Articles Posted in Madison Avenue Securities

Chicago-based Stoltmann Law Offices continues to see a surge of complaints from investors who bought unlisted or non-traded Real Estate Investment Trusts (REITs). For most investors, the prospect of getting a higher yield on any investment has been alluring. With rates near zero, it’s been hard to earn a return that beats inflation. Enter REITs and funds that invest in them. These are special vehicles that bundle real estate properties into one investment: You can invest in everything from apartment buildings to storage units.

Many REITs are listed and traded on stock exchanges, but some are not, which are called “private” or “unlisted” REITs. In their heyday, REITs routinely paid double-digit yields. Unlisted or “non-traded” REITs have been a consistent sore spot for investors in recent years. Many are loaded with fees and commissions, which dramatically lower investors’ net returns. They even may be money losers, even though they are sold with the promise that 90% of the income generated by properties they hold must be paid to investors. Middleman expenses, which can be as high as 15%, eat up returns in most cases.

Disclosure of the actual financial condition of these vehicles has also been troublesome. It’s hard for investors to know the true value of the properties within these vehicles, which have been aggressively sold by broker-dealers, who make high commissions selling them. When the COVID-19 crisis wracked the economy earlier this year – at first hitting commercial real estate developers and owners particularly hard – REITs that specialized in retail and office properties got clobbered. Retail and Hotel REITs were down 48% and 53%, respectively (as of April 15), according to Deloitte. Investors in these funds, of course, may be still experiencing large losses.

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, P.C. has been representing investors in FINRA arbitration cases involving the GPB Funds since March 2019, and we have filed dozens since. There is one common thread with GPB over the last year or so.  They consistently oversell “good news” which is followed up with more bad news.  Recently, GPB announced it had hired a new CFO – Someone who was going to right the ship and get those audited financials done so that GPB can comply with necessary SEC financial filing rules. Brokerage firms and their brokers who do not want to be sued for this mess, continuously promulgate the “good news”, trying to stave off investor complaints.  All that happens no matter the spin, is more bad news which brokerage firms and brokers do not tell their clients.

On  February 10, 2020 , GPB announced it would not be providing investors with IRS Form K-1 any time soon. So, as the lucky owner of units in a GPB fund, investors will have to wait to file their tax returns until GPB figures out how to send investors reliable tax documents.  Another mess created by GPB are for investors who received surprise IRS Form 1099-Rs because they or their brokers did not act fast enough last fall when GPB was bounced off of various trading platforms, including Charles Schwab. What this means is, those investors are being taxed as if they took a distribution of their GPB asset from their IRA.  So, if you invested $100,000 in a GPB fund in your IRA, and did not have it transferred to an IRA custodial firm, whatever the book value of the fund was on your statement, say $60,000, will be treated as an IRA distribution, and the investor likely will have to pay income tax on that amount. GPB is the gift that keeps on giving!

About a week after GPB announced that it could not even get tax forms to investors, another lawsuit was filed in Delaware Chancery Court against the fund by a group of angry investors.  This lawsuit, Lipman v. GPB Capital Holdings, LLC, Case No. 2020-0054, is a derivative suit filed against GPB on behalf of investors and the GPB Auto and Holdings II funds. The first paragraph of this complaint refers to David Gentile, Jeffrey Lash, and Jeffrey Schneider as “scoundrels who never should have been allowed to run a legitimate company.” Only days later, GPB was sued in the Federal District Court for the Southern District of New York by Volkswagen of America regarding control over three dealerships. This lawsuit relates back to David Rosenberg, who was the head of these three Volkswagen dealerships. He blew the whistle on GPB to the SEC, warning the regulator that GPB was engaging in financial fraud. GPB terminated him and Volkswagen alleges that this termination violated the agreement between GPB and the car company. The more things change with GPB, the more things stay the same. At the end, it is the investors left holding the bag.

The news continues to get worse for the thousands of retail investors with money locked-up in various GPB Capital Funds. Those funds include the GPB Automotive Fund, GPB Waste Management Fund, and GPB Fund II, amongst others. Stoltmann Law Offices has been investigating these funds for several months. We have filed roughly two dozen FINRA Arbitration claims on behalf of our clients to recover their losses in these funds from the brokerage firms responsible for soliciting them to invest in these ill-fated private placements.

On November 22, 2019, GPB sent a letter to their “partners” informing them of some really bad news.  The recent indictment of GPB Capital’s Chief Compliance Officer by the United States Attorney for the Eastern District of New York for obstruction of justice, amongst other claims, has caused the auditing process to fall off the rails. All of those promises by GPB to investors, all of those promises repeated by financial advisors to their clients, that GPB was well on its way to finally providing restated, audited financial statements, have officially been broken. The letter states that GPB’s auditor has “decided to suspend work on outstanding financial statement audits. In addition, the Audit Committee has elected to resign effective ups the earlier of the completion of the Rosenberg Investigation or by November 27, 2019.” The “Rosenberg investigation” is the self-implemented third party investigation into how the company’s CCO obstructed justice, and what GPB knew and when it knew it. Well, according to the indictment, detailed on this blog last month, GPB hired the CCO with knowledge that he had confidential information obtained from his participation in the SEC’s investigation of GPB. They knew he had  obtained information from the SEC in the course of its investigation, it would seem, and GPB made him their chief compliance officer.

The November 22, 2019 notice also eviscerates another false narrative promoted by GPB and passed along to clients by financial advisors, who are scrambling at this point to come up with excuses.  Despite operating in a red-hot economy where car sales are through the roof, the GPB Automotive Fund has managed to lose over $200 million and GPB Holdings II has lost roughly $125 million.  To add insult to injury to the investors stuck holding this rapidly depreciating asset, GPB is not allowing investors to unload their units on secondary markets.  Unfortunately for investors, this is what a Ponzi scheme looks like when it is no longer able to attract new investor money.

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
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