Private Placement

GPB Capital Executive Charged with Obstruction of Justice by Feds

October 23, 2019 | by Stoltmann Law Offices

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.

Investment Losses with John Hoidas and Uhlmann Price

August 1, 2019 | by Deanna Besbekos-LaPage

If you lost money in investments with John Hoidas, a registered representative of Uhlmann Price Securities LLC, contact our office. We are representing investors who lost hundreds of thousands of dollars in private placements and annuities that were sold to them by Mr. Hoidas, including GPB, LiquidSpace and IGF Investment Grade Fund. These investments were sold to unsophisticated clients who could not afford the risk that these investments presented.

In July 2019, three customers filed complaints against Uhlmann Price and Hoidas. He also has a laundry list of financial disclosures on his CRD Report, including over $67,000 in IRS and state tax liens. Hoidas disclosed several outside business activities, including:

Consultant with Gerson Lehrman Group;

IGF Investment Grade Fund Fails to Raise Capital, Leaving Investors Questioning its Viability

June 24, 2019 | by Deanna Besbekos-LaPage

Stoltmann Law Offices is pursuing investment losses for investors in IGF Investment Grade Funds I, LP (“IGF Fund”). IGF Fund is a real estate private placement that invests in single-tenant, net leased commercial properties, with 75% of the portfolio being “investment grade rated tenants with the remainder being of quality private credit tenants or those trending to investment grade.” IGF Fund advertises that it pays 6% annual returns to investors, paid monthly, with two-thirds of the income being tax-deferred. On its website, IGF Fund solicits property owners and brokers for “single tenant triple net or double net leased assets…retail, office, restaurants, and C-stores, and leases backed by investment grade tenant credit of AAA or BBB-“. While IGF solicits properties from $1 million to $16 million, it raised less than $12 million as of August 2018. IGF Partners Realty LLC is the general partner of the IGF Fund and is headquartered in Santa Barbara, California. The IGF Fund is a Delaware limited partnership and a Regulation D private placement.

Generally, Regulation D private placements should only be sold to accredited investors, with some exceptions. Some of the criteria considered is the investor’s annual income, net worth, and sophistication and investment experience. In order to qualify as an “accredited investor”, an investor must have a $200,000 annual income, or $300,000 joint income for the past two years, or a net worth of $1 million (excluding their home). When considering the suitability of a real estate investment for a client, a broker must take into consideration the client’s current asset allocation. For most client’s, their home is already one of the largest pieces of their net worth, so investing in more real estate (and particularly illiquid real estate investments, like IGF Fund) simply does not make sense.

IGF Fund is desperate to raise cash. The initial offering of $60 million was made on March 29, 2016. As of August 21, 2018, the fund raised only $11,720,000. This means that over 80% was left to be sold two years after the initial offering. Because of this, IGF Fund notified investors in early 2019 that it was extending its offering period from December 31, 2018 to April 30, 2019. IGF Fund and brokers selling this investment have been wining and dining current and potential investors to convince them to invest more cash. The lack of capital raised limits IGF Fund’s ability to purchase properties, thus minimizing any potential return for investors. Moreover, extending the offering period also extends the time period before the Fund can be liquidated. The IGF Fund is still paying distributions to investors, however without sufficient funding to purchase assets it will run dry, leaving investors with nothing.

Glenn Mueller and Northridge Investigated by Four State Securities Departments for Selling Unregistered Securities

June 15, 2019 | by Deanna Besbekos-LaPage

On June 10, 2019, the Illinois Securities Department, Massachusetts Securities Division, New Hampshire Bureau of Securities Regulation, and New Jersey Bureau of Securities each charged Glenn C. Mueller of West Chicago, Illinois, and his companies for selling unregistered securities. Mueller developed his scheme for over 40 years, building a web of at least 32 real estate development companies and selling at least $47 million of unregistered securities in the form of promissory notes in these companies to consumers. He referred to these promissory notes as “CD alternatives”, “CD IRAs”, or represented them as being real estate investment trusts (“REITs”). His companies include, but are not limited to, Northridge Holdings, Ltd., Eastridge Holdings, Ltd., Southridge Holdings, Ltd., Cornerstone II Limited Partnership, Unity Investment Group I, 561 Deere Park Limited Partnership, 1200 Kings Circle Limited Partnership, & 106 Surrey Limited Partnership (collectively referred to as “Mueller Entities”). Mueller organized Northridge in North Dakota with the subsidiaries incorporated in Illinois.

Northridge, founded by Mueller in 1984, is the primary property management company through which Mueller ran his scheme and is the general partner of many of his other limited partnerships. Mueller, through Northridge and the Mueller Entities, owned properties through the Chicagoland area. Mueller set up a “CD Account” through the Northridge website for investors. Once Northridge received the funds, he solicited investors to use the funds in their Northridge CD Account to invest in his various companies.

