Under scrutiny: $1B in alt product sales draw first client claims
A slow-building saga involving investing, cars and trash is spilling over into a new phase — arbitration against broker-dealers.
BDs that sold high-commission limited partnerships are facing the first of what could be many claims relating to an alternative asset manager under intense regulatory scrutiny. A widow and a retired couple who purchased a combined $700,000 in LPs issued by its funds filed the initial FINRA arbitration claims last month.
Earlier this year, the FBI, accompanied by the New York City Business Integrity Commission, paid a call on the offices of the issuer’s parent, GPB Capital Holdings, to collect information, ProPublica reported. The visit came after the SEC, FINRA and Massachusetts securities regulators launched their own investigations in 2018, according to Investment News.
GPB has said it’s cooperating with the probes and will release long-delayed financial statements after completing an audit by the end of 2019.
The manager has raised more than $1.5 billion since 2013 with a portfolio of 160 companies, many of them auto dealerships and waste management companies. Its two largest funds reaped sales of $1.27 billion — with commissions of 8% — before GPB halted investment in them last year.
Now, the 91-year-old widow from Florida and an immigrant couple from Oregon who purchased LPs issued by GPB funds have accused Madison Avenue Securities and Crystal Bay Securities of negligence and other claims in two FINRA arbitration cases.
More claims against BDs that sold GPB products are on the way, according to Joseph Peiffer of Peiffer Wolf Carr & Kane.
“What they all have in common is that none of them did due diligence on this. I think we'll be doing scores, if not hundreds, of filings ultimately in this case,” Peiffer said in an interview after filing the two arbitration claims. “I anticipate just an enormous wave of filings.”
Peiffer Wolf and another law firm, Meyer Wilson, went one better in a press release, describing the expected amount of client arbitration claims as an “avalanche.”
Representatives for GPB note that the alternative asset manager is not listed as the respondent in either case.
“These are not actions against GPB Capital, but against independent broker-dealers who are unrelated to GBP Capital,” spokeswoman Nancy Sterling said in an emailed statement. “The only avalanche we have seen is the number of press releases from plaintiff law firms who are trying to solicit clients for claims against broker-dealers.”
Nevertheless, the two BDs facing client arbitration represent only two of the more than 60 firms that sold LPs in GPB’s largest funds, according to SEC Form D filings. The group also includes HighTower Securities, Advisor Group’s four IBDs and Ladenburg Thalmann’s Triad Advisors.
“It appears that investors are at risk of losing all or most of their GPB investments,” says Meyer Wilson attorney Courtney Werning. “The products peddled by these companies were inherently flawed.”
Representatives for San Diego-based Madison Avenue declined to comment. CNO Financial Group, the parent of Chicago-based Bankers Life Securities — another BD respondent but one that isn’t alleged to have sold GPB products — didn’t respond to requests for comment.
In February, FINRA cancelled the membership of Delray Beach, Florida-based Crystal Bay after the firm failed to pay arbitration fees, according to FINRA BrokerCheck. Efforts to reach the firm or its president and chief compliance officer, Rafael Golan, were not successful.
FINRA also barred Golan earlier this year after he failed to respond to investigators’ requests for information, BrokerCheck shows. Former client Millicent Barasch suffered substantial losses from “illiquid, high commission, unsuitable products” such as three GPB funds, the claim alleges.
“Both the firm and the broker should have been shut down years ago,” says Barasch’s son Jeffrey. “They took nearly a million dollars from her and then they tried to close up shop and scatter like roaches. This should never be done to another elderly person.”
The retired couple, Alexandra and Grigory Kogan, purchased $50,000 worth of GPB automotive LPs, according to their separate claim. The Russian immigrants — one of whom is disabled — bought heavily into alternative investments, annuities and life insurance products.
“They told us those investments were ideal for us, though to this day I still have no idea what is meant by the term ‘alternative investments,’” Alexandra Kogan says. “Now we are at risk of losing everything we worked for.”
Barasch’s claim accuses Crystal Bay of violating “just and equitable principles of trade,” failure to perform due diligence, negligence, misrepresentations and breach of fiduciary duty. The Kogans pressed the same allegations, along with elder abuse and violation of Oregon’s laws.
The amount at stake in the two claims is $1.5 million in retirement savings and trust proceeds, according to the attorneys for the clients. They seek compensatory and punitive damages plus interest, along with attorney fees and other costs.
GPB’s own legal wrangling began in 2017, when the firm sued its former automotive retail director but also acquired a majority stake in the 11th-largest dealership conglomerate, Prime Automotive Group, according to a deep-dive article by Automotive News.
In a lawsuit filed against GPB in Massachusetts court this past summer, Prime Automotive CEO David Rosenberg said that the firm retaliated against “efforts to address fraudulent and wrongful activity” by withholding $5.9 million in required payments.
GPB has since fired Rosenberg.