David Gentile, the founder and CEO of GPB Capital Holdings, and Jeffry Schneider, the owner and CEO of Ascendant Capital, were found guilty of securities fraud and conspiring to commit securities and wire fraud by a federal jury in Brooklyn, New York, on Thursday, August, 1st. Each count of the indictment—conspiracy to conduct securities fraud, conspiracy to commit wire fraud, and securities fraud—was proved, and they were found guilty.
Two charges of wire fraud were also brought against CEO David Gentile. The allegations stem from an extensive scheme to mislead over 10,000 investors about the origin of the funding for GPB's monthly distribution payments and the income produced by three of the investment funds managed by the company.
Genesis of the Scam
Established in 2013, GPB Capital Holdings had phenomenal expansion selling high-risk private placements via dozens of independent broker-dealers. By the end of the fifth year, the firm had amassed $1.8 billion from affluent customers seeking income during the zero-interest-rate era of financial markets. With over six funds under its management, the business aimed to provide investors with a consistent 8% return each year.
The failure of Gentile and Schneider, the company's broker-dealer head, to file audited financial statements and other necessary documents with the Securities and Exchange Commission in a timely manner raised red flags for GPB Capital Holdings in 2018.
Operation of the Scheme
In a scam that lasted from August 2015 to December 2018, David Gentile and Jeffry Schneider allegedly misled and failed to disclose crucial information in order to defraud investors and potential investors in several GPB funds. The United States Attorney's Office claims that Gentile and Schneider, acting alone and via Ascendant Capital employees, misled investors into believing that the funds would pay out monthly distributions entirely from operating profits.
This would imply that the companies bought by the funds would be lucrative enough to pay out from cash flow, rather than using investor capital. However, the defendants attempted to conceal the funds' underperformance by creating false paperworks and paid out dividends using investors’ capital.
Several investment firms that included GPB Capital Holdings as a general partner raised and invested resources in private equity ventures. In order to promote the GPB funds to potential investors, GPB Capital Holdings collaborated with Schneider's broker-dealer, Ascendant Capital.
With frequent reports on the funds' performance, Gentile and Schneider collaborated closely on the marketing and administration of GPB funds. In essence, Gentile and Schneider gave the go-ahead for the bogus distribution payments while knowing the performance of GPB Funds have been subpar.
The U.S Attorney’s Statement
According to Breon Peace, the U.S. Attorney for the Eastern District of New York, “The jury found that the defendants lied to investors about the health of their funds and the source of fund distribution payments, all while they were fraudulently making those distribution payments with investor capital to maintain the appearance of successful portfolio companies.” Schneider, 55, and Gentile, 57, are both facing sentences of up to 20 years in jail.