The Illinois Securities Department filed a Temporary Order of Prohibition against Mueller, Northridge, and several of the Mueller Entities. Mueller solicited 140 Illinois residents to invest over $19 million through 244 promissory notes. Some of these investments were sold to clients in their IRAs.

Fidelity Announces it is Kicking GPB Capital Investments off its Platform

April 17, 2019 | by Joe Wojciechowski

Stoltmann Law Offices, P.C. has been retained by several investors who have their money locked up in one or more of the beleaguered funds issued by GPB Capital Holdings. Over the last six month, the bad news about GPB Capital has continued to slowly bleed out to the public. The latest news is deeply concerning and could be the most alarming of all red-flags to date. On June 17, 2019, it was reported that Fidelity, through its subsidiary National Financial Services, will no longer allow account owners to hold their GPB Capital interests through National Financial Services. This is huge blow to investors. Here’s what it means.

National Financial Services, which is owned by Fidelity, is one of the largest clearing and custodial firms in the world. Dozens, if not hundreds, of brokerage firms use National Financial Services to maintain custody and to clear client investments. National Financial Services’ main purposes, put simply, are to simply process transactions and present accurate values of the securities and investments account owners hold on account statements. These are back-office intensive jobs for which Fidelity/National Financial Services charge nominal transactional fees. In order to present a value for alternative investments like non-traded REITs, private placements, or in this instance, GPB Capital Funds, some value has got to be communicated to Fidelity so that it can then report that value to account holders. This valuation is based on “net-asset value” or “NAV”. Fidelity decided to boot GPB Capital from its platform and advise countless investors and their financial advisors that they will need to transfer their GPB Fund assets from their existing accounts to another custodial firm within 90 days. Not only does this create a logistical mess for investors and their financial advisors, it really calls into question what GPB Capital is doing and why the company has not provided any values for its various funds to Fidelity. This is a core obligation of any fund – report what its worth to investors!

Fidelity’s decision does not mean GPB Capital funds are worthless. What it means is Fidelity’s patience has worn so thin with GPB Capital that it is kicking it off its clearing and custodial platform. When this latest incident is added to the numerous previous problems with GPB Capital, it can only be looked at as more bad news. Investors should closely consider their options and consider bringing a claim for rescission through FINRA arbitration to get your money back from the brokerage firm that sold these GPB Funds in the first place. It was bad enough GPB suspended distributions and redemptions. Then GPB’s auditor quit. Now Fidelity lacks so much confidence in GPB Capital, Fidelity will not even allow GPB Capital to be held on Fidelity/National Financial Services account statements.

Stoltmann Law Offices, P.C. Files FINRA Arbitration Claim on Behalf of GPB Investor

April 12, 2019 | by Joe Wojciechowski

The securities fraud attorneys at Stoltmann Law Offices, P.C. continue to investigate investor claims against brokerage firms that sold their clients investments in various GPB Capital Holdings offerings. On March 22, 2019, attorney Joe Wojciechowski announced the filing of a Statement of Claim with FINRA Dispute Resolution for an investor who was sold units in GPB Automotive Fund, L.P. The claim was filed against NewBridge Securities and also includes allegations in connection with various non-traded REITs issued by American Realty Capital (ARC). The claim is for a retail investor whose financial advisor recommended she invest nearly 100% of her accounts in alternative investments offered by GPB Capital and ARC. The claim alleges misrepresentations and omissions of material facts in violation of the Securities Act of Washington, consumer fraud in violation of the Washington Consumer Protection Act, negligence for violating numerous regulatory rules including FINRA Rules 2111 (suitability) and 3110 (supervision), and breach of fiduciary duty. Our client seeks rescission of her GPB Automotive Fund investment and compensatory damages for her realized losses in the ARC REITs, plus attorneys fees, costs, interest, and punitive damages.

Investors who were solicited by financial advisors and brokers to invest in GPB Capital funds should consider their legal options to seek rescission of those investments. Under the state securities laws (frequently referred to as the Blue Sky Laws), the primary remedy for investors is called rescission, which means the investor sues to force the brokerage firm to buy the investment back. The rescission remedy seeks to put the investor back in the same place she was prior to purchasing the investment. This is important for investors who own alternative investments like GPB Capital Funds. These are not liquid or tradable investments, meaning an investor cannot call their advisor and sell it and realize a gain or a loss. Essentially, the investor is stuck. Given the troubling news about GPB Capital over the last several months, something Stoltmann Law Offices has written about extensively, investors are correct to be wary and should consider an exit strategy. Unfortunately, because there is no way out of the GPB Funds, the only option for investors may be to pursue arbitration claims against the brokerage firm responsible for soliciting the investments in the first place.

