Private Placement

James Galvin of Massachusetts is First Regulator To Drop the Bomb on GPB Capital

May 27, 2020 | by Joe Wojciechowski

It has taken longer than most practitioners expected, but finally, a securities regulator has formally filed a complaint against GPB Capital and its myriad private placement funds. Stoltmann Law Offices has been representing GPB Fund investors since January 2019 and filed dozens of cases against a laundry-list of brokerage firms that sold these speculative, conflict-laden disasters to their clients. Those brokerage firms we have filed cases against include National Securities, Madison Avenue, Kalos Capital, Newbridge Securities, Ausdal Financial, D.A. Noyes, and others. Every client’s case is unique, but fundamentally, each one of our GPB cases begin with the brokerage firm’s duties and obligations to perform due diligence on private placements prior to offering these opaque, complicated, unregulated, and speculative investments. This obligation is rooted in FINRA RN-10-22 and several other notices. Stoltmann Law Offices has written extensively on this blog about GPB and its numerous issues.

The regulatory complaint filed by Secretary Galvin of the Commonwealth of Massachusetts, alleges that GPB misrepresented material facts in connection with the offer of several of its funds. Galvin’s complaint details the gross conflicts of interest at play inside of and between these various GPB Funds. The Administrative Complaint alleges that GPB Capital Holdings, LLC violated MASS. GEN. LAWS ch. 110A, the Massachusetts Uniform Securities Act (the “Act”), and the regulations promulgated thereunder at 950 Mass. CODE REGS. 10.00 – 14.413 (the “Regulations”). The Enforcement Section also alleges that GPB Capital engaged in acts and practices in violation of Section 101 of the Act and Regulations. The Massachusetts action goes for the jugular, seeking ten forms of relief including rescission or all Massachusetts GPB investors, disgorgement of profits, civil penalties, and permanent bars from the securities and investment adviser industries.

Generally, the complaint alleges what those of us prosecuting FINRA cases for investors have known for some time. GPB began to pay investor distributions with new investor money beginning as early as 2017. This created an accounting disaster and GPB cannot find an auditor worth its salt to perform and sign off on an audit. The complaint also confirms the exceptionally complex spider web of interrelated companies across the funds and holding companies, including hundreds of different bank accounts. Eventually, all road lead back to David Gentile, the founder. The Massachusetts complaint also confirms that GPB used the promise of high commissions payable to selling brokers, and lots of bold promises about 8% distributions and a profitable exist plan, to raise $1.5 billion from retail investors nationwide. Selling brokerage firms collectively earned close to 10% of that total raise, or $150,000,000 in commissions for selling these conflict-laden complicated funds.

Investor Recovery Options for TCA Fund Management Losses

May 19, 2020 | by Joe Wojciechowski

Chicago-based Stoltmann Law Offices, P.C. is currently investigating claims on behalf of TCA Global Credit Fund and TCA Fund Management Group investors involving Royal Alliance advisor Mark Young, and Watts Capital, LLC and Thomas Watts. On May 11, 2020, the United States Securities and Exchange Commission (SEC) filed a civil suit in federal court in Miami, Florida against TCA Fund Management Group and TCA Global Credit Fund.

The SEC complaint seeks to prevent TCA Fund Management Group and the Global Credit Fund from committing ongoing securities law violations and also sought the appointment of a receiver. The SEC alleges that for many years, the TCA Global Credit Fund, through its affiliate TCA Fund Management, intentionally inflated the net-asset-value – or price – of the fund hiding massive losses from investors. The SEC alleges that TCA inflated these values in two ways. First, the fund recognized revenues that it never actually received. It would essentially book a gain on loan fees prior to actually receiving them and if the loans never closed, TCA would not adjust their books to reflect reality. The second way TCA artificially inflated its books, according to the SEC, was to book investment banking fees it never actually earned, and actually knew in many instances that it would never earn. Basically, the way this scam worked, according to the SEC, is TCA would enter into a contract with a company to perform investment banking services for, let’s say, $100,000. Instead of waiting to actually perform the services and receive the $100,000 payment, TCA would book the $100,000 as received on their books at the time the contract was executed. The result of these practices was to provide investors with inflated values of these funds. The SEC alleges that these practices violations Section 17(a) of the Securities Act of 1933, 15 U.S.C. Section 77q(a), and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Section 78j(b), and Exchange Act Rule 10b-5, 17 C.F.R. Section 240.10b-5; and violations of Sections 206(1), (2), and (4), along with Section 2076 of the Investment Advisers Act of 1940, 15 U.S.C. Sections 80b-6(1), 80b-6(2), 80b6(4), and 80b-7, and Advisers Act Rules 206(4)-7 and 206(4)-8, 17 C.F.R. Sections 275.206(4)-7, 275.206(4)-8.

