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.
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.
News of these exrbitant commissions comes on the heels of disclosure by GPB Capital Holdings that certain of its private placement funds have suffered substantial losses. According to GPB Capital, as of the end of 2018, the losses in their funds range from 25% to 73%, with GPB Capital’s two largest funds, GPH Holdings II and GPB Automotive Portfolio, suffering 25.4% and 38% respective declines. Further, GPB has failed to file audited financial statements for a prolonged period, suggesting that there may possibly be issues with its internal controls over financial reporting. The GPB funds, which once were collectively valued at around $1.8 billion, are now purportedly worth about $1.1 billion.
As a part of the GPB release on the value of its funds, GPB claimed that its funds have given $272 million back to investors via “distributions.” However, a material portion of these “distributions” were nothing more than returning some of the capital investors placed with GPB Capital. Investors thus receive some of their own invested funds back as principal distributions- like someone who keeps his money in a mattress, except with 9% taken out as commissions.
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.
In addition to extremely high commissions, 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 lack regulatory oversight. Accordingly, private placements are typically sold through what is known as a “Reg D” offering. 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.
Broker-dealers are required by law to conduct due diligence on an investment before it is recommended to a client. Furthermore, financial advisors have a duty to understand and disclose the risks associated with a financial product, as well as to conduct a suitability analysis to determine if such an investment meets an investor’s stated investment objectives and risk profile.
The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience representing investors in connection with complex investment products, including illiquid private placements and unregistered securities offerings. Investors may contact us via the contact form on this website, by telephone at (866) 966-9598, or by e-mail at email@example.com for a no-cost, confidential consultation. Attorneys at the firm are admitted in New York, New Jersey, Wisconsin and various federal courts around the country, and handle cases nationwide (in cooperation with attorneys located in those states if required by applicable rules).