Life is great if you work for GPB Capital. However, life is terrible if you’re an investor. It’s much, much, much worse than owning Netflix.

Following our recent article entitled The Colossal Wreck of Scientologist David Gentile’s GPB Capital Holdings Ponzi Scheme is Slowly Sinking Beneath the Waves, reader M.S. Cohn left  a comment suggesting we read GPB Capital Automotive Fund’s recently filed SEC 10K:

Perhaps read the GPB Automotive Portfolio Annual 10k published last week. It has adopted a liquidation style accounting that sets out the current position of the Fund. They write that it can take up to two years to liquidate the fund. a lot of uncertainty as to the exposure to Civil lawsuits. A lot of interesting information contained within this 10K

The 10K was on our list of things to read, so we appreciate M.S. Cohn’s timely reminder. The 10K is posted below as a PDF.  Many things stood out to us in the document. For example, GPB Capital is still paying the legal bills for David Gentile and Jeffry Schneider. Money is also being paid to lawyers to fight the torrent of lawsuits. Per the indemnification clause buried in the contracts GPB’s investors signed, they are on the hook for these legal bills created by the civil torts, fraud, and alleged criminal conduct of Gentile, Schneider, Lash, and others. GPB expects the litigation to go on for years:

We and our subsidiaries that used to operate dealerships are involved, and will continue to be involved, in legal proceedings arising out of the operations of our business, including litigation with customers, wage, hour and other employment-related lawsuits, and actions brought by governmental authorities. Some of these lawsuits purport or may be determined to be class or collective actions and seek substantial damages or injunctive relief, or both, and some may remain unresolved for several years.

The results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our business, financial condition, or results of operations. In the event settlement discussions regarding class action lawsuits or any pending regulatory investigations are unsuccessful, any liability may require an outflow of cash from the Partnership. The amount and timing of any such outflow of cash is not estimable at this time. GPB anticipates that the resolution of these matters will likely take substantial time. In many of the cases, there is still significant discovery and/or investigation to be completed. When combined with lengthy motion practice and possible trial and appeals, coupled with the inevitable slowdown due to the ongoing pandemic, some or all of these matters may not be resolved for several years.

We are advancing funds to officers, directors and representatives of the dealerships, as well as GPB, its principals and representatives, for any reasonable costs they may incur in connection with defending themselves in such disputes as required by various agreements or governing law. This advancing of funds does not cover any potential future outcomes or settlements that result from these disputes. The officers, directors and representatives of our dealerships (including our personnel or persons affiliated with GPB) may similarly receive funds by such dealerships. These arrangements to advance funds may result in contingent liabilities, for which we established reserves and escrows. In that regard, distributions to Limited Partners may be delayed or withheld until such reserve is no longer needed or the escrow period expires…

And then this bomb gets dropped:

If the amounts of such reserves or escrows are insufficient, such liabilities might ultimately have to be funded by Limited Partners to the extent that such Limited Partners have received prior cash distributions from us

It is possible that GPB Capital’s investors a/k/a “Limited Partners may have to repay any distributions for legal fees and other losses. This is one of the risks of investing in certain private equity deals: One is not a shareholder; one is a limited partner and bears the risks of paying losses out of pocket. To this point, the word “losses” appears 56 times in this 10k. The 10K lists numerous lawsuits and states in each case:

Any potential losses associated with this matter cannot be estimated at this time.

The 10K informs readers what everyone already knew: GPB Capital formally voted to liquidate the Automotive Fund. This was borne out by the sale of the bulk of the Automotive Fund to Group 1 Automotive. From the GPB Capital 10K:

Plan of Liquidation

Concurrent with reaching an agreement in principle with M&T Bank on December 28, 2021, to allow for distributions to the Partnership and GPB Holdings II, LP, Highline management, on behalf of GPB, commenced the plan to liquidate the Partnership’s remaining net assets and wind up the Partnership (“Plan of Liquidation”). Highline management reached its decision to commence the Plan of Liquidation because of, among other things, the advanced stage of the Group 1 Sale, the agreement in principle with M&T Bank to allow for the $570.0 million distribution, and that no further plans to deploy capital in other investments are contemplated. In accordance with accounting principles generally accepted in the United States (“US GAAP”), liquidation of the Partnership was thereby determined to be imminent, resulting in the need to adopt the liquidation basis of accounting as of December 31, 2021.

