Financial Institutions Law Alert

On February 4, 2021, New Jersey Attorney General Grewal  announced a New Jersey Bureau of Securities action against GPB Capital Holdings, LLC (“GPB”) its owners, and affiliated companies  for an alleged $1.8 billion securities fraud scheme that has affected approximately 17,000 investors across the United States (700 New Jersey investors).   GPB is a New-York based alternative asset management firm focusing on acquiring income-producing private companies and offering investors private placements in the funds. Investors must meet certain net worth and income thresholds.  The New Jersey regulators allege that GPB sold unregistered, high-commission limited partnership interests in a series of alternative-asset investment funds managed between 2013 and 2018.  Investors were allegedly lured with false and misleading promises that the GPB Funds would pay an 8% annualized distribution each month. Investors were also assured that their distributions would be fully covered by the cash flow of the portfolio companies owned by the funds.  In reality, monthly distributions were paid out of investors capital contributions.

The complaint also alleges that the GPB defendants engaged in undisclosed related party transactions that generated millions of dollars in commissions and fees for the individual defendants.  The individual GPB funds have not issues audited financial statements since 2016.

The previous year, in May 2020, the Enforcement Section of the Massachusetts Securities filed a complaint for violations of the Massachusetts Uniform Securities Act against GPB. Such private placements are relatively unregulated compared to sales of regulated  securities.  The SEC and five other states are also filing separate, simultaneous actions against GPB Capital.

This filing has resulted in increased scrutiny of the broker-dealers that recommended GPB private placements and there have been adverse arbitration awards against financial institutions that recommended and sold GPB. 

A recent FINRA arbitration award found that a broker dealer who sold certain private placements managed by GPB liable for damages to its customer. As private placements become under increased scrutiny, it is important to ensure that broker dealers and investment advisers are conducting due diligence with respect to those private placements on its platform. Even in cases where there are allegations of malfeasance and misrepresentations by the issuer to the broker-dealers, broker-dealers may still be liable to its clients for such investments being sold on their platforms.

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