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.

“To existing and prospective investors in the limited partnership funds, GPB Capital projected an aura of success, touting that it consistently made an 8% annualized distribution payment to investors, as well as periodic ‘special distributions’ ranging from 0.5 to 3%,” the SEC said in a February 2021 lawsuit against the company in New York federal court. “In reality, GPB Capital used investor funds to cover the shortfall between funds from operations of the portfolio companies and the amount needed to make an annualized 8%.”

GPB Capital funds raised capital by selling limited partnership interests to retail investors. It primarily raised capital through Ascendant, whose employees contacted brokers and RIAs. The firm was ordered into receivership by the SEC in June.

This year alone, several firms have been firms have been pinched by Finra for selling investments in GPB to clients without telling them entire story about delayed financials related to some of the funds.

Sanctuary Securities in Indianapolis (formerly known as David A. Noyes & Co.) was fined $60,000 in August of this year for failing to tell eight investors in 2018 that audited financials on two GPB funds had not been filed on time when the brokerage sold the clients $600,000 in private placements, deals that netted Sanctuary/Noyes $48,000 in commissions. Capital Investment Group of Raleigh, N.C., was fined $50,000 the same month for nine similar sales totaling $860,000 in placements that generated $68,800 in commissions.

In March, BD4RIA, a firm in Fort Worth, Texas, was fined $45,000 by Finra and ordered to pay partial restitution of $45,000 after selling $500,000 worth of partnership interests in one fund, GPB Holdings II LP, to seven customers without telling six of the clients that the fund had not filed audited financial statements on time. A few days later, Finra fined Geneos Wealth Management $150,000. Though that case involved an unrelated mutual fund, Geneos was called out for a similar failure to notify clients about audited financials in GPB’s automotive fund. Finra said Geneos sold three limited partnership interests to clients totaling $165,000 without telling the clients about the material audit information. Geneos is based in Centennial, Colo., and has 340 registered reps.

Dempsey Lord Smith, a Rome, Ga., firm with 100 registered brokers, sold interests in the GPB automotive portfolio to four clients for a total of $323,000 and received $25,840 in commissions for it, also while neglecting to tell these clients about the filing problems with the fund, Finra said.

One of the biggest charges for GPB-related missteps was against National Securities Corporation of Boca Raton, Fla., a firm with 574 reps. Tucked into a June letter ordering a $3.6 million fine and $4.77 million disgorgement from the company, Finra said National Securities Corporation had sold 115 limited partnership interests in the GPB Automotive Portfolio fund and eight interests in its GPB Holdings II fund in 2018 without disclosing that the partnerships would be late in disclosing audited financial statements. Those sales totaled $8.7 million, and NSC received $701,480 in commissions.

Too Much To Bear
Carol Wildermuth said that defending against the arbitration claims over GPB became too expensive to keep her firm afloat.

“Kalos carried primary and secondary E&O insurance policies,” she said in her declaration, “but even so, the cost of an eight-to-12 month arbitration process typically costs a broker-dealer approximately $170,000. The process does not allow for a dismissal on a meritless claim (e.g., the product was not sold by the broker-dealer, or the client/investor never lost money) until the hearing after the claimant rests his/her case. Because by that time the respondent (the broker-dealer) will have spent 95% of the total cost of defense, many firms choose to settle highly defensible cases prior to the hearing if the expected settlement is less than $170,000.”

Neither of the Wildermuths currently have any disclosures on their BrokerCheck sites, though Daniel Wildermuth is currently not registered with Finra. Carol Wildermuth is currently listed under a firm called "Wildermuth Securities" in Ponte Vedra Beach, Fla.

The bankruptcy filing said Kalos’s revenue in 2016 was nearly $28.5 million. However, Carol Wildermuth said that the Covid-19 pandemic had sharply cut into the firm’s revenue at the same time the GPB settlements started. Together, they created “a perfect storm that ultimately led to Kalos’s demise,” she said in her declaration. The Wildermuths have committed to paying $100,000 from their own pockets for the estate to benefit creditors.

Carol Wildermuth did say that her firm had vetted the GPB investments with an experienced due diligence team, including veterans of the boards of the Alternative & Direct Investment Securities Association and the Investment Program Association. She denied the funds were a Ponzi scheme. Since the SEC's monitor was put in place, she said, the investments may yet have value.

“GBP started filing its previously delinquent audits, and under SEC supervision, the net asset value pricing on all the investments was revised and published, indicating that there was value and the investments were not fraudulent or a Ponzi scheme,” she wrote in her declaration. “Because of the repricing, some of the clients who filed claims against Kalos may actually make money from the GPB investment.”

As of press time, the Wildermuths could not be reached for comment.

The lists provided by class action plaintiffs point to some 80 firms in total that allegedly recommended or sold GPB. Besides the firms already mentioned, a partial list includes Aegis Capital Corp., Arete Wealth Management, Cabot Lodge Securities, HighTower Securities, Money Concepts Capital Corp., Orchard Securities, SagePoint Financial, Woodbury Financial, Eisner Amper, FSC Securities, Triad Advisors, SCF Securities, Vanderbilt Securities and WestPark Capital.