Enforcement News: SEC Charges Investment Adviser and Others With Running a Ponzi-Like Scheme to Defraud Over 17,000 Retail InvestorsPrint Article
- Posted on: Feb 15 2021
In mid-December 2020, the Securities and Exchange Commission (“SEC” or “Commission”) issued an investor alert (here), warning of “Investment Scam Complaints on the Rise.” In the alert, the SEC urged investors to be on the lookout for investment scams, such as Ponzi schemes, fake CD scams, bogus stock promotions, and community-based financial scams. The SEC said that during the COVID-19 pandemic it had experienced a significant uptick in tips, complaints, and referrals involving investment scams.
Today, we examine SEC v. GPB Capital Holdings, LLC, a case involving a long-running scheme to defraud, which had Ponzi-like attributes, and violations of the whistleblower protection laws.
SEC v. GPB Capital Holdings, LLC
As explained in the SEC’s February 4, 2021, press release (here), the Commission charged three individuals and their affiliated entities with running a Ponzi-like scheme, which raised over $1.7 billion from securities issued by a New York-based asset management firm and registered investment adviser, GPB Capital Holdings, LLC (“GB Capital”). The SEC also charged GPB Capital with violating the whistleblower protection laws.
According to the SEC’s complaint (here), David Gentile (“Gentile”), the owner and Chief Executive Officer of GPB Capital, and Jeffry Schneider (“Schneider”), the owner of GPB Capital’s placement agent Ascendant Capital, LLC (“Ascendant Capital”), lied to investors about the source of money used to make an 8% annualized distribution payment to investors. According to the SEC, these defendants, along with Ascendant Alternative Strategies, LLC (“Ascendant Alternative Strategies”), which marketed GPB Capital’s investments, told investors that the distribution payments were paid exclusively with monies generated by GPB Capital’s portfolio companies. The SEC alleged that GPB Capital used investor money to pay portions of the annualized 8% distribution payments. GPB Capital and Gentile, with the assistance of Jeffrey Lash (“Lash”), a former managing partner at GPB Capital, also allegedly manipulated the financial statements of certain limited partnership funds managed by GPB Capital 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 was possible.
The SEC further alleged that GPB Capital and Ascendant Capital made misrepresentations to investors about millions of dollars in fees and other compensation received by Gentile and Schneider. As alleged, the fraudulent scheme continued for more than four years in part because GPB Capital kept investors in the dark about the true financial condition of the limited partnerships, failing to deliver audited financial statements, and failing to register two of its funds with the SEC. GPB Capital 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.
[Ed. Note: The SEC Whistleblower Program rules allow the SEC to prosecute violations of the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) through enforcement action. This means that persons who retaliate against individuals who blow the whistle on fraud or other illegal conduct risk having to defend themselves against SEC investigations and enforcement actions that may result in penalties, disgorgement, and other monetary relief.
Last year, we wrote about an enforcement action in which the SEC amended its complaint to add violations of the anti-retaliation provisions of the Act because the defendants sought to silence potential whistleblowers from coming forward with information about their alleged wrongdoing (here).]
“As alleged in our complaint, the defendants told investors that they would be paid distributions from profits of the portfolio companies when, in reality, many of the payments were being made from the investors’ own funds,” said Richard Best, Director of the SEC’s New York Regional Office. “This action shows our continued pursuit of those who deceive investors and conceal their misconduct to reap profits for themselves.”
Jane Norberg, Chief of the SEC’s Office of the Whistleblower, added, “Whistleblower protections are a cornerstone of the SEC’s whistleblower program. The charges filed today reinforce the Commission’s commitment to protecting whistleblowers from retaliation and attempts to stifle the free flow of information to the Commission about possible securities law violations.”
The SEC filed its complaint in the United States District Court for the Eastern District of New York. The Commission charged Gentile, Schneider, GPB Capital, Ascendant Alternative Strategies, and AscendReant Capital with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 (“Exchange Act”), and Lash with aiding and abetting certain of those violations. The complaint also charged GPB Capital and Gentile with violating the antifraud provisions of the Investment Advisers Act of 1940 (“Adviser’s Act”) and charged GPB Capital with violating the registration and whistleblower provisions of the Exchange Act and the Advisers Act’s custody and compliance rules. The SEC is seeking disgorgement of ill-gotten gains, plus prejudgment interest and penalties.