According to documents field with the SEC for TCA funds, called a Form D, TCA Fund Management Group used numerous FINRA-Registered broker/dealers to sell investments in the TCA Global Credit Fund for many years including:

SEC Sues Robert Gravette and Mark MacArthur, former Ausdal Financial and Criterion Wealth Management advisors, over Illicit Fees

February 25, 2020 | by Joe Wojciechowski

Stoltmann Law Offices is investigating claims made by the Securities and Exchange Commission (SEC) against Robert Gravette, Mark MacArthur, and their Registered Investment Advisory firm, Criterion Wealth Management Insurance Services, Inc. According to the complaint filed by the SEC on February 12, 2020, Gravette and MacArthur orchestrated a scheme whereby they funneled their clients’ money into four private placement funds without disclosing that the fund managers, with whom they were personal friends, paid them compensation in excess of $1 million for doing so. This compensation arrangement was recurring, so Gravette and MacArthur had an undisclosed financial incentive to keep their clients’ money in these funds, as opposed to allocating the money elsewhere, when appropriate. Further, the huge fees Gravette and MacArthur received reduced the investment returns that the investors would have otherwise received. The SEC alleges that these acts violated the fiduciary duties owed by Gravette and MacArthur to their investment advisory clients, and constituted fraud. The SEC complaint alleges an impressive list of federal statutory violations, including Sections 206(1), 206(2), 206(4), and 207 0f the Advisers Act, 15 U.S.C. sections 80b-6(1), 80b-6(2), 80(b)-6(4), and 80b-7, and Rule 206(4)-7 thereunder.

At all times relevant to these allegations, both Gravette and McArthur were dually registered representatives with a FINRA registered broker/dealer called Ausdal Financial Partners. According to the SEC, Ausdal Financial was involved in these transactions because Criterion opened accounts for them at Ausdal and the private placement funds were held on Ausdal’s account statements. Under FINRA Rules and regulatory notices, Ausdal Financial, at all times relevant, had a duty to supervise the disclosed Advisory activities of its registered representatives. See FINRA Rule 3280, NTMs 91-32, 94-44, and 96-33. The dual-registration of investment advisors creates supervisory challenges for brokerage firms like Ausdal because under SEC Rules, they must maintain and record transactions like those entered into by their dually registered agents on their books and records, or its a violation. Since they must maintain transaction records which they did by virtue of holding these funds on their account statements, they also must supervise those transactions and the activities of their registered representatives, even if they appeared to be acting solely on behalf of their advisory firm. FINRA does not care and neither should the victims of this scam, which was executed in plain sight. Any competent compliance department would have supervised the transitions in these real estate private placement funds.

The very nature of these funds being “private placements” would have required an added measure of scrutiny by Ausdal compliance. Private placements tend to be speculative and exposed investors to unique risks like lack of liquidity, concentrated risk, key-man risk, and management risk not typically found in publicly traded investments like mutual funds. The most substantial issue with a private placement is that they typically pay their brokers very high commissions compared to more standard investments.

GPB Fails to Provide Investors with Tax Forms and Gets Sued Two More Times!

February 25, 2020 | by Joe Wojciechowski

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.

Robert Walberg Allegedly Took $600,000 from Montessori School, Used Fidelity Accounts to Further His Scheme

December 17, 2019 | by Joe Wojciechowski

Stoltmann Law Offices continues to investigate allegations that Robert Walberg of Arlington Heights, Illinois, defrauded a few dozens investors, including family, friends, and the Northwest Suburban Montessori School. As we previously discussed, on January 24, 2019, the Illinois Securities Department issued a Temporary Order of Prohibition against Robert C. Walberg, Chartwell Strategies LP, and Chartwell Advisory Group LLC. Chartwell Strategies LP is a hedge fund created and sold by Robert C. Walberg and his company, Chartwell Advisory Group LLC. According to the Illinois Securities Department, Mr. Walberg solicited an Illinois resident at the end of 2017 and early 2018 to invest in Chartwell Strategies LP. Mr. Walberg allegedly commingled his client’s funds with his personal assets. Walberg was charged in early October with wire fraud, investment advisor fraud, securities violations, and theft by deception. According to court papers, Walberg is alleged to have converted more than $600,000 from the Montessori school he acted as Treasurer for, which puts the school’s future at risk. It was reported recently that Walberg also stole $45,000 worth of retirement money from his Aunt and Uncle.

