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Articles Posted in Private Placements

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Investors in private placement securities including Shopoff Land Funds and other private placement securities 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 Whirlpool
Shopoff Land Funds and other private placement investments are generally categorized as alternative investments and may be unsuitable for many inexperienced investors or those with a modest net worth.  Private placements are investments that are not publicly registered with the Securities and Exchange Commission that are offered via various exemptions from registration that permit the sales.  Sales of certain private placements including those offered under an exemption known as “Regulation D” are largely limited to sales to “accredited investors” who meet certain eligibility criteria established by the Securities and Exchange Commission (SEC).  For example, an investor would be accredited if they had a net worth over $1 million, excluding primary residence (individually or with spouse or partner) or income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year.  Investors can also be deemed accredited based upon professional experience.

Shopoff private placement offerings have reportedly included the following:

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Investors in private placement securities including Madison Funding I bonds and Poet’s Walk Funding I bonds, 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 Whirlpool
The brokerage firm Herbert J Sims & Co., a/k/a HJ Sims reportedly offers to investors a number of private placement investments that the firm itself structures and establishes.  For example, a private placement known as Madison Funding I, LLC was brought to market in 2019 by HJ Sims and issued $5,115,000 in bonds due June 1, 2024.  The Madison Funding I bonds reportedly defaulted on principal payments due March 2, 2021 and have paid reduced interest since.  Despite the default, Madison Funding I bonds are reportedly shown as having a full value of $100 on customer account statements.

In another private placement offering, Poet’s Walk Funding I, LLC, $10,000,000 in bonds were reportedly sold to the public.   These bonds have reportedly also defaulted and have paid reduced interest.

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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”.
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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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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Piggybank in a CageOn November 9, 2018, GPB Capital Holdings, LLC (“GPB”) notified certain broker-dealers who had been selling investments in its various funds that GPB’s auditor, Crowe LLP, elected to resign.  As reported, GPB’s CEO, David Gentile, stated that the resignation purportedly came about “[d]ue to perceived risks that Crowe determined fell outside of their internal risk tolerance parameters.”  GPB has since engaged EisnerAmper LLP to provide it with audit services moving forward.

As we recently discussed, GPB has come under considerable scrutiny of late.  In August 2018, the sponsor of various private placement investment offerings including GPB Automotive Portfolio and GPB Holdings II, announced that it was not accepting any new investor capital, and furthermore, was suspending any redemptions of investor funds.  This announcement followed GPB’s April 2018 failure to produce audited financial statements for its two largest aforementioned funds.  By September 2018, securities regulators in Massachusetts disclosed that they had commenced an investigation into the sales practices of some 63 independent broker-dealers who have reportedly offered private placement investments in various GPB funds.  To name a few, these broker-dealers include: HighTower Securities, Advisor Group’s four independent broker-dealers – FSC Securities, SagePoint Financial Services, Woodbury Financial Services, and Royal Alliance Associates, in addition to Ladenburg Thalmann’s Triad Advisors.

The various GPB private placement offerings include:

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Money in WastebasketAs recently reported, the Massachusetts Securities Division (the “Division”) has commenced an investigation into the sales practices of some 63 independent broker-dealers who offered private placements sponsored by alternative asset manager GPB Capital Holdings, LLC (“GPB”).  Specifically, the Division has intimated that it began an investigation into GPB following a recent tip concerning the firm’s sales practices which allegedly occurred not long after GPB announced that it was temporarily halting any new capital raising efforts, as well as suspending any redemptions.

According to the Division’s head, Mr. William Galvin, the investigation is in its “very nascent stages.”  At this time, Massachusetts securities regulators have requested information about GPB from more than 60 broker-dealers, including HighTower Securities, Advisor Group’s four independent broker-dealers, as well as Ladenburg Thalmann’s Triad Advisors.

In August 2018, GPB – the sponsor of certain limited partnership offerings including GPB Automotive Portfolio and GPB Holdings II – announced that it was not accepting any new capital.  According to filings with the SEC, sales of the two aforementioned GPB private placements allegedly netted the broker-dealers marketing these investment products some $100 million in commissions, at a rate of about 8%, since 2013.

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1st-Global-Capital-1As we have discussed in several recent blog posts, on July 27, 2018, 1 Global Capital (a/k/a 1st Global Capital) (hereinafter, “1GC”) filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court for the Southern District of Florida.  Formed about 5 years ago, 1GC was purportedly in the business of making short term merchant cash advances to a range of small businesses.  In exchange for investor money, 1GC issued so-called “memorandums of indebtedness,” sometimes referred to as First Global Capital Notes (“Notes”), to numerous retail investors through a nationwide network of advisors and sales agents.  Investors were promised a high-return, low-risk investment in supposedly safe, short-term deals.

Prior to 1GC’s bankruptcy filing, the SEC had “opened an investigation into the company’s activities related to alleged possible securities laws violations, including the alleged offer and sale of unregistered securities, the alleged sale of securities by unregistered brokers, and by the alleged commission of fraud in connection with the offer, purchase and sale of securities.”  In the weeks following 1GC’s $283 million Chapter 11 filing, it has become apparent that numerous investors nationwide have been negatively impacted.  As alleged by the SEC, 1GC “used a network of barred brokers, registered and unregistered advisers, and other sales agents – to whom they paid millions in commissions – to offer and sell unregistered securities to investors in no fewer than 25 states.”

