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Articles Posted in Private Placements

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Investors in certain syndicated conservation easement private placements may have legal claims, if their investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the stockbroker or advisor.

Money Flies
The federal government is suing EcoVest Capital (“EcoVest”), a real estate investment company, for allegedly creating sham tax shelters by exploiting so-called conservation easements, which are intended to preserve natural land.  EcoVest’s scheme hinged on grossly overvalued appraisals, the lawsuit alleges.  EcoVest, based in Atlanta, is reportedly one of the biggest promotors of syndicated conservation easements investment programs.  The Justice Department suit states that EcoVest has been involved in 51 syndication easement deals since 2009, generating $1.7 billion in federal tax deductions.

Investors who bought investments in private placements known as syndicated conservation easements could be facing serious consequences: their investments could be worthless and they may be facing back taxes, interest, tax penalties, and audits.

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Investors who were sold private placements investments offering high tax deductions arising from conservation easements may have FINRA arbitration claims, if their investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the stockbroker or advisor.

Money Bags
The Internal Revenue Service (“IRS”) began a crackdown on these types of investments in 2017 after it concluded that many so-called syndicated conservation easements were nothing more than sham transactions designed to create tax deductions.  Syndicated conservation easements are private placements that promise tax deductions worth four to four-and-a-half times a person’s investment.  That means an investor could hypothetically turn a $100,000 investment into $400,000 or more in tax deductions.

However, new IRS guidance (IRS Notice 2017-10, accessible here notice 2017-10) designated certain conservation easement transactions as “listed transactions”, meaning their participants must disclose to the IRS on their tax returns their participation in the transaction. IRS Notice 2017-10 applies to certain syndicated conservation easement transactions are listed transactions if entered into on or after January 1, 2010, and is targeted at those prospective investors who receive oral or written promotional materials offering the possibility of a charitable donation deduction of at least 2.5 times their investment.

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Investors in the Walton Land Fund companies (“Walton”) may have FINRA arbitration claims, if their investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the stockbroker or advisor.

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Walton has marketed a series of highly speculative private placements focused on vacant, undeveloped properties that do not generate income.  The private placements are structured as limited partnerships, and include the following:

Walton U.S. Development Fund, LP

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As we previously reported, the SEC, FINRA, the FBI, and the State of Massachusetts are investigating GPB Capital Holdings LLC (“GPB”) related to the accuracy of GPB’s disclosures of financial information to its investors.  GPB, a New York asset management firm, focused on private placement investments, has been under investigation since September 2018. On October 23, 2019, GPB’s legal problems continued as the U.S. Department of Justice charged Michael Cohn, Chief Compliance Officer of GPB, with Obstruction of Justice related to the SEC investigation.  Mr. Cohn, who up until October 2018 worked at the SEC as an examiner, allegedly reviewed and took with him unauthorized significant and comprising information related to the SEC’s GPB investigation when he left the SEC to work for GPB. Additionally, throughout his tenure at GPB, Mr. Cohn allegedly would brag about his inside knowledge of the SEC GPB investigation to senior members of GPB.

Wastebasket Filled with Crumpled Dollar Bills
GPB and the broker-dealers that sold it to their clients have weathered a storm of bad news over the past year.  Public records show there are at least 80 broker-dealers that sold, or were authorized to sell investments for GPB.  As registered broker-dealers selling private placements, these companies were required to conduct their due diligence in investigating potential investments and making sure their clients understand the risks associated with each potential investment before investing their clients’ money in the investment.

The list of broker-dealers who sold or were authorized to sell GPB securities includes:

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Broker dealers that sold funds offered by GPB Capital Holdings LLC (“GPB”) have collectively been paid $167 million in commissions, according to a report from the publication Investment News.  This sum represents 9.3% of the $1.8 billion that investors paid for these risky private placements, which are offered under SEC regulations allowing the sale of private placements to certain so-called accredited investors that meet certain minimum thresholds for income and/or net worth.

money whirlpool
While brokers and broker-dealers theoretically are allowed to collect as much as 10% in commissions for selling private placements and other non-traded securities to clients, very few investments pay such a high rate.  Some sponsors of private placements like GPB Capital induce brokers and their firms to sell such risky investments by offering much higher commissions and fees that are commonly available elsewhere.

