The attorney for a former compliance officer at an upstate New York broker-dealer is claiming vindication for his client after state regulators in Massachusetts filed a fraud lawsuit against a $1.5 billion private fund.
Toni Caiazzo Neff says she lost her job at Albany, New York-based Purshe, Kaplan Sterling because she spoke out against the firm’s decision to sell GPB Capital at 8 percent commissions, having rejected the fund twice before.
On May 27, Massachusetts secretary William Galvin filed the first government enforcement action against GPB, accusing it of conflicts of interest and self-dealing. Neff’s lawyer, Jason Kane of Peiffer Wolf Carr & Kane, said that the Massachusetts suit proves that Caiazzo Neff’s instincts were right.
“What happened here is a shame,” Kane told sister publication RCW in a phone interview. “Toni was right from the get-go. GPB has been a fraud from the beginning.”
‘Serious red flags’
Caiazzo Neff has filed an arbitration claim against Purshe, Kaplan for wrongful termination and a separate lawsuit is pending in federal court in Pennsylvania. For its part, Purshe, Kaplan has filed a defamation suit against Caiazzo Neff, claiming that she was a “disgruntled employee” who was fired for incompetence. The firm says that when Caiazzo Neff referred to herself as a “whistleblower” at a news conference last year, she committed defamation per se against Purshe, Kaplan.
As Caiazzo Neff tells it, in both her court pleadings and in a series of interviews with RCW, Purshe, Kaplan had rejected GPB for sales in 2014 and again in 2016. But in 2017, she claims top executives at Purshe, Kaplan bypassed the firm’s due diligence committee to approve the sale of GPB.
“It raises serious red flags that the product was twice declined, and the fact that they executed a selling agreement the third time before it was even submitted and considered by the due diligence committee,” Caiazzo Neff said. “If you read their policies and procedures, it’s in derogation of their duties. Red flags all over the place.”
‘Wait and see’
Caiazzo Neff prepared the due diligence report on GPB for Purshe, Kaplan’s due diligence committee in 2016. She says she uncovered, in an unrelated lawsuit, a series of lucrative early deals that show how GPB’s principals were enriching themselves. The Massachusetts complaint alleges that the self-dealing and conflicts were even more widespread than Caizzo Neff suspected at the time.
Purshe, Kaplan CEO J Peter Purcell declined to comment for this story, as did firm attorney Lewis Fischbein. The defamation suit acknowledges that Purshe, Kaplan’s due diligence committee “withheld approval” of GPB in 2014 and 2016 because it wanted to take a “wait and see attitude.”
“In the spring of 2018, after conducting comprehensive due diligence, an outside due diligence specialist recommended a second successor offering, which the committee then voted to approve,” the firm’s suit says. “Ultimately, PKS’s sales of GPB Capital-sponsored offerings comprised a mere 0.1 percent of the total sales of the offerings.”
GPB under siege
GPB raised its first $1 billion in just five years by relying on two broker-dealers that claimed nearly 12 percent in commissions, SEC records show. In 2017, Purshe, Kaplan became one of 85 broker-dealers selling GPB, at 8 percent commissions. GPB’s fund values grew to $1.8 billion over the next two years.
GPB is now under siege, having repeatedly missed SEC deadlines to file audited financial reports. There are lawsuits pending in state and federal courts – including a class-action suit filed by Kane’s firm, in federal court in Texas – and its former CCO, one-time SEC investigator Michael Cohn, is under indictment on charges that he leaked details of federal investigations to the fund in order to obtain his job.
The Massachusetts lawsuit alleges that GPB offered high commissions to broker-dealers and “hammered” them with sales calls, but also reimbursed broker-dealers who attended their pitch meetings and paid third-party firms to prepare due diligence reports for them.
GPB has denied the allegations and promised to fight them “vigorously,” but Kane, Caiazzo Neff’s attorney, said that whatever the outcome of any of this litigation, B-Ds should consider any fees around or above 8 percent a sign that extra due diligence should be done. Firms also ought to see offers to reimburse for travel and to pay for due diligence as warning signs. And firms must do a better job of understanding that compliance professionals aren’t just saying “no” to be mean.
“Broker-dealers will continue to get themselves in trouble as long as they treat their compliance professionals like the anti-sales team,” he says.
This article first appeared in sister publication RCW