SEC Says New York Firm Ran $1.7 Billion 'Ponzi-like' Scheme, Violated Whistleblower Laws

The Securities and Exchange Commission filed an enforcement action against a New York asset-management firm and its related entities and principals, alleging that the group ran a “Ponzi-like” scheme that raised over $1.7 billion from nearly 20,000 investors and also retaliated against a whistleblower. The Commission’s lawsuit, filed in a New York federal court, named GPB Capital Holdings, LLC (“GPB”), Ascendant Capital, LLC (“Ascendant Capital”), Ascendant Alternative Strategies, LLC (“AAS”), David Gentile, Jeffry Schneider, and Jeffrey Lash as Defendants. The Commission is seeking disgorgement of ill-gotten gains, civil monetary penalties, and pre-judgment interest. The allegations, if proven, would make GPB one of the largest Ponzi schemes in history and the largest in the last several years; by comparison, the total amount of investor funds involved in Ponzi schemes during the entire year of 2020 would be roughly half of the funds allegedly invested in GPB.

Allegations

According to the Complaint, GPB held itself out as an asset-management firm overseeing limited partnerships that invested in the automotive retail, waste management, and healthcare sectors. Those limited partnerships marketed the investments through Ascendant and AAS which in turn enlisted the services of a series of broker-dealers across the country to reach potential investors. To entice those investors, GPB touted a promised annual return of 8% paid through monthly dividends as well as “special distribution” payments ranging from .5% to 3% on top fo the promised 8% return. In the various marketing documents provided to investors, GPB represented that those payments would be funded from the operations fo the companies in the limited partnership’s portfolio.

But the Commission alleges that GPB began experiencing difficulties in meeting the distribution obligations as early as August 2015. Instead of suspending or reducing the distributions, GPB allegedly paid over $260 million in annual and specialized distributions for the next three years until distributions ceased in late 2018. The Complaint alleges that the majority of those disributions from August 2015 to October 2018 were funded not with cash flow from the limited partnerships’ portfolio companies, but rather with other investor funds.

In order to create the appearance that the distributions from August 2015 forward were coming from operations, the Commission also alleges that GPB and Gentile, with assistance from Lash, manipulated certain financial statements (that were provided to broker-dealers and prospective investors) to paint a rosier picture.

The Complaint also accuses the Defendants of violating the whistleblower provisions of the Securities Exchange Act of 1934, both by failing to include necessary carve-outs in employee departure agreements as well as retaliating against another employee. Specifically, GPB is accused of including language in termination documents for two former employees that restricted one employee’s disclosure of confidential infirmation without GPB’s approval while requiring another employee to contact GPB upon any outreach from any regulatory agency. Another employee who played a key role in automotive operations was fired shortly after he raised concerns to GPB management and later copied GPB on communications with the Commission about those concerns.

Lengthy Investigation

The filing of the enforcement action confirms widely-held beliefs that GPB had been the subject of a lengthy non-public investigation. In early 2019, GPB confirmed that the FBI and a New York agency had searched its offices while also acknowledging that it had received inquiries from the Commission. Later that year, a former SEC examiner who took a job as GPB’s chief compliance officer was indicted on charges that he illegally accessed information on the SEC’s investigation into GPB shortly before leaving the SEC. MIchael Cohn, the former CCO, later pleaded guilty to a misdemeanor in September 2020 and is scheduled to be sentenced on March 24th.

The Complaint also indicates that the Commission had entered into tolling agreements with all of the Defendants as early as February 2019. Tolling agreements are typically used by the Commission to toll the expiration of statutes of limitation during the pendency of an investigation and/or discussions about a potential resolution.

First FINRA Award Issued Involving GPB

As alleged in the Complaint, GPB used a series of broker-dealers across the country to reach potential investors. After GPB ceased distributions in late 2018, those broker-dealers have faced an onslaught of customer arbitrations filed in the Financial Industry Regulatory Authority’s (“FINRA”) arbitral forum. As those cases have worked their way through the arbitration forum largely outside of the public view, last week saw the first case reach a final award stage (after a Zoom trial) where a FINRA panel held Arete Wealth Management, LLC liable for the full amount of the claimant’s loss and attorney’s fees.

A copy of the Commission’s complaint is below.