The Highline board of directors (the “Board”) formally approved the commencement of the Plan of Liquidation at the Board meeting held on February 3, 2022. The Board concluded that it was appropriate to adopt liquidation accounting in accordance with US GAAP for financial reporting purposes, using a “convenience date” of December 31, 2021.

The Partnership cannot predict the timing or amount of any distributions to its limited partners (the “Limited Partners”), as uncertainties exist as to the ultimate amount of expenses associated with implementing its monetization strategy, liabilities, operating costs and amounts to be set aside for claims, obligations and provisions during the liquidation and winding-up process and the related timing to complete such transactions and the overall liquidation process. Nevertheless, it is expected that the liquidation will be complete by December 31, 2024. Please see “Item 1A. Risk Factors.”

The 10K further informs readers that GPB execs Rob Chmiel, Michael Emanuel, and Mike Frost each have a $1 million annual salary package. In our view, these salaries are obscene for a fund that is circling the drain and its three founders are headed to their Federal criminal trials. GPB Capital is liquidating its funds. Selling off assets is radically different than managing an ongoing firm to produce income and growth.

Our take: Salaries for these three GPB Capital liquidators should be $250,000 max as they have zero corporate responsibility to achieve growth, produce income, or increase shareholder value. Chimel, Emanuel, and Frost are not corporate executives in the classic sense of the term. Instead, they are simply burning cash to sell off assets.  The 10K describes the costs associated with liquidation. Once the assets are sold, the cash flow from these assets is gone and GPB Capital then has to spend part of the cash from sales to fund itself as it continues to liquidate. It is not hard work to sell off assets as compared to hitting earnings projections. From the 10K (emphasis ours):

3. Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation

The liquidation basis of accounting requires the estimation of net cash flows from operations and all costs associated with implementing and completing the plan of liquidation. These accrued receipts and costs are estimated and are anticipated to be collected and paid out over the liquidation period. We project that we will have estimated costs in excess of estimated receipts during the liquidation period. These amounts can vary significantly due to, among other things, the timing and estimates for receipts and costs associated with the operations of Prime Subaru Manchester until ownership transfers, estimates of direct costs incurred to complete the sale of assets, the timing and amounts associated with discharging known and contingent liabilities, the costs associated with the winding up of operations, and other costs that we may incur which are not currently foreseeable. These accrued receipts and costs will be adjusted periodically as projections and assumptions change. Upon transition to the liquidation basis of accounting on December 31, 2021, we accrued receipts and costs expected to be earned or incurred during liquidation which is anticipated to be complete by December 31, 2024, however, no assurances can be provided that this date will be met. The liability for estimated costs in excess of estimated receipts during liquidation at December 31, 2021 was comprised of (in thousands):

The 10K tells us that Rob Chmiel and Michael Emmanuel are entitled to $1 million severance packages if they are let go without cause. This sounds like a golden parachute deal to us. Chmiel and Emmanuel also get their COBRA benefits paid for 18 months under this severance deal.

COBRA benefits cost what? $2000 a month? For Chmiel and Emmanuel to negotiate post-exit COBRA benefits payments after being paid a $1 million a year salary is an outrageous abuse of investor money. Rob and Mike should pay their own damn COBRA payments after they leave. However, true to form, GPB Capital insiders continue to grab investor money at a every possible opportunity; even for 18 months of COBRA benefits post-exit.

Several thousands of GPB Capital’s investors are over 65 and lost substantial amounts of their life savings. And yet Rob and Mike must have their COBRA paid. The cynical and endless money-grab at the expense of GPB’s investors shows the predatory culture at GPB Capital has not changed. Investor money means nothing to these hogs feeding at the trough.

