Investment News is reporting that broker-dealers and their brokers that sold GPB Capital Holdings private placements to investors have collectively been paid $167 million in commissions. That large number represents 9.3% of the $1.8 billion that supposedly accredited, wealthy investors paid for these risky private placements. Recent reports had estimated that the commissions paid were lower, at around $100 million (about 7% per transaction), but GPB Capital has apparently confirmed the much larger number.
While brokers and broker-dealers are allowed to make up to a 10% commissions for selling financial products to clients, very few investments pay such a high rate. However, private placements, such as GPB Capital, entice brokers and their firms to sell such risky investments by offering much higher commissions and fees.
For private placements, it is not uncommon for financial representatives to earn around 7% in commissions, with another 2% going to the brokerage firm. In comparison, mutual funds and other similar investments typically pay less than half as much in commissions.
The fact that GPB private placement investors paid this much in commissions is only adding fuel to growing concerns that many of these investments may have been inappropriately sold to investors and that the high fees were likely the incentive for the sales.
GPB Private Placement Funds Suffer Steep Losses
News of the high commissions comes on the heels of disclosure by GPB Capital Holdings that all 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.
All of the GPB funds, which once were collectively valued at around $1.8 billion, are now estimated to be worth about $1.1 billion, roughly losing $600 million for investors. That’s 61% of the total capital that was raised by investors, while brokerage firms and their brokers have walked away from the sales with their tens-of-millions of dollars in commissions and fees intact.
In its article about the high commissions investors paid, InvestmentNews noted that the GPB Armada Waste Management Fund is now valued at around $53.4 million. That’s a 67.4% drop, as investors paid $163.4 million for that fund. To put it in terms of the result for investors, this means that for every investor that paid $50,000 for a GPB Armada Waste Management share, now his/her investment is currently worth $16,330.
Lack of Investor Profits, Unsuitability
More than 60 brokerage firms sold GPB private placements to investors. These same investors saw redemptions in the private placement funds suspended last year. As a part of the GPB Capital release on the value of its funds, company documents report that GPB Capital Holdings has given $272 million back to investors via “distributions.” However, the company is now clear to point out that these “distributions” were nothing more than returning some of the capital investors placed with GPB Capital. That is, the money sent to investors thus far were not returns/profit made on the investments. This, sadly, sounds very similar to how a typical Ponzi Scheme works, whereby investors are paid money through the funds of other investors rather than through profits in the company.
There is also growing concern that many of the investors who were sold GPB investments were not accredited investors and therefore did not meet the criteria required for who can invest in private placements. These are requirements put in place to make sure that these investments are suitable and not too risky for investors who do get involved. In such instances when an unaccredited investor has invested in GPB, then the private placements would have been unsuitable for them from the start and should never have been recommended.
GPB Private Placement Fraud Claims
In the last year alone, the US Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), state securities regulators, and the FBI have opened investigations into GPB Capital and its private placements. An ex-business partner who is suing GPB, Patrick Dibre, claims that the GPB funds were operated like a Ponzi scheme. As discussed above, even GPB Capital’s own recent statements seem to support Mr. Dibre’s allegation.
Our GPB Capital private placement lawyers are representing clients in filing broker fraud claims against the broker-dealers and their representatives for wrongfully selling investors GPB Capital funds. Contact Shepherd Smith Edwards and Kantas, LTD LLP (SSEK Law Firm) today so that we can help you explore your options during a free, no obligation case consultation.