A jury found David Gentile, the founder and CEO of GPB Capital Holdings, and Jeffry Schneider, the owner and CEO of Ascendant Capital, guilty on charges of securities fraud and conspiring to commit securities and wire fraud in federal court in Brooklyn, N.Y., today.
Prosecutors had successfully argued that the two defendants had defrauded more than 10,000 investors over many years by mispresenting the sources of monthly distribution payments and the revenue they’d made off three private equity funds. The Department of Justice said the two had raised over $1 billion from investors.
The investments had been a major legal headache for a number of high-profile broker-dealers, requiring many fines and settlements, and GPB sales helped run some companies out of business.
Gentile and Schneider each face 20 years in prison.
“The jury found that the defendants lied to investors about the health of their funds and the source of fund distribution payments, all while they were fraudulently making those distribution payments with investor capital to maintain the appearance of successful portfolio companies,” stated Breon Peace, U.S. Attorney for the Eastern District of New York.
GPB sponsored several investment funds that put money to work in private equity investments, the Department of Justice said in a press release. It was founded in 2013 by Gentile, an SEC-registered advisor based in New York. The firm worked with marketing firm Ascendant to market GPB’s funds to retail investors, and Ascendant employees worked with brokers and RIAs.
GPB Capital Holdings, an SEC-registered advisor, ran 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, according to SEC and Financial Industry Regulatory Authority filings. 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.
“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 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%.”
Several broker-dealers were later disciplined by Finra for selling investments in GPB to clients without telling them entire story about delayed financials related to some of the funds.
One firm, Kalos Capital, based in Alpharetta, Ga., eventually closed its doors after it said it was swamped by arbitrations related to the GPB offerings. Another defunct firm, Center Street in Nashville, closed because of another holding but had also gotten in trouble for GPB investments.
The lists of firms provided by class action plaintiffs pointed to some 80 firms in total that allegedly recommended or sold GPB. The list included 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.