It is not uncommon for individual financial advisors and stockbrokers to earn around 7% in commissions for selling private placements and other illiquid investments- with another 2% going to the brokerage firm.   However, what is common in the private placement world as far as commissions, is extremely high compared with commissions payable to brokers for selling conventional investments.   Mutual funds and other similar investments typically pay less than half as much in commissions as private placements.

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Funds offered by GPB Capital Holdings LLC (“GPB”) have shown signs of distress for some time now.  First, it was reported that the U.S. Securities and Exchange Commission (“SEC”), Financial Industry Regulatory Authority (known as “FINRA”), the FBI, the State of Massachusetts, and the New York Business Integrity Commission are investigating GPB Capital Holdings LLC (“GPB”) for financial misconduct. Then one of GPB’s business partners, Prime Automotive Group in Massachusetts, accused GPB of serious financial misconduct and running a “Ponzi-like scheme”.

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Now, these problems have apparently come home to roost in the form of investor losses, as it was recently reported that GPB issued revised, lower valuations for two of its funds, GPB Holdings Fund II and GPB Automotive Fund.  The funds purportedly lost 25.4% and 39% of their value respectively.  Investors are left to guess whether this is the end of the losse, or whether GPB’s other funds including GPB Holdings LP, GPB Holdings III, GPB Waste Management, LP, and GPB NYC Development LP – will also lose value.

GPB is a New York-based alternative asset management firm whose business model is predicated on “acquiring income-producing private companies” across a number of industries including automotive, waste management, and middle market lending.   An issuer of private placements, GPB has raised $1.8 billion from accredited investors in funds that in turn invest in auto dealerships and the waste management industry.  Stockbrokers and advisors from dozens of brokerage and financial advisory firms sold the high risk, high-commission private placements, including GPB Automotive Portfolio, LP, and GPB Waste Management, LP.   According to SEC filings approximately 60 brokerage firms sold clients investments in various GPB Capital Funds.  However, the primary sellers of these toxic funds appear to have been Royal Alliance, FSC Securities, SagePoint Financial, and Woodbury Financial Services.

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As discussed in previous posts on this blog, the U.S. Securities and Exchange Commission (SEC), the FBI, and the New York Business Integrity Commission are reportedly investigating GPB Capital Holdings LLC (“GPB”).  Now David Rosenberg, a principal of a private company and one of GPB’s business partners, Prime Automotive Group in Massachusetts, is also reportedly accusing GPB in publicly-available court papers of financial misconduct and running a “Ponzi-like scheme”.

Piggy Bank in a Cage
GPB is a New York-based alternative asset management firm whose business model is predicated on “acquiring income-producing private companies” across a number of industries including automotive, waste management, and middle market lending.   An issuer of private placements, GPB has raised $1.8 billion from accredited investors in funds that in turn invest in auto dealerships and the waste management industry.  Stockbrokers and advisors from dozens of brokerage and financial advisory firms sold the high risk, high-commission private placements, including GPB Automotive Portfolio, LP, and GPB Waste Management, LP.

David Rosenberg, the former CEO of Prime Automotive Group, is reportedly a former partner of GPB who sold his majority state in 2017 and is now publicly accusing GPB of engaging in a “Ponzi-like scheme.”  Mr. Rosenberg claims in his lawsuit that GPB used money from investors to prop up the performance of various auto dealerships and to finance payments to other investors.  Law Office of Christopher J. Gray, P.C. has not independently confirmed these allegations, and is merely reporting what Mr. Rosenberg has alleged in his publicly-available court papers.

