In a press release on February 4, 2021, the Securities and Exchange Commission (“SEC”) announced that it was bringing charges against three individuals and their affiliated entities in connection with a Ponzi scheme involving $1.7 billion in funds.  The SEC alleges that David Gentile, the owner and CEO of GPB Capital, and Jeffry Schneider, the owner of GPB Capital’s placement agent Ascendant Capital, made annual distributions that included funds from investors own capital rather than from profit generated from the funds’ portfolio companies.  The SEC also alleged that Gentile and Jeffrey Lash, a former managing partner at GPB Capital, manipulated the financial statements of certain funds managed by GPB Capital to deceive investors and give them a false impression regarding the finances of the funds. GPB Capital also allegedly failed to register some of its funds with the SEC and failed to issue audited financial statements.  The SEC also charged GPB Capital with violating SEC whistleblower protections by including prohibited language in separation agreements and retaliating against a known whistleblower.

Ponzi schemes are not always the complete fraud that people envision when they think of Charles Ponzi or Bernie Madoff.  Legitimate investment funds can run afoul of the SEC’s antifraud rules if they do not take steps to ensure capital funds stay sequestered from funds used for distributions to investors.  In difficult economic times, investment advisors and fund managers may be tempted to dip into a fund’s capital in order to meet the distribution expectations of investors.  While tempting, and possibly done with good intentions, this exposes funds and investment advisors to potential enforcement actions by the SEC or the Department of Justice.  To prevent this scrutiny, it is crucial that funds issue audited financial statements on an annual basis and put safeguards in place to ensure the integrity of capital funds.

This case also demonstrates the SEC’s strong efforts to protect whistleblowers.  The SEC relies heavily on whistleblowers to reveal potential fraud to SEC.  Fraud, by its nature, is concealed from the prying eyes of both curious investors and the SEC.  Whistleblowers are crucial in pealing back the shades and revealing fraud.  Therefore, the SEC provides whistleblowers with a portion of any recovery against individuals and entities that the whistleblower has reported, incentivizing them to come forward and report potential wrongdoing.  Further, there are protections in place to prevent retaliation and ensure that previous employees are not hampered in bringing fraud to the attention of the government.  

The attorneys at Chilivis Grubman represent clients of all types and sizes in connection with SEC investigations and related securities litigation.  If you need assistance with such a matter, please contact us today.