile and Schneider.

GPB, founded by Gentile in 2013, served as the general partner of several investment funds, including GPB Holdings LP, GPB Holdings II LP, GPB Automotive Portfolio LP, GPB Waste Management LP, and GPB Cold Storage, LP. GPB managed the funds, which raised and invested capital in a portfolio of private equity investments. From 2013 through early 2018, Lash was responsible for overseeing the GPB funds’ investments in car dealerships.

The SEC claims that the “Ponzi-like” scheme continued for more than four years in part because GPB kept investors in the dark about the limited partnership funds’ true financial condition, failing to deliver audited financial statements and register two of its funds with the SEC.

In the years leading up to the SEC charges, the firm missed multiple deadlines for its audited financial reports following the resignation of its auditor, and later, its audit committee.

GPB Capital also allegedly violated the whistleblower provisions of the securities laws by including language in termination and separation agreements that impeded individuals from coming forward to the SEC, and by retaliating against a known whistleblower.

Specifically, a transition agreement and general release from January 2017 between a senior GPB employee and GPB contained confidentiality provisions that stated, “You shall not, without the prior written consent of [GPB Capital] or as required by law, use or disclose or enable anyone else to use or disclose any confidential information of [GPB Capital].” The SEC claims that prior to entering into this agreement, the employee had raised concerns internally about GPB’s use of investor funds to make distribution payments to investors.

In another separation agreement, a former senior employee was told to “immediately notify GPB” if they were contacted by any regulatory agency or authority, including, the SEC or FINRA.

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 various federal securities laws. Lash was charged with aiding and abetting certain of those violations.

The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest and penalties.

Yesterday, the Justice Department unsealed an indictment charging Gentile, Schneider, and Lash with securities fraud, wire fraud and conspiracy. If convicted of the federal charges, the defendants each face up to 20 years’ imprisonment.

Separate actions against GPB and the defendants are reportedly being taken up by Alabama, Illinois, South Carolina, Georgia, Missouri, and New Jersey.

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