To help these GPB Capital execs limp along at $1 million a year in salary, US taxpayers loaned, and then forgave, GPB Capital $20 million dollars in PPP loans: 

Paycheck Protection Program Loans

In 2020, the Partnership’s subsidiaries entered into Paycheck Protection Program loans (“PPP Loans”), for a total initial amount of $20.0 million across 30 loans. Interest accrued at 1% per annum. Per H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020, all payment of principal, interest, and fees was deferred until the date on which the amount of loan forgiveness, as determined by the SBA, was remitted to the lender. Twenty-nine loans have been approved for forgiveness in whole or in part. For the years ended December 31, 2021 and 2020, $19.8 million and nil, respectively, was forgiven and is included in gain on forgiveness of PPP Loans on the Consolidated Statement of Operations.

Long-time GPB Capital exec Evan Myrianthopoulos left the firm in June 2021. He received $354,167 in severance pay which brought his 2021 total compensation to $584,475. This is great pay for six months of work.

That PPP loans helped pay the million dollar salaries of Rob Chmiel, Michael Emmanuel, and Mike Frost is an outrage.

The PPP loans also helped pay Evan Myrianthopoulos’ severance package.

As we previously reported, David Gentile engaged in self-dealing and loaned GPB Automotive Fund millions of dollars at 13.5% interest. Gentile did through his “GPB Borrower LLC” which he privately owns. In the text below “GPB AISF” is mentioned. According to prior filings, “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.

This tangled web of self-dealing loans necessitated the payment of  “certain incremental procurement costs”, “debt issuance costs”, and of course ” accrued interest.” GPB Auto’s 10K tries to describe the mess:

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.

The increase in principal of $3.4 million represented the incremental procurement costs directly related to the issuance of the note and was classified as debt issuance costs on the Consolidated Balance Sheets. These costs, along with the change in interest rate, were accounted for as a modification to the existing debt with no gain or loss recognized. It was subsequently determined that the actual debt issuance costs on AISF Note 1 totaled $2.1 million. The difference was applied to AISF Note 2 (defined below) and a note issued to HA (defined below) for which the debt issuance costs relate. The $2.1 million was capitalized as debt issuance costs was being amortized over the four-year life of the note using the effective interest rate method.

In 2016, the Partnership entered into three loan agreements (“AISF Note 2, AISF Note 3, and AISF Note 4”) with GPB AISF for a total of $18.0 million and incurred debt issuance costs of $2.9 million. In 2017, the Partnership entered into two loan agreements (“AISF Note 5 and AISF Note 6”) with GPB AISF for a total of $11.8 million and incurred debt issuance costs of $2.0 million. In 2019, the Partnership entered into one loan agreement (“AISF Note 7”) with GPB AISF for $3.3 million and incurred debt issuance costs of $0.6 million.

Each AISF note matures four years from the issuance date, and accrues interest at 8.75% per annum, payable monthly in arrears. In July 2021, AISF Note 5 and AISF Note 6 were amended to increase the interest rate to 12.5% and to extend the maturity date to December 2022. Interest expense relating to these loans reflected as a component of interest expense to related parties on the Consolidated Statements of Operations for the years ended December 31, 2021, 2020, and 2019 was $1.4 million, $3.3 million, and $4.1 million, respectively. The amortization of the capitalized debt issuance costs reflected as a component of interest expense to related parties in the Consolidated Statements of Operations for the years ended December 31, 2021, 2020, and 2019 was $0.5 million, $1.8 million, and $2.0 million, respectively. The balance of accrued interest associated with these loans was $1.6 million and $0.1 million as of December 31, 2021 and December 31, 2020, respectively, and was included as a component of due to related parties in the Consolidated Statement of Net Assets in Liquidation and the Consolidated Balance Sheet.

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.

What began as a scammy private equity fraud now ends in criminal trials, lawsuits, and 17,000 investors with little or no hope of recovering anything for many years to come. If justice is served, David Gentile, Jeffry Schneider, and Jeff Lash will, soon enough, be meeting a tough new class of aggressive investors who expect to be repaid in full: