Articles Posted in Private equity

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.

Would you complain about your broker to the Financial Investor Regulatory Authority (FINRA) if you thought your odds of success were good?  They are, at least so far in 2019.  In the first half of 2019, investors won 44 percent of the arbitration cases they filed against brokers and brokerage firms from January through June of this year, according to FINRA statistics.  This is an improvements from the 38 percent investor win rate five years ago.

Another piece of good news for investors is mediation cases are being decided faster.  Mediation is a common way to resolve investor cases filed with FINRA without having to go through an arbitration hearing.   The turnaround time it takes to resolve cases through mediation has shrunk from 126 days to 93 days, a 26 percent improvement.

The number of private equity claims filed by investors cases are increasing as more of these types of investment products are appearing in the portfolios of retail investors with 63 claims filed in the first half of 2019 compared to 54 filed in all of 2018.  Investors are also bringing more actions involving Real Estate Investment Trusts (REITS) while claims involving Exchange Traded Funds (ETFs) declined by close to half from January to June 2019 (60) compared to January to June 2018 (104).  Claims involving muni bonds, a mainstay of retirees aiming to safeguard their principal, have also dropped from 331 from 462.

Stoltmann Law Offices, P.C. continues to investigate, file, and prosecute cases on behalf of investors that were burned in the volatility spike from early February 2018, including the Frontier Permo Fund. A few mutuals funds, like LJM Preservation and Growth Fund which invested in uncovered S&P 500 index options, were absolutely crushed in a matter of hours as the United States equity markets swung hundreds of points in minutes, sending the VIX into chaos and creating havoc for those holding options exposed to this volatility. Many other investments, including hedge funds and private placement funds, also had shocking losses in reaction to this volatility spike. One of those private funds was the Frontier Permo Fund.

The Permo Fund, offered in several iterations like the Esulep LLC Permo Fund, (Esulep is the name of the company’s CEO – John Peluse – spelled backwards, how clever) or the Frontier Permo Fund, LLC. Whatever the name, Esulep Management LLC has at all times been the manager and owner of the fund company. Permo Fund markets itself as an absolute return, pooled investment fund utilizing a proprietary trading strategy to maximize value and performance for its investors.  The fund generally invested in index options in February 2018, when the volatility spike caused serious dislocation in the market for S&P 500 index options. So much money had piled into short-VIX related options, that those same investors tended to be long the S&P 500. Because of Permo Fund’s exposure to S&P 500 index options, amongst other issues, the Permo Fund saw whipsaw losses of approximately 36% in days.

Frontier Wealth Management, a fiduciary Registered Investment Advisory firm headquartered in Kansas City, Missouri, contracted with the Permo Fund in 2017 to raise capital for a pooled investment vehicle for their advisory clients to access the Permo Fund. According to a Form D filed with the Securities and Exchange Commission, this private offering raised at least $27,900,000 from 148 investors, all likely fiduciary clients of Frontier Wealth Management. This offering was dated March 13, 2017 and less than a year later, the fund plummeted.  Clients of Frontier Wealth Management who were sold private placement interests in the Frontier Permo Fund may have claims to pursue against Frontier to recover those losses.

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