A toxic private equity fund complex that’s plunged multiple broker-dealers into regulatory and legal trouble has now brought one big Georgia firm to a premature end.
Kalos Capital, a firm in the Atlanta suburbs run by Daniel and Carol Wildermuth, filed for Chapter 11 protection in a federal bankruptcy court on Monday. According to the bankruptcy statement, Kalos, which once boasted 100 registered producers, $28.5 million in revenue and 60 offices, was finally overwhelmed by litigation relating to GPB Capital Holdings LLC. The New York-based private equity firm sold private placements in its funds, and Kalos reps recommended them from 2014 to 2018. GPB’s ex-chief executive was later arrested and the PE company was condemned for Ponzi-scheme-like activity by the SEC. Afterwards, the lawyers came calling, and many clients have turned on the broker-dealers who sold GPB’s private placements, saying these non-registered private placement notes were illiquid, opaque and unsuitable for most investors.
The troubled GPB funds have gotten a number of other broker-dealers pinched by Finra this year: Among the firms stung by Finra fines in the GPB debacle in are National Securities Corporation, Capital Investment Group, Sanctuary Securities, Dempsey Lord Smith, BD4RIA, and Geneos Wealth Management. Massachusetts Secretary of the Commonwealth William Galvin said in 2018 that he would be probing 63 broker-dealers who offered private placements in the firm. One class-action suit filed in West Texas named 76 broker-dealers for abetting GPB’s sales and questionable statements.
Kalos Capital, based in Alpharetta, Ga., asked the agency to terminate its registration earlier this month on October 4, according to Finra records.
“To date, the legal fees related to the arbitrations, tolling agreements, and complaints against Kalos have cost in excess of $9 million,” said Carol Wildermuth in a declaration to the bankruptcy court.
Kalos had tried to wrap the multiple arbitration filings against it into a global mediation, using $2 million from insurance. That effort wrapped up in January 2021, according to Carol Wildermuth’s statement, but even after that settlement, new plaintiffs continued to emerge, she said. Kalos currently counts 17 pending arbitrations against it related to the GPB product, the bankruptcy statement said.
The Wildermuths, a husband-and-wife team, launched Kalos in 1997. Carol Wildermuth had previously done private client work for Morgan Stanley and Lehman Brothers in the U.S. and Singapore. The 36-year industry veteran began her career with IDS/American Express.
Kalos began offering investments in GPB Capital Holdings LLC’s funds in August 2014, targeting accredited investors with a net worth of at least $1 million, the bankruptcy filing said.
Private Placement Offerings
GPB Capital Holdings, an SEC-registered advisor, runs private equity funds designed to buy controlling stakes in profitable, income-producing companies in such industries as car dealerships, IT service and cold storage companies. The firm, said the SEC, promised 8% returns to shareholders from the income it was able to juice from those early stage and middle-market companies. The firm had raised some $1.8 billion in capital for its funds from its inception in 2013 until January of 2021, according to court documents.
In February 2021, the U.S. Attorney’s Office for the Eastern District of New York announced the arrest of David Gentile, the founder, owner and chief executive officer of GPB, as well as Jeffry Schneider, the owner and CEO of Ascendant Capital LLC (the placement agent for GPB Capital). The DOJ also said Jeffrey Lash, a former managing partner of GPB, had been arrested. The government charged the three with defrauding investors by misrepresenting the source of the funds’ monthly distribution payments, as well as misrepresenting the revenue generated by two of the funds: GPB Holdings LP and GPB Automotive Portfolio LP.