This is our latest installment on the continuing story of the alleged $1.8 billion GPB Capital Holdings Ponzi scheme operated by Scientologist David Gentile of Long Island, New York. Gentile and his co-defendants Jeffry Schneider and Jeffrey Lash were criminally indicted by the US Department of Justice in February 2021 on five felony counts: Securities fraud; conspiracy to commit securities fraud; conspiracy to commit wire fraud; and two counts of wire fraud. The DoJ is seeking criminal forfeiture from the defendants on all counts. Trial is set for April 2024 in New York.

GPB Capital Holdings LLC (GPB) filed its required ADV and Part 2 Brochure on March 28, 2023. Both forms are posted below in PDF format.

In this latest filing GPB reports 7 partnerships holding $611,928,800 in Registered Assets Under Management (RAUM). However, the Part 2 Brochure makes it clear that the stated RAUM does not reflect GPB’s total assets:

GPB’s Regulatory Assets under Management: GPB manages seven Partnerships, each of which is managed on a discretionary basis. For five of those Partnerships, the majority of assets are Portfolio Companies, the value of which GPB does not count as regulatory assets under management (“RAUM”) for purposes of GPB’s Form ADV. For clarity, GPB’s reported RAUM does not reflect the full value of all of GPB’s assets under management (“AUM”). ACCORDINGLY, A PORTION OF THE ASSETS MANAGED BY GPB DOES NOT CONSTITUTE RAUM, AND THUS RAUM IS NOT INDICATIVE OF GPB’S TOTAL AUM.

To assist in estimating the fair value and assessing goodwill with respect to certain Partnerships, GPB retains a third-party valuation firm to perform calculations relative to certain investments, which are complete. RAUM will fluctuate from time to time due to the Partnerships’ acquisitions and dispositions of assets, and portfolio company performance. As of December 31, 2022, GPB manages an estimated $611,929,800 of assets that do qualify as RAUM. The most recent RAUM is significantly lower than the RAUM reported on GPB’s previous Form ADV, filed on March 31, 2022. This change is due to an increase in value of some of the Partnership’s assets that are not RAUM, resulting in a large portion of the reported March 31, 2022 RAUM being excluded from this filing.

This clarification on RAUM vs. AUM is long overdue. Previous ADV’s have caused GPB investors a great deal of confusion as to the actual value of total assets held by GPB Capital. Nevertheless, even with this clarification there is still not a published total asset value of all GPB’s holdings.

Examples of the confusion caused by the wide swings in GPB’s reported RAUM:  

• GPB’s ADV of March 29, 2019 showed 9 partnerships with $335,776,805 RAUM
• GPB’s ADV of March 31, 2021 showed 8 partnerships with $15,562,910 RAUM.
• GPB’s ADV of March 31, 2022 showed 8 partnerships with $1,218,600,173 RAUM.
• GPB’s ADV of March 28, 2023 showed 7 partnerships with $611,928,800 RAUM

GPB Capital sold its Prime Auto portfolio to Prime 1 for $880 million in 2021` and this, presumably, caused the March 2022 spike in RAUM. However, the almost exactly 50% decline in reported RAUM for March 2023 still raises questions as to how GPB Capital accounting works even in the post-Gentile phase. For example, was 50% of the 2022 RAUM put into AUM? And if so why? Investor money purchased the Prime Auto dealerships. How does investor money (RAUM) become AUM?

Even with a Monitor in place, GPB Capital’s asset reporting still seems opaque.

GPB Capital’s accounting does not make sense to us even with Monitor Joseph Gardemal’s oversight. The reason for this Kafkaesque situation is stated in the ADV Part 2 Brochure:

Each Partnership seeks to deliver to each Investor, as soon as practicable following the end of each fiscal year (i) financial statements for such fiscal year prepared on a GAAP basis and audited by a Public Company Accounting Oversight Board-registered firm, and (ii) all necessary tax reporting information to satisfy reporting obligations under the IRC, with respect to any acquisitions the Partnerships make in any entities organized or formed in jurisdictions outside the United States. GPB also intends to deliver to each Investor on a semi-annual basis an unaudited summary report with Partnership valuations. Despite all its intentions otherwise, however, GPB has in the past, in particular due to the Proceedings, been unable to provide the aforementioned reports on a timely basis, and GPB expects that the inability to provide the reports timely, if at all, in the future will continue.