Mr. Walberg was a registered FINRA broker on and off from 1984 through 2013, but he has not been registered with the SEC or FINRA since November 2013. Because he was not registered, in furtherance of his scheme, Walberg had his investor “clients” open accounts at Fidelity. He then used the clients’ credentials to log-in to their accounts and transfer funds from their Fidelity accounts to Chartwell Strategies, a private entity allegedly created for investment purposes.

Depending on the nature of the transactions and specifically how Walberg gained access to his clients’ funds, Fidelity could be responsible for either negligence, or aiding and abetting breach of fiduciary duty. All too frequently, fraudsters use big named, well known companies like Fidelity to give their schemes an aura of legitimacy. Fidelity has duties and obligations to all of its clients, including purported victims of Walberg’s scam, to at a minimum, perform its compliance, execution, and supervisory functions at or above the standard of care. Further, Fidelity, as a FINRA member firm, has explicit responsibilities to its clients to ensure it adaquetly monitors and supervises electronic access to their accounts and have reasonable measures in place to ensure someone other than the client is not logging-in using their credentials. This is a bright red flag that someone is acting in a questionable manner. In the normal investment advisor-client relationship which uses Fidelity as the broker/dealer, that investment advisor has his own log in credentials and uses the Fidelity RIA platform to run his business. That Walberg did not do this and instead used client credentials is an indicia that he was not licensed or registered to act as an investment advisor. Upon information and belief, Walberg abused his trust in this way to numerous clients resulting in the theft of as much as $5 million. Fidelity could have liability for these losses.

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.

LiquidSpace Inc. – Just Another Illiquid Private Placement Costing Investors their Life Savings.

July 3, 2019 | by Deanna Besbekos-LaPage

LiquidSpace, Inc. is an illiquid Regulation D private placement in which investors have lost their hard-earned retirement savings. LiquidSpace is a flexible office space rental start-up that rents office space and meeting rooms on an hourly or monthly basis. The first Regulation D offering by LiquidSpace was registered on December 16, 2012 for $412 and a second registered on the same day for $1,805,740. The second offering stated that $1,299,999 had already been sold. On June 2, 2014, Robertson Stephens, an investment bank that provides capital to entrepreneurial clients, affiliated with LiquidSpace and registered the Robertson Stephens LiquidSpace LLC in California. Subsequently, LiquidSpace Inc. filed a third Regulation D offering of $19,999,997 with $14,015,701 sold.

Investments in LiquidSpace were sold as “convertible promissory notes”. According to the “Convertible Note Purchase Agreement”, the outstanding principal and unpaid accrued interest of the client’s note would be converted into Conversion Shares upon the closing of a Qualified Equity Financing. Stoltmann Law Offices has addressed the issues with promissory note investments in other articles. It is common for clients to be sold investments in the form of promissory notes, which are considered securities. Unfortunately, it is also common for promissory notes to be used in fraudulent investment schemes, such as Ponzi schemes, selling away (i.e. when a broker sells you an investment that was not approved by the brokerage firm), and theft. Given that these investments also are not publicly traded, it is impossible for investors to know the true value of their investment. It also makes it extremely difficult, and in many cases impossible, for them to liquidate the investment, unless the investment becomes publicly traded or the investment offers a liquidation period. At least some investors have not received any distributions or income from their investment in LiquidSpace, and it is unclear when they will be able to liquidate their investment.

If you invested in LiquidSpace through a FINRA Broker Dealer, Registered Representative, or a Registered Investment Advisor, then we may be able to file a complaint on your behalf to rescind your investment. Brokerage firms owed duties to their clients to perform due diligence into LiquidSpace prior to recommending it to their clients, and disclose any risks and conflicts of interests at the time of any recommendations to invest. In exchange for pushing speculative products like LiquidSpace, broker dealers were paid hefty commissions of approximately 10% which is why it was sold to clients regardless of the known risks or each client’s investment objectives. If you invested in LiquidSpace, contact Stoltmann Law Offices for a free evaluation to determine the best course of action for you to take. We are a contingency fee law firm which means we do not get paid until you do.

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.