GPB Ponzi Scheme: Special Investigation Update

In February 2021, the New York State Attorney General Letitia James filed suit against GPB Capital Holdings LLC and five other co-defendants for allegedly engaging in a Ponzi-like scheme that defrauded investors out of hundreds of million, and New York investors of more than $150 million. Separate yet simultaneous suits have also been filed against the defendants by Alabama, Georgia, Illinois, Missouri, New Jersey, South Carolina, and the SEC. The other defendants in the New York suit are Ascendant Capital, Ascendant Alternative Strategies, David Gentile, Jeffry Schneider, and Jeffrey Lash.

Timeline of Fraud Against GPB Capital

Year End 2016:  GPB releases financial statements to its broker-dealers.  The statements show that distributions are not being covered by profits.  Many GPB sales representatives continue to distribute marketing flyers claiming the distributions are “100% covered.”  This claim was false.

April 2018: GPB announces that it will not produce audited financial statements.

August 2018: No new investments are accepted in any GPB Funds, including GPB Auto, Waste Management (now called Armada Waste) and GPB Holdings.

September 2018: Investigation into the financial advisors and broker-dealers who sold GPB is commenced by the State of Massachusetts.

February 2019: Investigations by the SEC and FINRA are launched against the broker-dealers that sold GPB funds.

October 2019:  GPB’s managing director and chief compliance officer is charged with obstruction of justice. 

February 2021: The owners of GPB, including David Gentile, are arrested by the FBI.

November 1, 2021 Monitor Report

Summary of the charges against GPB Capital Holdings

The Attorney General’s suit charges the defendants with planning and conducting a fraudulent scheme for the purpose of self-enrichment, at the cost of investors, without ever delivering a profit to those investors. In total, investors put in more than $1.8 billion of funds into GPB Capital, of which New Yorkers paid up more than $150 million, the court filing claims.

One of the major red flags investors should be aware of is the promise of guaranteed returns. This is even official advice from the FBI. According to Attorney General James’s filing, the defendants made repeated representations that the fund would offer “generous monthly distributions” that would come entirely from operating profits. Instead, the defendants used over $100 million from new investors to pay distributions to earlier investors, the filing alleges.

This is the very definition of a Ponzi scheme—paying early investors with money from later investors instead of from profits from actual investments. Eventually, the money runs out, later investors are left high and dry, and the entire scheme collapses.

Ponzi schemes are named after Charles Ponzi of Boston, Massachusetts, who ran the first recorded Ponzi scheme in the early 1900s.

The suit further alleges that the defendants paid themselves excessive compensation from the funds and that this was not disclosed to investors.

Indictment Against David Gentile, Jeffrey Schneider & Jeffrey Lash

Ponzi Scheme Allegations Explained

The filing claims that a Ponzi scheme system was in place when defendants used money from new investors to cover shortfalls in promised payments.

Funds marketed as an alternative to traditional private equity funds, offering monthly cash distributions that totaled up to an annual return of 8%. The returns were supposed to be “fully covered” by the operating profits of companies in the funds’ portfolios, said the filing.

Unfortunately, the funds routinely failed to generate the required operating profit to make these 8% annual returns possible, which was when the defendants opted to use funds from new investors to pay off early investors to keep them happy and to entice new investors, the Attorney General said.

According to the filing, there were times when distributions consisted entirely of new investor money, thereby endangering the long-term financial survival of the fund. The defendants attempted to conceal the funds’ financial standing by falsifying documents and making undisclosed interfund transfers, the filing claimed.

The funds continued to draw in new investors due to the fraudulently obtained returns, the Attorney General said.

Volkswagen Group v. GPB Capital

Allegations of Personal Enrichment

The court filing goes on to say that the individual defendants diverted money from companies in their portfolio to themselves through shell companies. In total, and through various fraudulent means, the filing said that Gentile and Schneider pocketed $2 million in undisclosed stipends, made use of private planes, purchased one Ferrari for personal use, and made payments to Gentile’s wife.

A total of $5 million in personal liabilities were shifted to investors, but it actually ended up costing them $14 million because of the way it was structured, the filing claimed.

State of New York v. GPB Capital Holdings

Who Were the GPB Defendants?

According to the filing, the two leaders in this alleged scheme were David Gentile and Jeffry Schneider. Gentile is a former accountant and once admitted under oath that he was a “novice” in private equity funds and private placements, said Attorney General James.

Schneider has a “troubled history in the securities industry,” having worked for several firms that have subsequently been expelled by FINRA, and having been the subject of multiple sanctions himself, says the filing.

This history is a matter of record. According to Schneider’s official BrokerCheck record, he worked for three firms that were expelled by FINRA—IMS Securities, Inc, expelled in 2018; Puritan Securities, Inc, expelled in 2011; and J.P.R. Capital Corp., expelled in 2007—and was personally barred by the state of Illinois from registering as a salesman in the state for a period of two years. In 2002, he was separated from CIBC World Markets Corp. after it was discovered that he had arranged a forgivable loan for the Office Sales Manager and then shared in the loan’s proceeds. Schneider said he thought he was “acting at the request and direction of management.” In 1997, he was permitted to resign from Merrill Lynch after incurring a “substantial loss” for the firm when he entered orders for several foreign clients who then failed to pay for them.

SEC v. GPB Capital, et. al.

What About the Sales People Who Sold GPB Capital?

The sales people who sold GPB are required by federal and state law to conduct “reasonable” due diligence into all investments that they sell.  Many of the salespeople who sold GPB were also licensed with the Financial Industry Regulatory Authority, or FINRA.  Brokers licensed by FINRA are subject to FINRA’s rules and guidance pertaining to due diligence of private placements.

There were pronounced red flags in the GPB Auto offering that was exposed in the New York State attorney general’s filing.  For example, GPB Automotive released financial statements to its broker-dealers in 2016, which (if read at all) would have demonstrated that distributions were not 100% covered by profits. These same broker-dealers provided their client’s with marketing flyers claiming that distributions were “100% covered” by profits.  These claims were false and could have easily been disproven.

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