GPB Capital Ponzi May Put $1.7 Billion at Risk, U.S. Says

(Bloomberg) -- GPB Capital Holdings chief David Gentile was indicted for allegedly taking part in a Ponzi-like scheme that defrauded thousands of investors across the country and that regulators say may have put more than $1.7 billion at risk.

Gentile and two other executives are accused of using the funds to cover shortfalls and enrich themselves instead of securing returns for their customers. Some 17,000 investors were affected, about 4,000 of them seniors, according to a related complaint by the U.S. Securities and Exchange Commission.

GPB had raised the big sum from individual investors nationwide, and almost all of it is still at risk, the regulator said, although it didn't put a dollar figure on the fraud itself. In 2018, GPB suspended redemptions and distributions, and in a recent regulatory filing its assets were described as far below its obligations to investors, according to the SEC's complaint.

If proved, it would be one of the largest such schemes to target individual investors since the massive frauds of Bernard Madoff and Robert Allen Stanford came to light.

‘All a Lie'

William McGovern, a lawyer for Gentile, declined to comment on the allegations. The firm's website had been taken down Thursday, and a spokesperson couldn't be immediately reached for comment.

“The defendants misrepresented the holdings of GPB Capital through deceptive marketing practices, luring investors with promises of monthly distributions that would be covered by funds from the investments and not drawn from underlying invested capital,” William Sweeney, the head of the Federal Bureau of Investigation's New York office, said in a statement.

“As we allege today, however, this was all a lie,” Sweeney said. “In truth, a significant portion of GPB's distributions were paid directly from investor funds.”

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The indictment was unsealed in federal court in Brooklyn, New York, on Thursday. Gentile, 54, the New York investment advisory firm's founder and chief executive officer, was charged with conspiracy, securities and wire fraud and arrested in Boston. At an initial court appearance, he was released on a $500,000 bond co-signed by his wife and directed to surrender firearms he has at his homes in Manhasset, New York, and Clearwater, Florida.

Gentile faces as long as 20 years in prison if convicted of the most serious charges, including securities fraud, as well as a fine of as much as $5 million on the securities fraud count, Assistant U.S. Attorney Amanda Beck told the court.

‘Aura of Success'

GPB used the funds to subsidize private planes and luxury travel for the three executives, according to a separate lawsuit Thursday by New York Attorney General Letitia James, one of several state AGs to file suit. Payments went to their personal bank accounts and to family members, and Gentile even purchased a Ferrari with the money, James alleged. She put the fraud at more than $700 million.

In the SEC's complaint, also filed in Brooklyn, the regulator called the firm's work “an illusion.”

“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 reality, it claimed, the firm “used investor funds to cover the shortfall between funds from operations of the portfolio companies and the amount needed to make an annualized 8% distribution payment.”

The SEC also says GPB violated whistle-blower protection laws by including language in termination and separation agreements that barred two former employees from coming forward to the regulator and by retaliating against a third who complained to the SEC.

Alternative Asset Manager

The alleged scheme went from August 2015 to December 2018, according to the indictment, which also names Jeffrey Lash, 51, of Naples, Florida, a former managing director at GPB, and Jeffrey Schneider, 52, of Austin, Texas, the owner of GPB's placement agent Ascendant Capital.

Kevin Galbraith, a lawyer for Lash, and Glenn Colton, a lawyer for Schneider, didn't immediately return calls seeking comment on the case.

GPB, founded in 2013, has described itself as an alternative asset manager that acted as general partner and manager for other funds, which invest in businesses from automotive retail to waste management to health care, according to the SEC.

The firm hasn't delivered audited financial statements for the limited partnership funds to investors for more than four years and is more than three years delinquent in registering two of the funds, the regulator said.

Madoff was sentenced to 150 years in prison for masterminding the largest Ponzi scheme in history. Stanford's racket involved fraudulent certificates of deposit tied to a private Caribbean bank that offered a return federal prosecutors said was “too good to be true.” He is currently serving 110 years in prison.

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