GPB Capital’s Prime Automotive Group filed an amended Form 10 with the SEC on July 21, 2021. In reviewing the 10A, a few items of interest caught our attention.
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- David Gentile purchased a $200,000 car from GPB Prime Automotive in October 2020. In the Form 10A, Gentile is referred to as “the Member”:
The optics of this are horrible. GPB Capital Holdings’ 17,000 investors have incurred significant losses — and some have lost all — from their $1.8 billion in investments. The firm has not paid any distributions to its investors since 2017. However, Scientologist David Gentile still has the money to purchase a $200,000 supercar.
However, it appears Gentile may be on a budget as he previously had Prime Auto purchase a 2015 Ferrari FF at a cost of $355,000 for his personal use, this as reported by dealbreaker.com:
Among other things, GPB allegedly used fund money to cover the costs of private jets, including a $90,000-a-year flight attendant, all-terrain vehicle rentals and more than $29,000 in expenses that an auditor said included “David’s 50th Bday,” according to the state’s complaint. It also claims GPB spent $355,000 on a 2015 Ferrari FF used by Mr. Gentile….
David Gentile’s Ferrari FF supercar was later sold at a huge loss in what looks like a sweetheart deal. Perhaps Gentile owed a wise guy on Staten Island a favor? The details will likely emerge in his upcoming criminal trial.
The 2015 Ferrari FF screams affluence and success. It is the perfect company car for any accomplished Ponzi Schemer. As legal records show, Gentile stuck Bob’s Buick — one of GPB’s automotive dealerships — with the $335,000 bill for the Ferrari.
Alabama’s lawsuit against GPB Capital, David Gentile et. al. details how Dave Gentile’s Ferrari deal went down:
199. Gentile even used fund assets to buy himself a Ferrari at investors’ expense. In November 2014, a Lash dealership that was a Holdings portfolio company purchased a new 2015 Ferrari FF for $355,000. A few weeks later, that dealership sold the Ferrari to another Lash operated portfolio company doing business as Bob’s Buick. Gentile has stated under oath that this Ferrari was his car for his own personal use.
200. Gentile’s brand-new Ferrari, however, was never transferred into his name. Instead, with Gentile driving it, the Ferrari stayed on the books of Bob’s Buick. Internal email traffic occasionally discussed whether Gentile would finally pay for it. He never did.
201. Finally, in 2017, GPB sold the car to someone else for $172,000. Investors in the Holdings fund bore the loss. As one employee wrote to another: “We are looking at a wholesale loss of ($183,000) that will be applied to Bob’s Buick GMC wholesale loss for the month of December 2017.”
David Gentile stuck his investors with a $183,000 loss on the Ferrari. However, Karma inevitably hammers the contemptuous and the greedy. Five months after buying his $200,000 supercar, David Gentile was arrested by the FBI on several felony charges. Bob’s Buick was able to see some justice after getting stuck with that $183,000 loss on Gentile’s con job. GPB’s investors deserve to see justice as well.
Due to his arrest, Gentile was forced to step down as CEO of GPB Capital. Things got worse for Gentile when he was next ordered to have no role whatsoever in his own company when GPB Capital was taken over by a court-appointed monitor.
It would appear that David Gentile is now only using his $200,000 supercar to drive around town to the offices of his many civil and criminal attorneys.
Several years ago, David Gentile purchased a private jet from car dealer and super-yacht aficionado John Staluppi. The jet was used for personal and business travel by GPB’s top execs. A flight attendant was hired at $90,000 a year. This was in addition to pilot and co-pilot salaries. The jet is gone these days.
In its May 2021 Form 10, GPB Capital issued the ominous statement every investor fears to read:
We have determined that there is substantial doubt as to our ability to continue as a going concern.
GPB Capital’s July 2021 amended Form 10 restated this matter with a caveat (emphasis ours):
In our initial Form 10 filing dated May 14, 2021, we determined that there was substantial doubt as to our ability to continue as a going concern. We have subsequently determined we will have sufficient liquidity to meet our obligations for a period of at least 12 months from the date of filing this Amendment No 1 to Form 10 and therefore, we have concluded there is no longer substantial doubt about our ability to continue as a going concern. However, our financial condition could be materially adversely impacted if we are unable to extend the maturity.
GPB Capital’s Prime Automotive Fund is in limbo: It is not quite dead yet. But it could be dead if it cannot extend the maturity date on its debt. Then it will be dead.
