New York private fund advisor GPB Capital is vowing to fight back against state and federal accusations that it was all an elaborate fraud.
“We will be mounting a strong defense to these unfounded allegations,” the firm says in a February 8 letter to its investors obtained by sister title Regulatory Compliance Watch. The letter signed only “GPB Capital,” says the firm “has been cooperating with government investigations and is extremely disappointed” in the enforcement and law enforcement actions.
For nearly six years, the sword of Damocles has dangled over the heads of GPB and its principals. The firm raised north of $1.8 billion from some 17,000 investors around the country in portfolios that included trash haulers, car dealers and property, all the while declining to register as an investment advisor, claiming kinship with Warren Buffet’s Berkshire, Hathaway group.
The thread began fraying in late 2018, after the firm blew an audit deadline. Class action suits began piling up. In late 2019, federal authorities indicted GPB’s chief compliance officer, accusing him of using secrets he learned while working in the SEC’s Enforcement Division to sweeten his job prospects. Last summer, Massachusetts regulators filed a civil suit, alleging that the firm was a kind of hybrid Ponzi scheme/affinity fraud.
The thread snaps
On February 4, the thread snapped. Prosecutors in the Eastern District of New York indicted GPB and its founders, David Gentile and Jeffrey Lash, as well as their partner Jeffry Schneider, founder of a broker-dealer called Ascendant Capital that authorities allege was merely another face of the criminal enterprise. New York regulators added B-D Axiom to its suit; Ascendant and Axiom were the only two B-Ds to sell GPB in its first few years.
The Commission has filed a suit of its own, as have regulators in New York, New Jersey and Alabama. Regulators in Illinois, Missouri, Georgia and South Carolina have opened administrative proceedings.
It is unclear whether the criminal indictments end the case or merely open a new phase of it. GPB has some questionable connections. At least some of its seed money came from a notorious Russian/Israeli oligarch who is barred from entering the US. Founder Gentile is a prominent Scientologist and at least some of the money appears to have gone to church institutions or elders; and its waste management portfolio has been the subject of multiple investigations. As early as 2016, officials from the FBI and New York City Police Department’s organized crime bureau called Gentile into a meeting to warn him about his new business partners, sources familiar with the investigation tell RCW.
For GPB, the difficulty is that it has gored more than one ox. State regulators have argued that the firm is proof that the Reg D regime has failed. FINRA and the Commission are each facing down critics who say their whistleblower programs failed. The SEC, separately, still has to come to terms with the prospect that one or more of its agents were turned. Federal authorities are likely upset not just that Gentile ignored their warnings back in 2016, but that GPB’s CCO – the ex-SEC enforcer – got off lightly.
Sources familiar with the investigation tell RCW that the Commission, the state regulators and the Eastern District collectively reached out to GPB and its principals in July, about a month after Massachusetts’ suit, and offered to settle the case.
Negotiations dragged on for months but never really got anywhere, sources say. Among the sticking points, Schneider and Gentile refused to resign their positions. Frustrated, authorities decided to take their cases to court. Federal officials arrested Schneider and Lash on February 3. Gentile surrendered to authorities while traveling in Boston on February 4.
What is left?
The SEC has moved to have GPB put into receivership to distribute what is left of the money, which sources say may be up to $1 billion. FINRA is likely to have chats with the nearly five dozen B-Ds who sold GPB at commissions between 8 percent and 12 percent.
With a new administration in Washington, state regulators see an opportunity to bring a little sunlight into the private funds world, so prepare to hear a lot about ‘transparency’ in the months and years ahead.
The day after his arrest, Gentile resigned as GPB’s CEO. The firm has elevated its CFO, Robert Chmiel, a consultant and alumnus of Orion Resource Partners, to serve as interim CEO. According to its latest Form ADV filing, GPB’s RAUM is down to $239 million.
With reporting by Graham Bippart