Articles Posted in Cetera Advisors

Chicago-based securities law firm Stoltmann Law Offices continues to represent investors in FINRA arbitrations nationwide recovering losses suffered in the GPB Capital Holdings group of funds, including the GPB Automotive Fund, GPB Holdings Fund II, and the GPB/Armada Waste Management Fund.

One of the appealing pitches that broker-dealers and investment advisers offer is the opportunity to invest in private companies with outstanding earnings potential, or in the case of GPB, relatively high annualized “interest” payments. Instead of buying shares in public companies on stock exchanges, the advisers sell interests in “closely held” companies, which are not listed on exchanges and not required to openly disclose their financial statements.

One such company was GPB Capital Holdings LLC, which has been the subject of federal and state litigation. GPB Capital is a New York City-based alternative investing firm that “seeks to acquire income-producing private companies.” So-called private placements have posed problems for investors in recent years because of sketchy financial disclosure and overselling.

Stoltmann Law Offices, P.C, a Chicago-based securities law firm specializing in representing investors nationwide, continues to hear from investors who have suffered devastating losses in alternative investments.  One of the most common and popular alternative investments peddled by brokers over the last several years are “business development companies” or “BDCs”. The most common issuer of BDCs is a company called Franklin Square, and brokerage firms have pushed hundreds of millions of dollars in these speculative investments to unsuspecting investors for a decade.

FSKR, the publicly-traded BDC called FS KKR Capital Corp. (NYSE: FSKR), was created by the merger of four Franklin Square non-traded BDCs in December 2019:

  • FS Investment Corporation II (FSIC II)

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses as a result of financial advisors who sell investments that are technically “unauthorized” by their firms. These side gigs, while profitable for the broker due to high commissions, are prohibited by FINRA, the industry regulator.

Brokers may pitch clients on a private securities transaction, for example. Of course, the investors rarely have any clue that what they are being asked to invest in is “unauthorized” or a “private securities transaction.” Sometimes these take the form of stock offerings that are unlisted. Broker Henry A. Taylor III, for example, then working for the Cetera brokerage firm, sold $30,000 in private stock that invested in a trucking firm. Taylor did not notify his firm of the sale and had initially deposited his client’s check in his personal account.

After a FINRA arbitration claim was filed, the regulator fined Taylor $7,500 and suspended him for three months earlier this year. Taylor neither admitted nor denied the findings of the FINRA action. The original transaction took place three years ago.

Chicago-based Stoltmann Law Offices has represented hundreds of investors who have been victims of one of the most egregious investment frauds: Ponzi schemes. These swindles promise quick riches and rely upon an increasing number of “investors” to keep the operation going, sometimes over a period of years. The schemes eventually blow up when new investors can’t be found to perpetuate it or promoters are outed by investors or associates for faking returns.

The most famous Ponzi scheme – and perhaps one of the largest – involved broker-money manager Bernie Madoff. Over a period of 17 years, Madoff defrauded thousands of investors, lying about profitable trades. In 2009, he was sentenced to 150 years in prison, after pleading guilty to a $65 billion swindle of some 65,000 victims around the world. Many of Madoff’s victims, which ranged from non-profit organizations to celebrities, were financially ruined. A court-appointed “Madoff Victims Fund” has distributed nearly $3 billion to investors. His sons, who worked for their father’s firm, turned Madoff into authorities when they learned of the scam.

Despite the notoriety of the Madoff swindle, Ponzi schemes are still ensnaring innocent investors. As one of the oldest investment fraud vehicles around, the Ponzi scheme has two selling points: Promoters promise outrageous returns in a short period of time and rely upon continuing stream of new victims to “pay off” early investors in fake profits. This perennial false promise of easy riches makes it one of the most durable schemes for dishonest brokers, who continue to sell them — until the frauds collapse.

Chicago-based Stoltmann Law Offices, P.C. continues to see a surge of investor cases involving “alternative” investments like non-traded REITs, BDCs, oil and gas LPs, and other private placements. These “alts” are almost always considered to be on the speculative end of the risk scale, and frankly, they usually perform poorly and result in investor losses.

Alternative investments cover a wide variety of unconventional investment vehicles. They may employ novel or quantitative trading strategies or pool money for investments in commodities or real estate, for example. The one thing they all usually have in common is steep management fees along with commissions. Both expenses come out of investors’ pockets. Examples of alternative investments, or “alts” in industry parlance, include unlisted or “private” Real Estate Investment Trusts (REITs), private equity, venture capital and hedge funds. While they are generally sold to high-net worth investors who can afford to take on increased risk, they are usually illiquid and complex. Brokers who sell these vehicles may not fully disclose how risky they are. Most of these investments are unregulated, so supervision by regulators is typically light or non-existent.