In the last several years, as interest rates remained very low, it has been difficult for investors to find fixed income investments, like corporate and municipal bonds, that offered higher yields without exposing them to speculative risk. Likewise, due to the long term low interest rate environment, the principal value of the bonds begin to drop as interests rates have risen. The solution to these problems for brokerage firms has been to sell “alternative investments” that offer relatively high yields, but because they are non-traded and do not report any real market value, they have the appearance of a stable value for investors. The bonus for brokerage firms is that these alternative investments offer the advisors commissions they could never achieve by selling standard fixed income securities like corporate bonds or municipal bonds. Advisors sell the sizzle of a high yield and fixed prices and either gloss over or completely misrepresent the speculative risk being taken by investors who entrust their money to private entities like GPB Capital.

Legal Options For Buyers of Direct Lending Investments (DLI)

March 26, 2019 | by Stoltmann Law Offices

Investors who were solicited to invest in Direct Lending Investments (DLI) in Glendale, California by their financial advisor may have actionable claims to recover their money. This week, the Securities and Exchange Commission (SEC) charged registered investment advisor Direct Lending Investments LLC with a fraud spanning multiple years that caused an $11 million over charge of management and performance fees to its private funds https://www.sec.gov/litigation/litreleases/2019/lr24432.htm. The company allegedly fraudulently inflated it annual returns by 2 percent to 3 percent per year for multiple years.

According to the SEC:

Brendan Ross, DLI’s owner and then-chief executive officer, arranged with QuarterSpot to falsify borrower payment information for QuarterSpot’s loans and to falsely report to Direct Lending that borrowers made hundreds of monthly payments when, in fact, they had not. The SEC alleges that many of these loans should have been valued at zero, but instead were improperly valued at their full value, because of the false payments Ross helped engineer.

Loss Recovery Options for Frontier Permo Fund Investors

March 21, 2019 | by Joe Wojciechowski

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.

GPB Waste Management Fund Being Questioned Over Investment in Five Star Carting

March 14, 2019 | by Stoltmann Law Offices

The securities fraud attorneys at Stoltmann Law Offices, P.C. are continuing to investigate due diligence and suitability claims against brokerage firms that sold their clients investments in various GPB Capital Holdings offerings. The most recent news has to do specifically with the Waste Management Fund, which buys and sells private waste haulers and garbage collectors. Not exactly the most glamorous of funds certainly, but new allegations have surfaced that GPB Capital purchased a company called Five Star Carting in March 2017, which has been embroiled in litigation amid allegations of a poor safety record. To make matters worse for GPB Waste Management, according to an InvestmentNews report, GPB’s director of waste strategy – that is seriously the reported title – is Rod Proto, formally of Waste Management. He was fired from his position as President and COO of Waste Management 1999 and then charged with insider trading in 2003 by the SEC for which he paid a $3.7 million fine and stipulated to a ban from serving as an officer or director of a publicly traded company for five years. It is unknown at this time if the FBI search warrant or other searches conducted by the New York City Business Integrity Commission – which happens to regulate waste haulers in New York City – has anything to do specifically with the GPB Waste Management Fund. In any event, the continued bad press and regulatory pressure is not good for GPB Fund investors.

Almost weekly more negative news comes out about GPB Capital Holdings. We have written considerably about many of these issues. Brokers sell private placements like GPB Waste Management Fund, or the more popular GPB Automotive Fund for one reason – commissions. There is no other logical reason and exposure to a particular sector is not an excuse. If an investor needs exposure to the automobile sector, there are hundreds of publicly traded, low-commission options, including common stocks of car companies or the companies from the automotive supply chain. If an investor is seeking a high-income investment, there are literally thousands of publicly-traded corporate or municipal bond options available at a fraction of the cost of a private placement like the GPB Funds. These private placements offer investors a toxic cocktail of 1) illiquidity, meaning once your money goes in it does not come back out until GPB says it does, 2) speculative risk, meaning the highest risk investment product available, and 3) a poor risk/return profile, meaning the risk you are taking is not being compensated by some potential of a high return. GPB Funds were simply bad deals for investors. The only people that make out in situations like this are the brokerage firms like NewBridge Securities, FSC Securities, Cetera Advisors, Royal Alliance, and many others, who sold an estimated $1.5 billion of these funds to their clients. At a 10% commission rate, these brokerage firms generated approximately $150 million in revenue just from selling these speculative and opaque funds.

If you were sold investments in any of the GBP Capital offerings by your financial advisor and wish to know your legal options, please call 312-332-4200 for a no obligation free consultation with an attorney. Stoltmann Law Offices is a Chicago-based contingency fee firm which means we do not get paid until you do.

So What’s Next For GPB Fund Investors?

March 11, 2019 | by Stoltmann Law Offices

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.