Some of GPB Capital’s debt seem to be funny money to us.
FUNNY MONEY
GPB Capital appears to have habitually engaged in self-dealing to loan itself money. In this recent Form 10, we are informed of an entity called GPB AISF. The Form states, “GPB AISF is an offshore financing facility formed primarily for the benefit of the Partnership.” GPB AISF is an acronym for GPB Automotive Income Sub-Fund, Ltd.
Our research shows that GPB AISF is a Cayman Islands entity with $40.6 million in assets. Where did the $40.6 million come from?
The Form 10 declares that GPB AISF is a GPB-controlled entity which exists for the benefit of the Partnership. However, how can this be a truthful statement when GPB AISF loans the partnership money at usurious loan-sharking rates of 13.5%? GPB AISF appears to be a self-dealing entity which exists solely for the benefit of its owner(s). From the Form 10, emphasis ours:
NOTES PAYABLE TO RELATED PARTIES
In October 2015, the Partnership entered into a loan agreement with GPB Borrower LLC, an affiliate of the General Partner, and received proceeds in the form of a loan of $12.0 million, maturing in October 2019. The loan accrued interest and was paid monthly in arrears at 13.5% per annum. In August 2016, the note was restructured and certain incremental procurement costs incurred at the loan’s inception were added to the existing principal, increasing the principal balance to $15.4 million (“AISF Note 1”). As part of the restructuring, AISF Note 1 was assigned by GPB Borrower LLC to an affiliate of the Partnership, GPB Automotive Income Sub-Fund, Ltd. (“GPB AISF”). GPB AISF is an offshore financing facility formed primarily for the benefit of the Partnership.
GPB AISF has a predecessor in a previous scammy entity called LSG. Specifically, David Gentile, Jeffry Schneider, and Jeff Lash have been sued for, among other causes of action, misappropriating GPB Capital investor money through a shell company called LSG. From the lawsuit filed by New Jersey against GPB Capital:
Gentile, Schneider, and Lash Misappropriated Money Through a Shell Company Named LSG
173. Gentile, Schneider, and Lash failed to disclose that they had unlawfully misappropriated portfolio company earnings from 2014 to 2016.174. The instrumentality of this diversion was a shell company called LSG Auto Wholesale, LLC (“LSG”) – named for Lash, Schneider, and Gentile, its primary beneficiaries. LSG was formed on April 9, 2014, as a Delaware limited liability holding company. It had only three corporate members:
(1) Jachirijo, LLC (“Jachirijo”), controlled by Gentile;
(2) GPB Lender, LLC (“Lender”), also controlled by Gentile, and,
(3) EMDYKYCOL, Inc.
(“EMDYKYCOL”), a now-dissolved Florida corporation owned by Lash.The existence of LSG and the payments through it were a secret even to GPB Capital’s own former CFO, its current Chief Operations Officer, and its former auditors. All of them testified that they had been unaware of LSG’s existence until after it was disclosed in a counterclaim filed against GPB Capital in 2018.
GPB Capital’s Form 10-A dated July 21, 2021:
Categories: The Scientology Money Project
Thanks for the udpate, Jeff. A couple random thoughts:
1. At least they put the indictment first in the summary risks section, which is the very first part of the document. I’m sure the lawyers mandated that they not try to bury the truth deep on page 1,384 as many companies do.
2. Yeah, loaning money from the GPB AISF at 13.5% is pretty steep, but the last time I checked, that’s consistent with subprime consumer auto loan rates. You’d expect that the rate charged to the GPB dealerships would be a bit lower, reflecting the fact that they don’t have marketing costs to find borrowers, perhaps 8% or 9%.
The 13.5% rate may actually be lower than any other financing that they can get for the dealerships, so this could have a legitimate purpose in making money available at a LOWER cost than what’s available otherwise. That said, it sure smacks of double-dealing and also bad optics: where did they get the cash to put into that entity? I’m sure the Feds are all over finding out the answer to that question, by the way.
Note that the monitor may not be able to prevent them from doing a new self-deal if the interest rate is competitive with other financing avenues; I don’t follow that segment of the rules so I don’t know what a monitor can prevent (versus the somewhat similar job of bankruptcy receiver, who has lots more power to prevent hanky-panky).
