It is time for GPB Fund investors to seriously consider their legal options. Over the last year, the GPB Capital Funds have been beset by serious issues raising red flags for investors:
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.
The smoke emanating from the GPB Funds continues to build. As detailed in our post from November, the 1.8 billion-dollar GPB Capital Funds have been raising eyebrows for a few months now. Back in September, Massachusetts Secretary of State William Galvin announced an investigation into 63 brokerage firms that sold investments in GPB to its clients. According to a recent Investment News report, both FINRA and the SEC have now also inquired into brokerage firm sales practices connected to the GPB Capital Funds.
According to published reports, GPB paid brokerage firms a 12% commission to sell its speculative, high-risk private placements to retail investors. This sort of commission is the driving force behind brokerage firms selling private placements. By comparison, a brokerage firm will generate a commission of about 1% on a stock trade and perhaps as high as 5% on a Class A mutual fund. With the increasing popularity of cheap alternatives like Index Funds which only generate commissions of less than 0.5% in most instances, it is clear why brokerage firms peddle speculative investments like those issued by GPB Capital. A financial advisor would have to sell a lot of stocks and bonds to generate the same amount of commissions.
For example, if a financial advisor sells an investor a $100,000 unit of one of the GPB Capital private placements, the advisor and his firm would be paid $10,000-$12,000 for making this sale. If on the other hand, the advisor instead sold the investor a basket of Dow 30 stocks for $100,000, the take would be only $1,000-$2,000. This advisor would have to sell over a million dollars of stocks to this client to make the same commissions. Plus, selling a basket of stocks and bonds requires ongoing professional service and advice from the financial advisor. Issues related to rebalancing and market volatility require ongoing financial advice. Financial Advisors love selling private placements like those offered by GPB Capital because they feel like they can sell it and forget it. These private placements do not price to a market daily, creating the illusion that they are stable and that an investor’s principal is safe. It is really a no brainer for your trusted financial advisor.