NJ Investors Pump $70M Into Massive Securities Fraud Scheme: OAG

NEWARK, NJ — A New York-based firm has been accused of taking part in a $1.8 billion “securities fraud scheme” that allegedly fleeced about 700 investors in New Jersey.

On Thursday, the New Jersey Bureau of Securities within the state Division of Consumer Affairs announced that it filed a securities enforcement action against investment adviser GPB Capital Holdings LLC and others for their alleged involvement in a $1.8 billion securities fraud scheme that has affected approximately 17,000 investors across the United States.

The list of victims includes about 700 New Jersey investors, who pumped more than $70.4 million into the scheme via limited partnership interests in various GPB funds, prosecutors said.

The complaint, filed in Superior Court in Essex County, alleges that GPB Capital, New York-based broker-dealer Ascendant Alternative Strategies LLC (AAS) and Texas-based securities marketing firm Ascendant Capital LLC, as well as David Gentile of Florida, Jeffry Schneider of Texas, and Jeffrey Lash of Florida, collectively defrauded investors across the country who purchased limited partnership interests in various GPB-controlled private equity funds in violation of New Jersey’s Securities Laws.

In a separate administrative action, the bureau revoked the broker-dealer registration of AAS and the agent registration of Schneider. None of the other defendants are registered with the bureau, prosecutors said.

The case was investigated in parallel with multiple state securities regulators, the U.S. Securities and Exchange Commission (SEC), the U.S. Attorney’s Office for the Eastern District of New York (EDNY) and with assistance from the state of Texas.

The EDNY unsealed indictments against Gentile, Schneider, and Lash on Thursday morning on related charges.

Along with New Jersey, the SEC and six other states are filing separate but simultaneous actions against GPB Capital and other defendants, prosecutors said.

Joining New Jersey in filing simultaneous actions today are the states of Alabama, Georgia, Illinois, Missouri, New York, and South Carolina, as well as the SEC. The EDNY unsealed indictments against Gentile, Schneider, and Lash on Thursday morning on related charges.

“Today’s coordinated action sends a strong message to all those who would unlawfully enrich themselves at the expense of investors: you will be held accountable,” Attorney General Gurbir Grewal said.

Prosecutors released the following allegations:

“The defendants’ alleged scheme centered on the sale of unregistered, high-commission limited partnership interests in a series of alternative-asset investment funds managed by GPB Capital. The funds were targeted to ‘accredited investors,’ whose net worth or income qualified them to participate in private placement securities transactions exempt from SEC and state registration requirements. From 2013 through late 2018, the defendants allegedly lured investors in with false and misleading promises that the GPB funds would pay an 8% annualized distribution each month. The defendants assured their investors that these monthly payments were ‘fully earned’ or ‘fully covered’ by the cash flow of the portfolio companies owned by the funds. The GPB funds owned companies in the automotive retail, waste management, information technology, and healthcare sectors.”

Prosecutors continued:

“Despite their promises, the defendants increasingly relied on ‘Ponzi financing’ – using new investors’ capital contributions to pay prior investors the monthly distributions. This reduced the amount of capital a GPB fund could use to invest in new opportunities and significantly compromised the long-term value of investors’ stake, according to allegations contained in the complaint. To conceal their scheme, the defendants also created fictitious and misleading ‘performance guarantees’ that fraudulently inflated the reported income of some of the GPB funds. The defendants allegedly further harmed investors by diverting and misappropriating fund assets for their own benefit.”

According to prosecutors, the group then used the ill-gotten funds to pay family members and support “luxurious lifestyles” at their investors’ expenses, including travel by private jet and the purchase of a Ferrari for Gentile’s personal use.

Prosecutors said the “unlawful conduct” allegedly included:

• "Gentile and Schneider did not tell investors that significant and increasing portions of the monthly distributions were secretly being paid from the investors’ own capital contributions rather than from operating profits, as promised"
• "GPB Capital, Gentile, Schneider, and Lash falsified financial statements by adding fictitious performance guarantee payments which created a false appearance to investors of illusory profits earned by certain Fund auto dealerships"
• "Gentile, Schneider, and Lash enriched themselves at investors’ expense by diverting money and business opportunities from certain Fund-owned auto dealerships to a shell company owned by themselves"
• "Gentile, Schneider, and Lash used investor funds without investors’ knowledge for personal benefit, including private jet travel and luxury automobiles"

“This case is a cautionary tale for investors considering ‘alternative’ investments not subject to state or federal registration,” said Christopher Gerold, chief of the New Jersey Bureau of Securities.

“Although the promise of higher returns can be enticing, unregistered securities inherently have greater risk and potential for fraud,” Gerold said. “As we pursue action against the defendants in this case, we urge investors to proceed with caution when approached to invest in so-called private securities.”

The bureau is seeking court-ordered monetary penalties, investor restitution, disgorgement, and permanent injunctive relief barring the defendants from violating the Securities Law or participating in the sale or issuance of securities in the future.

Prosecutors added:

“It is critical that investors ‘Check Before You Invest.’ Investors can obtain information, including the registration status and disciplinary history, of any financial professional doing business to or from New Jersey, by contacting the bureau toll-free within New Jersey at 1-866-I-Invest (1-866-446-8378) or from outside New Jersey at (973) 504-3600, or by visiting the bureau’s website at www.NJSecurities.gov. Investors can also contact the bureau for assistance, or to raise issues or complaints about New Jersey-based financial professionals or investments.”

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