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As we previously reported, the U.S. Securities and Exchange Commission (“SEC”), Financial Industry Regulatory Authority (known as “FINRA”), the FBI, and the State of Massachusetts are investigating GPB Capital Holdings LLC (“GPB”) in probes reportedly concerning the accuracy of GPB’s disclosures of financial information to their investors.  GPB, a New York asset management firm, focused on private placement investments, has reportedly been under investigation by Massachusetts since September 2018.

Building Demolished
According to public documents filed with the SEC, there are approximately 80 broker-dealers that may have sold, or were authorized to sell investments for GPB.  As registered broker-dealers, any firms who actually sold GPB securities were required to conduct adequate due diligence in investigating potential investments and also to ensure their clients understood the risks associated with any GPB potential investment.

The broker-dealers who appear in the SEC filings for GPB offerings are listed below.  It is important to note that none of these broker-dealers has been found to have engaged in any wrongdoing.

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As previously reported, both the SEC and FINRA have reportedly commenced investigations into GPB Capital Holdings, LLC (“GPB”).  According to news reports GPB is now under investigation by the FBI as well.   Investment News reports that the FBI made an unannounced visit last week to the investment firm’s office in New York, along with officials from a New York regulator.  According to press reports, the focus of the SEC’s inquiry was the accuracy of financial disclosures made by GPB to investor in its funds.   The target of the reported FBI investigation has not been publicly reported.  These investigations by federal regulators come on the heels of Massachusetts securities regulators announcing in September 2018 their own investigation into GPB, as well as the sales practices of more than 60 independent broker-dealers who reportedly offered private placement investments in various GPB funds to their clientele.

Money Bags
GPB is a New York-based alternative asset management firm whose business model is predicated on “acquiring income-producing private companies” across a number of industries including automotive, waste management, and middle market lending.   An issuer of private placements, GPB has raised $1.8 billion from accredited investors in funds that in turn invest in auto dealerships and the waste management industry.  Stockbrokers and advisors from dozens of  brokerage and financial advisory firms sold the high risk, high-commission private placements, including GPB Automotive Portfolio, LP, and GPB Waste Management, LP.

Private placement investments are complex and fraught with risk.  To begin, private placements are often sold under a high fee and commission structure.  Reportedly, one brokerage executive has indicated that the sales loads for GPB private placements were 12%, including a 10% commission to the broker and his or her broker-dealer, as well as a 2% fee for offering and organization costs.  Such high fees and expenses act as an immediate drag on investment performance.

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Money WhirlpoolAs recently reported, both the SEC and FINRA have commenced their own investigations into GPB Capital Holdings, LLC (“GPB”).  GPB is a New York-based alternative asset management firm whose business model is predicated on “acquiring income-producing private companies” across a number of industries including automotive, waste management, and middle market lending.  These investigations by federal regulators come on the heels of Massachusetts securities regulators announcing in September 2018 their own investigation into GPB, as well as the sales practices of more than 60 independent broker-dealers who reportedly offered private placement investments in various GPB funds to their clientele.

GPB has raised approximately $1.8 billion in investor funds across its various private placement offerings, including GPB Automotive Portfolio, LP, and GPB Waste Management, LP.  Private placement investments are complex and fraught with risk.  To begin, private placements are often sold under a high fee and commission structure.  Reportedly, one brokerage executive has indicated that the sales loads for GPB private placements were 12%, including a 10% commission to the broker and his or her broker-dealer, as well as a 2% fee for offering and organization costs.  Such high fees and expenses act as an immediate drag on investment performance.

Further, private placement investments carry a high degree of risk due to their nature as unregistered securities offerings.  Unlike stocks that are publicly registered, and therefore, must meet stringent registration and reporting requirement as set forth by the SEC, private placements do not have the same regulatory oversight.  Accordingly, private placements are typically sold through what is known as a “Reg D” offering.  Unfortunately, investing through a Reg D offering is risky because investors are usually provided with very little in the way of information.  For example, private placement investors may be presented with unaudited financials or overly optimistic growth forecasts, or in some instances, with a due diligence report that was prepared by a third-party firm hired by the sponsor of the investment itself.

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