Publicly available information indicates that numerous investors in the greater Kansas City, KS area have sustained losses in connection with investing in 1GC Notes.  In particular, publicly available information suggests that Overland Park-based investment group Pinnacle Plus Wealth Management (a/k/a Pinnacle Financial) (“Pinnacle”), through its principal and Pinnacle employees / agents, may have recommended investments in 1GC Notes to retail investors.  In fact, court records indicate that approximately 160 1GC accounts involved Kansas City area addresses, and moreover, it appears many investors committed their retirement funds to 1GC investments through their retirement accounts.

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Piggy Bank in a Cage
On September 14, 2018, the SEC initiated a civil action (the “Complaint”) in federal court in the Southern District of Indiana against Ms. Tamara Rae Steele (CRD# 3227494) (“Steele”), as well as her eponymous investment advisory firm, Steele Financial, Inc. (“Steele Financial”), alleging that Ms. Steele had defrauded a number of her advisory clients through recommendations to invest in certain high-risk securities issued by Behavioral Recognition Systems, Inc. (“BRS”), in a scheme that purportedly generated $2.5 million in commissions for Ms. Steele’s benefit.  According to publicly available information through FINRA, Ms. Steele, a former middle school math teacher, first began working as a financial in or around 1999.  Most recently, she was affiliated with broker-dealer Comprehensive Asset Management and Servicing, Inc. (CRD# 43814) (“CAMAS”) from January 2009 – July 2017.  Ms. Steele’s CRD record showing her employment history and customer claims filed with FINRA is accessible below.

tamara rae steele

As alleged by the SEC in its Complaint, Ms. Steele was terminated by her former employer, CAMAS, when the “broker-dealer learned that [she] was selling BRS securities outside the scope of her employment with the firm and without the firm’s knowledge and approval, a practice called ‘selling away’ from the firm.”  Specifically, the SEC has alleged that Ms. Steele fraudulently recommended “over $13 million in extremely risky securities issued by a private company, Behavioral Recognition Systems, Inc. (‘BRS’).”  Further, the SEC has alleged that Ms. Steele violated her fiduciary duty to her clients — many of whom were unaccredited retail investors who were either current or former teachers and public-school employees — by purportedly failing to disclose that she was earning “[c]omissions ranging from 8% to 18% of the funds raised for BRS.”  The SEC Complaint is accessible below:

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As we discussed in a recent blog post, a $283 million Chapter 11 bankruptcy filing on July 27, 2018, by the Hallandale Beach, FL firm 1 Global Capital (a/k/a 1st Global Capital, or 1GC) has negatively impacted investors nationwide.  Unfortunately, many retail investors committed their hard-earned money, in many instances their retirement funds, into so-called 1GC “memorandums of indebtedness” which were also sometimes referred to as First Global Capital Notes (“Notes”).  Publicly available records indicate there are more than 4,000 1GC accounts across the country, sold by many advisors in various states.

Formed approximately 5 years ago, 1GC was purportedly in the business of financing small business by providing capital to a range of businesses including restaurants, construction companies, manufacturing operations, and healthcare companies.  1GC issued its Notes to retail investors, often referred to in the contract as “lenders” or in other instances as “creditors.”  In exchange, these lenders or creditors invested in supposedly safe, short-term deals that would pay out around 7% in interest at the end of the term (e.g., 9-month term).

Upon information and belief, a number of 1GC investors were steered into these Notes by advisors.   Advisors who have recommended Notes reportedly may include Matthew Walker or others working for his Overland Park, Kansas-based group of Pinnacle Plus companies.

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An issuer of purported secured notes backed by real estate has been sued by the Securities and Exchange Commission alleging that amid losses, it “devolved into a Ponzi scheme.”  The group of companies, known as EquityBuild, solicited investors via Internet advertising, social media, and other methods, the SEC alleges.  According to the SEC suit, EquityBuild and its leaders  defrauded investors that invested in notes backed by South Side of Chicago real estate and other assets.   EquityBuild affiliates “sustained heavy losses and the properties they pitched to investors failed to earn anywhere near enough to pay the promised double-digit returns,” the SEC complaint says. “As a result, (the EquityBuild) investment program devolved into a Ponzi scheme: Defendants could only pay earlier investors by raising funds from unwitting new investors.”

Jerome and Shaun Cohen, father and son, run EquityBuild and a subsidiary, EquityBuild Finance.  EquityBuild allegedly  has raised at least $135 million from more than 900 investors since 2010, according to the SEC suit, filed in federal court in Chicago.  EquityBuild allegedly solicited investors to invest in debt used to finance properties.  EquityBuild allegedly touted outsize returns of 12 to 20 percent with minimal risk of loss of principal. and downplayed the risks, according to the SEC complaint.  The SEC alleges that EquityBuild, based in Marco Island, Florida,  skimmed 15 to 30 percent off each investment through fees that the company and the Cohens didn’t disclose.  EquityBuild also allegedly paid returns to older investors with the proceeds of newer investments, paying investors about $14.5 million in interest payments  between January 2015 through February 2017 although income and fees from EquityBuild properties totaled only $3.8 million, according to the SEC suit.
It is unclear from publicly available information whether EquityBuild investments were sold by FINRA or SEC-registered financial advisors.  Investors in EquityBuild may wish to consider claims against professionals such as stockbrokers, financial advisors, or insurance agents who sold them the investments, or any professional services firms (law firms, accounting firms, etc.) that may have materially participated in EquityBuild’s unregistered securities offering.  As the SEC has alleged that the EquityBuild investments were securities that were not registered or exempt from registration, investors may be able to pursue claims against various third-parties that materially participated in these transactions.

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