Investors can file arbitration claims with FINRA if brokers sell inappropriate alternative investments to clients. A year ago, FINRA censured and fined the broker-dealer Berthel Fisher in connection with sales of “inappropriate” alternative investments. FINRA awarded six investors $1.1 million and fined the firm $675,000. Berthel Fisher has had a history of running afoul of investors and regulatory fines. In 2014, the firm was fined $775,000 by FINRA for “supervisory deficiencies, including Berthel Fisher’s failure to supervise the sale of non-traded real estate investment trusts (REITs), and leveraged and inverse exchange-traded funds (ETFs).” The firm was also selling managed commodity futures; oil and gas programs; business development companies; leveraged and inverse Exchange Traded Funds and equipment leasing programs.

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with unscrupulous investment brokers selling exchange-traded products. Many of these high-risk products are unsuitable for retail investors.

With the COVID-19 crisis roiling financial markets, many investors have been sold products that rise when market indexes or individual securities fall. Many “exchange-linked products” (ETPs) often use borrowed money, or leverage, to magnify gains when the market drops, but they can also increase losses. They are generally only suitable for sophisticated investors and are linked to complex underlying futures contracts.

When the coronavirus crisis first made major headlines in the U.S. in early March, the stock, bond and commodities markets crashed. Since markets over-react to widespread greed and fear, traders went into mass selling mode over (later justified) expectations that demand for nearly everything from luxury goods to commodities would drop dramatically.

Stoltmann Law Offices continues to investigate and file cases on behalf of investors in connection with the GPB Capital Funds.  On November 6, 2019, a new lawsuit was filed in the Federal District Court for the Western District of Texas, in Austin, that provides a new level of detail about the scam being run by GPB Capital for the last six years or so. The complaint is filed as a class-action complaint on behalf of an investor, and all similarly situated, in any of the several GPB Capital Funds. The case, Barasch v. GPB Capital Holdings, et al., Case No. 19-cv-01079, alleged civil conspiracy, fraud, and violations of various securities laws. The complaint offers a glimpse into the multiple layers of gross conflicts of interest that permeated, intentionally, throughout the entire GPB Capital universe. From the auditors to the placement agents, at every level of the organization, conflicts existed from which GPB Capital actively sought, and did, capitalize. The complaint alleges that the 8% return guaranteed by GPB Capital was a farce. The truth is, according to the allegations, the 8% distributions were paid with other investor money, or the actual investor’s money meaning it was actually a return OF investment, as opposed to a return ON investment. The complaint references misleading and fraudulent account statements generated by GPB Capital representing these payments as “distributions” when in reality the fund was robbing Peter to pay Paul.

Stoltmann Law Offices has been retained by dozens of investors to purse claims involving GPB Capital Holdings, including the following GPB Funds:

    • GPB Automotive Portfolio, LP

The smoke has been steadily rising from GPB Capital Holdings for about a year at this point. Over the last few months, however, it has been all quite on the GPB Capital front. The main talking points being communicated by GPB Capital to brokers and financial advisors to then deliver to their investor-clients, have been that everything at GPB Capital is fine and that the audited financial statements will be delivered in no time. Well, as the Wizard of Oz said, “Pay no attention to that man behind the curtain.” Just today, InvestmentNews published a story reporting that an executive at GPB Capital has been indicted for obstruction of justice. Nothing happening indeed.

According to a press release issued by the United States District Court for the Eastern District of New York, on Wednesday, October 23, 2019, a superseding indictment was unsealed charging Michael S. Cohn, Managing Director and Chief Compliance Officer with obstruction of justice, unauthorized computer access, and unauthorized disclosure of confidential information. According to the indictment, Mr. Cohn was an employee of the United States Securities and Exchange Commission (SEC) when he left the commission for a position with GPB Capital Holdings. In the course of that transition, Mr. Cohn is alleged to have stolen investigatory files and materials relevant to the ongoing SEC investigation into GPB Capital and then delivered those materials to his brethren at GPB Capital. FBI Assistant director-in-charge William Sweeney was quoted in the press release stating, “When Cohn left the SEC to join GPB, he left with more than his own career ambitions.” What’s worse, when Cohn was interviewing for his job with GPB, he let them know he had this information and shared it. The grand jury indictment  contains allegations, which if proven beyond a reasonable doubt, could land Mr. Cohn in prison for decades.

The fact that GPB Capital hired Mr. Cohn after he told them that he had inside information about the SEC’s ongoing investigation into GPB, is as clear an indication yet that GPB Capital is running an unreliable and highly questionable business, where at a minimum, ethics are of no concern. Investors should be concerned about this latest development because it indicates a few important points. First, it’s an indication that the SEC’s investigation into GPB is still ongoing. Second, the indictment reflects the acts of an allegedly corruptible person who was entrusted at GPB with being the company’s chief compliance officer – a position for the incorruptible. It is staggering that GPB would hire Mr. Cohn after he approached the firm with clearly illegally obtained information and highly confidential documents.

