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Information exists to support that GPB Capital was inappropriately sold by independent brokerage firms across the country. These investments, often promoted as investments in car dealerships and waste management, are now illiquid and essentially worthless. These brokerages are liable for the losses of their investors.
The investments were sold by a number of independent brokerages across the country. That list of brokerages includes, but is not limited to, Royal Alliance Associates, Sagepoint Financial, FSC Securities, and Woodbury Financial.
Brokerages have duties to investors in the sale of investments such as GPB. These investments were high-risk, and brokerage were only allowed to recommend the investments to individuals who can withstand the high level of risk and illiquidity that these investments pose. Despite the fact that these investments are only suitable for a small fraction of the investing public brokers sold large quantities of GPB to a broad portion of their clientele. The motivation appears to be the heightened commission paid on this investment.
These broad selling practices has resulted in $1.8 billion of GPB investment sales from investors who bought the high-commission private placements. The GPB investment, which is considered a private placement, had a transaction cost of 12%. 10% of the cost was commission to the broker and broker-dealer and 2% was in offering and organization costs.
On August 17, 2018, GPB halted sales to review accounting. The purported reason given by GPB was to “integrate the high volume of recent acquisitions.”
On August 24, 2018, GPB announced that the fund will restate its 2015 and 2016 financial statements. The adjustments were due to errors in income and the source of such income that came to light in audits done on the investments.
The fund also missed 2 required filings to the SEC in 2018. The SEC requires a private company like GPB with more than $10 million in assets and 2,000 individual investors to file financial statements with the SEC.
On September 12, 2018, Massachusetts top securities regulator William Galvin started an investigation into the sales practices of independent stock brokerage firms in connection with the recommending of investments in GPB Capital Holdings.
GPB investments were always known to be very high risk. As such, the investments were not suitable for a large portion of the investing public. Brokers have a legal obligation to only recommend suitable investments. The motivation for selling such risky investments to moderate investors is likely the result of the excessive commissions that were paid the brokers for such sales – commissions much higher than would be paid for the sale of suitable investments.
Commissions may be seen as one of the motivators to sell this risky investment without conducting reasonable research into the investment. These investments were known to pay a very high commission. Brokers on average made a commission of over 8.3%. Compare this to stock sales where the commissions are usually less than 1%.
The Massachusetts Securities Division has information about one independent stock brokerage firm’s sales practices in connection with GPB sales, coming in the wake of GPB’s announcement that GPB has temporarily stopped bringing in new funds. It has also suspended redemptions while it concentrates on accounting and financial reporting.
In addition, there is an issue with the failure to file financials. Such a failure should have been discovered by any brokerage firm selling the investments and should have been a red flag of the extreme risk in the recommendation of the investments. Two private GBP investments that are required because of their size to file financial statements with the Securities and Exchange Commission failed to meet filing deadlines.
These matters have led to a sweep by regulators of 63 securities brokerages that sell GPB, with the regulators requesting data on the extent of sales activity in Massachusetts, disclosure and marketing documents that the firms provide to investors on the solicitations and data on investor suitability.
“While my Securities Division’s investigation is in the very nascent stages,” stated Massachusetts Securities Division head William Galvin, “Recent activity within GPB raises red flags of potential problems. These red flags, coupled with the fact that sales of private placements [a particularly risky type of investment that is not traded on a public market] by independent broker-dealers have been an ongoing source of investor harm, have led to this investigation.”
Brokerages with questionable GPB sales include, but are not limited to the following; Geneos; FSC; Woodbury; Triad; Sagepoint; Royal Alliance; Madison Avenue Securities; National Securities Corp. (NSC); Moloney Securities; Sandlapper; DFPG; Dawson James; Colorado Financial Service Corp.; Stephen A. Kohn; Orchard Securities; Kalos Capital; Center Street Securities; Avere Financial; and Coastal Equities.