What Did Your Brokerage Firm or Investment Adviser Do Wrong With GWG
Published On: December 19, 2018

GPB Capital, a New York-based private equity firm and manager of several private placement funds, announced last week that the auditor of its funds’ financial statements, Crowe, LLP, had resigned. According to an article published by Investment News on November 14, 2018, Crowe walked-away from performing audits on GPB’s two largest funds amid concerns about “risks that Crowe determined fell outside of their internal risk tolerance parameters.”  This decision by the auditor to resign, as opposed to performing the audits, is a red-flag that these funds were, at a minimum, using investor money in a way that fell outside the express limitations or disclosures contained in the fund offering materials.

This latest news about GPB Capital comes on the heels of previous announcements to investors that it was suspending redemptions, meaning it was no longer honoring investor requests to pull  money out which is alarming, was restating its financials for 2015 and 2016, and was delaying filing its 2017 financials.

GPB Capital created several private placement funds in 2013 including the GBP Holdings, LP, GPB Holdings II, LP, GPB Automotive Portfolio, LP, and the GPB Waste Management Fund, LP. These fund are all “private placements” meaning they are registered with the Securities and Exchange Commission as being “exempt” from registration under SEC Rule 506. Being exempt from registration means the funds can raise capital from investors, but only those that are “qualified” or “accredited.”

Dozens of brokerage firms nationwide have sold over a billions dollars worth of GPB Capital Funds to investors, including SagePoint Financial, Royal Alliance, Woodbury, and FSC Securities.  Brokerage firms sell private placements to their clients like the GPB Funds because they get paid commissions of between 7% and 10%.  When compared to the commissions they charge for selling stocks, bonds, or mutual funds (between 0.5% and 2%), selling high risk private placements like those offered by GPB is a no-brainer for these firms.

Brokerage firms like FSC Securities, Woodbury, Royal Alliance, and SagePoint Financial have an obligation pursuant to FINRA Rule 2111.05(a), to perform reasonable due diligence on private placement investments prior to offering them for sale to any client.  Failing to adhere to this obligation, as discussed by FINRA at length in FINRA Regulatory Notice 10-22, results in a brokerage firm failing to abide by the suitability rule.  It is a gatekeeper, first line of defense requirement.  Private placements are not publicly registered, besides a simple Form D which discloses virtually nothing about the underlying investment. There are no publicly available, audited financial statements, like with publicly traded companies on Form 10-Q. There are no analysts or credit ratings agencies that follow, opine on, or publish information about these entities.  They operate largely in the dark, so investors are reliant on their financial advisors and brokerage firms to check under the hood before the investment even makes it to the actual point of solicitation.

Private placement investments are almost always speculative (meaning the highest risk), illiquid (meaning you cannot trade, sell, or otherwise get your money out), and pay brokers a premium commission. They are opaque and should only be sold to investors who are at peace with the reality that there is a pretty good chance they will lose 100% of their investment. Because of the lack of oversight and corporate accountability, private placements tend to be a hotbed for fraud.  Compliance and supervision departments at brokerage firms should be on high alert when their brokers sell private placements to clients and must make sure that the brokers are not misrepresenting the risks of these speculative funds.

If you invested money in GPB Capital and are interested in knowing your legal options and rights, please contact our securities investor law firm at 312-332-4200 for a free, no obligation consultation with an attorney.


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