Incidentally, the question arises as to whether $40 million is enough to fund operations. They sold about $400 million in new and used cars in 2021Q1, or around $1.7 billion per year (not attempting to forecast dip in demand due to component shortages as discussed below). If they need to finance all their dealer inventory, $40 million in capital at 13.5% is not enough to keep them in inventory at sales levels consistent with Q1. So either they’re still getting some financing from the manufacturers or they’re in trouble. Not sure which it is. They may still be getting full financing at competitive rates, and this LP is merely a short-term swing facility to tide them over if they get cut off until they can line up other more permanent financing sources. I’m not going to wade carefully through 200 pages of legalese to try to answer this, if the answer is even in the Form 10-A.
3. The disclosure about goodwill at the bottom of Page 4 in the 10-A is worth noting. When you do an acquisition, “goodwill” is the amount that you paid for the company that exceeds the value of its tangible assets (buildings, inventory, machinery, etc.). These days, there’s often a lot of goodwill associated with the acquisition of a successful, growing business; it can be from several times to dozens of times the value of tangible assets, depending on the industry.
As the 10-A says, you have to test annually to see if the goodwill is “impaired,” in other words, whether the acquired business is still valuable. If it’s not, you make an accounting adjustment (we Global Capitalists call that “flushing”) to write down the goodwill to a more appropriate value. This results in a big one-time hit to profits, which will often result in substantial losses as recorded on the standard financial statements. As an aside, this charge against profits doesn’t actually burn cash. In other words, the fund doesn’t have to write a check to someone for the amount of the goodwill impairment writedown. The check was written to the seller of the company when the acquisition closed several years previously. This is just the time when they have to acknowledge that they overpaid. But I digress.
In a partnership, that loss gets passed on to the investors, who can use it to offset some other investment profits on their taxes. However, it’s a pretty sure sign that at least that part of the money they invested is never coming back. In other words, they’re no longer temporarily under water, they’ve permanently lost that portion of their investment. If a large goodwill flush occurs, it will certainly make it harder to raise money in the future. It’s the equivalent of what is variously called a “washout,” “cram-down” or “down round” in venture capital investing — when new investors put money in at a lower valuation than the last round. Why, when there are so many good investments out there, would anyone put money in a partnership at any valuation with tangible evidence of how much of the previous investors’ money management lost through their screw-ups?
4. It’s not entirely clear that this is the time to buy dealerships. Sure, there’s a shortage of cars, so dealers are marking up units with significant premiums over sticker price. However, looking at monthly unit sales, the numbers are bouncing around a bit. They had rebounded to levels near previous years in comparable months in the winter and spring, but the bottom seems to have fallen out in July, most likely due to low dealer inventory, driven by component shortages. Looking at the St. Louis Federal Reserve domestic vehicle production history, units continue to drop, with July production coming in at a monthly rate about 1/3 the production rate five years ago. As you know, much of the bottleneck for production at this point is availability of semiconductors, most of which are custom-made parts and not high-volume generic parts like memory chips. It’s harder to get on the production schedule for that type of chip once things have gone sideways in the fab. So I’d expect that semi supply issues are going to persist at least through the end of 2021, perhaps until the fall of 2022 when the cutover to 2023 model years starts. Unfortunately, the high end luxury models have the most different chips, and are thus most likely to see continued production problems. And those are the most profitable cars for both dealers and manufacturers. I’d thus suggest that this could actually be the WORST time to sell dealers, not the best.
That’s all I’ve got time for at the moment.
–JPC
One more thought: here’s a good analogy about goodwill impairment. It’s like gambling in a casino. When you’re standing at the tables and you’re on a losing streak, you can convince yourself that if your luck changes, you will make your money back and emerge a winner, as long as you have some chips left. You know you’re under water, but you still have some hope.
But flushing the goodwill and taking the declared loss is like cashing in the chips you have left and leaving the casino. At that point, you have to reckon with the fact that you lost the money and it’s not coming back (unless you’re in extreme denial and planning to take your depleted cash and go to a different casino to try and win it back). Same thing: a major goodwill writedown is an irrevocable and visible acknowledgement that you lost in that acquisition.
Also, for you accounting wonks out there: I most certainly do know that there is a normal process for regular periodic amortization of intangible assets (including goodwill) that you always find in GAAP financial statements. I’m sidestepping that issue in the above discussion for simplicity’s sake, because amortization is predictable and regular, and many companies with lots of amortization can still be nicely profitable and thus good investments. I’m focused on the unanticipated extraordinary charges, and didn’t want to overcomplicate the discussions.