What Did Your Brokerage Firm or Investment Adviser Do Wrong With GWG
Published On: March 11, 2019

Many retail investors who were recommended GPB Capital Holding related investments by their financial advisors are asking the question “What’s next”?  Unfortunately, the answer will likely be unpleasant.  GPB Capital Holdings, LLC is a New York-based issuer of private placements offered under the “GPB” moniker. Over the last several years, GPB has raised at least $1.3 billion dollars from mostly retail investors through eight separate private offerings. These offerings include the GPB Automotive Portfolio, LP along with the GPB Waste Management Fund, and GPB Holdings Fund, I, II, and III, GPB New York Development, LP, and GPB Cold Storage, LP.  The GPB Automotive Portfolio was organized as Delaware limited partnership on May 27, 2013 with an expressed purpose to acquire, operate, and resell auto dealerships. The sale of these Class A units were expressly intended to be sold only to “accredited” investors, as that term of art is defined in Regulation D.

It was disclosed this week that the Federal Bureau of Investigation (FBI) is investigating GPB Capital and made an unannounced appearance at the headquarters last week.  As we have previously discussed , last year, the firm stopped taking in new investor money and ceased distributions.  It also restated its financial statements on top of an investigation by Massachusetts Secretary of the Commonwealth William Galvin.  While the company took great pains to point out that it has not been named in any action by any regulatory authority and it is not the target of any active investigation, the events of recent weeks gives all of the appearances that a major financial disaster is in store for investors in GPB.

Brokers at firms like Royal Alliance, FSC Securities, NewBridge Securities, and Cetera Advisors heavily peddled these high risk investors to investors.  Why?  Because of the fees and commissions. The GPB Fund paid out brokers between 8% and 11% of every dollar sold to clients. So for selling a $100,000 investment in the GPB Fund, brokers and their firms received between $8,000 and $11,000 for this one recommendation.  It is useful to put this extraordinary commission into context with those received for more standard, marketable securities like stocks, bonds, or mutual funds.  Financial Advisors in the traditional brokerage setting employed by an independent broker/dealer like NewBridge Securities, would earn between 0.5% and 1.5% on equity trades or corporate/municipal bonds trades.  Mutual funds, depending on share class, charge sales loaded and back-end fees that can be as high as 4.5%, but ETFs like those offered by Vanguard, are virtually fee-free. Moreover, many brokerage firms offer electronic trading for clients on a per trade basis as low as $4.95 per trade regardless of the amount of the transaction. Crucially, there are no break-point discounts available for private placements, meaning if an investor invests a million dollars, the broker gets the same commission rate. Publicly traded options like mutual funds and UITs, however, offer commission breakpoints; the more money an investor invests, the lower the commission rate. At 8%-11%, there is simply nothing that competes with this level of compensation, which is why many brokers spent their career selling “alternative investments” like GPB.

We have received reports from our clients they were promised certain returns on the investments and the risks were heavily downplayed.  Also, many elderly or retired investors were pitched the investments as being suitable for income generation, and some were recommended very large concentrations.  Unfortunately, the representations made to thousands of investors weren’t accurate.  In addition, the due diligence required to be performed by the brokerage firms before selling the investments was substandard.  Along with limited or no operating history, total illiquidity, and key-personnel risk, i.e., the success or failure of this partnership is dependent on the abilities and performance of only a handful of people, the GPB Fund, pursuant to its limited partnership agreement, was authorized to lever-up to 50% of the total assets under management. This leverage ratio is substantial when compared to domestic closed-end investment companies (mutual funds) which are statutorily limited to only levering-up 33% for the most speculative mutual funds. It also made the investment much riskier than many investors thought.

In order to recover the money invested, investors who own GPB Capital Holding must use the Financial Industry Regulatory Authority (FINRA) arbitration process.  Investors can sue for damages or seek rescission of the investment (the return of the client’s money and the investment is given back to the brokerage firm).  We expect the news to only get worse with respect to the GPB related investments.  To speak with an attorney about contingency fee legal options for suing to recover losses or rescission, please contact our Chicago based securities law firm at 312-332-4200.

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