On August 2, 2019, a class action complaint was filed against GPB Capital Holdings and several affiliated entities in the United States District Court for the Southern District of New York, Case No. 19-cv-7250. There are two named plaintiffs, one an investor in the GPB Automotive Fund, there other an investor in the GPB Holdings Fund II. The class action is actually quite limited in scope, broadly alleging that the investors have been damaged by GPB Capital because the funds have collectively failed to provide audited financial statements as required by the private offering memoranda and the Securities and Exchange Commission. The class action complaint has two counts: breach of contract and breach of fiduciary duty. There are no allegations of fraud or other misconduct and the complaint parrots many of the published claims about GPB, including many of the same facts identified on this blog before.

Investors should not be lulled into complacency by the filing of this class action complaint, as if it will be from where their investment losses are recovered. Investors need to continue to honestly assess their individual situations and determine whether their financial advisors or brokers sold them these funds based on misrepresentations or omissions of material fact.  Many of the GPB investors represented by Stoltmann Law Offices have made allegations of unsuitability and breach of fiduciary duty against the brokerage firm responsible for selling GPB Funds to them. Those FINRA arbitration claims also include other alternative investments too, because brokers who sell private placements tend to sell more than just one. Many of our investors have serious concentration issues, with substantial percentages of their assets under management – some near 100% – in alternative, private placements including the GPB Funds.

GPB Capital utilized a network of independent brokerage firms, including Madison Avenue Securities, FSC Securities, Royal Alliance, amongst about 60 others, to sell almost $2 billion worth of their securities to retail investors. Now investors are locked into investments that have been marked down up to 70% in some instances, with no dividends being paid, and with a constant drip of negative news. Brokers are telling their clients not to worry; to sit tight; to wait it out. Advisors are telling investors this will “blow over” and that GPB will be paying dividends again in no time. These “lulling” statements should not be relied on by investors. Brokers and advisors have no more information about what is happening inside GPB Capital than the investors do at this point, and any statement or advice from a broker to “hold tight” is self-serving. Investors should ask their brokers 1) how much money in commissions they were paid to sell them GPB Funds; and 2) ask to see the due diligence file the broker created on GPB prior to selling it. The responses will not be friendly.

The news just keeps getting worse for investors in GPB Capital Holdings. On July 19, 2019, a former GPB Capital business partner sued GPB Capital in Norfolk County, Massachusetts court alleging, amongst other things, that GPB Capital has been engaged in a massive Ponzi-like scheme for some time. The allegations are in connection with a $230 million deal gone wrong, including that this former partner was forced out of GPB Capital after complaining to the SEC about the company’s financial misconduct.  The complaint alleges that GPB Capital uses investor money to prop-up flailing auto-dealerships it owns and also uses investor funds to make interest or distribution payments to other investors – the hallmark of a Ponzi scheme. The complaint alleges that GPB Capital also engaged in an elaborate coverup to cause investors to believe their investments were safe.

As we have discussed on several posts on this cite, GPB Capital has run into trouble in numerous ways. GPB Capital raised almost two-billion dollars from retail investors beginning in 2013 from an array of brokerage firms, including Cetera Advisors, FSC Capital, and Royal Alliance, amongst others. Abruptly in late 2018, GPB Capital’s auditor resigned, which is almost always a bad sign. Then GPB Capital announced it was under investigation by a slew of regulators and law enforcement.  It was then informed by National Financial Services, an affiliate of Fidelity, that it would no longer allow GPB Capital securities to be held on its account statements.  In response to that, GPB Capital rushed to provide an “accurate” Net-Asset-Value (NAV) which reduced the value of its funds by anywhere from 35% to 50%.  These massive markdowns caused sticker-shock when investors received their monthly account statements and they saw the historically “stable” investment suddenly reflecting massive losses.  Investors are now rightly looking at the the financial advisors and brokerage firms responsible for soliciting and selling units in GPB Capital to them.

Brokerage firms have many duties and obligations when they sell clients investments in private placements like GPB Capital Holdings. Initially, a brokerage cannot even approve an offering in a private placement to be sold by their brokers until the firm engages in a due diligence investigation. Only after this investigation meets with the approval of the firm can it sell the investment to their clients. These duties and obligations are encoded in FINRA Rule 2111 Suitability Rule and at least a half-dozen Regulatory Notices, including RN-10-22 which is an opus on brokerage firm due diligence responsibilities to perform due diligence on private placements prior to offering them to firm clients, NASD NTM 03-71 which speaks to a firm’s obligations to vet non-conventional investments, and NTM 05-26 which discusses the vetting of new products.  This vetting process is mired in a massive conflict of interest. Brokerage firms like FSC and Royal Alliance were paid at least 7% commissions for selling GPB Capital.  If the investment never gets past the due diligence step, then the firms and brokers can’t reap those huge commissions!

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