Prior issued financial statements Partnerships’ have been retracted because the financial statements and the independent accountants’ report thereon should no longer be relied upon. GPB does not currently anticipate completing audits for the certain Partnerships due to the resignation of auditors, the Proceedings and other factors, which could have an adverse effect on the Partnerships and which could result in losses to Investors. Consequently, certain audits of Partnerships will not be provided and GPB has been unable to provide timely annual reporting of financial statements.

As GPB’s auditor long ago resigned and GPB’s past financial statements cannot be relied upon, then it stands to reason, at least to us, that any stated RAUM also cannot entirely be relied upon. GPB states that it has had valuation experts value the remaining portfolios, but this too is a fairly meaningless statement given the numerous caveats contained in the ADV and the brochure. Here is one example of such a statement:

The Partnerships have been forced, and may in the future be forced, to write down or write off assets, restructure Portfolio Companies or incur impairment or other charges that could result in losses. Even when GPB’s due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with preliminary risk analyses.

This latest ADV was written with Gentile, Schneider, and Lash facing a US Federal criminal trial in 2024 and the financial impact of this is stated:

GPB, Highline, the Partnerships and the Portfolio Companies are incurring significant legal and other costs due to the Proceedings, including indemnification and advancement obligations for defendants, including the Indicted Individuals, in the Proceedings and other civil actions. These costs could have a material adverse impact on GPB, Highline, the Partnerships and Portfolio Companies. See also Item 8: “Methods of Analysis and Investment Strategies – General Risks,” for further discussion of certain costs and risks associated with the Proceedings. Due to the Proceedings, no additional Interests in the Partnerships will be sold.

GPB decided a few years ago that it could no longer conduct its own daily affairs and therefore formed a management arm called Highline Management. Highline is responsible for managing the daily affairs of GPB. Why this expense is necessary given the fact that GPB ran its own daily affairs for years has never been satisfactorily explained, particularly given the fact that former GPB execs were running Highline.

In 2021 the US Securities and Exchange Commission asked the court to appoint an outside Monitor to oversee GPB’s affairs. This request was granted. In the ADV, GPB complains about the expenses of the Monitor and further carps about how the upcoming criminal trial will distract GPB and could “have a material adverse effect on Partnership and Portfolio Company performance.”

Beyond legal costs incurred in connection with the Proceedings, which are expected to be substantial, the Proceedings may adversely affect the Partnerships and the Portfolio Companies in various ways, including by distracting GPB and its affiliates and by harming relationships among GPB, the Partnerships, the Portfolio Companies, Investors, third party service providers and other parties important to the success of the Portfolio Companies, including, but not limited to, auditors, accountants, valuation experts and banks. In particular, the Proceedings have a material adverse effect on Partnership and Portfolio Company performance. GPB is incurring significant costs related to the Proceedings as well as from the engagement of the Monitor.

David Gentile attempted his Memorial Day takeover of GPB Capital in May 2022 when he acted to appoint three new directors who were all his buddies including fellow Scientologist Matt Judkin. Monitor Gardemal objected and called for GPB to be put into Receivership so that its assets could be distributed to the investors and the firm dissolved. This matter is before the court at present.

The 2023 ADV says this of its former GPB Chief Compliance Officer Michael Cohn:

MR. COHN WAS CHARGED BY THE U.S. DEPARTMENT OF JUSTICE IN A FOUR COUNT INDICTMENT WITH OBSTRUCTION OF JUSTICE (FELONY), UNAUTHORIZED DISCLOSURE OF CONFIDENTIAL INFORMATION (FELONY), THEFT OF PUBLIC PROPERTY (FELONY), AND OBTAINING INFORMATION FROM A GOVERNMENT COMPUTER (FELONY)…

ON SEPTEMBER 8, 2020, MR. COHN PLED GUILTY TO A MISDEMEANOR CHARGING HIM WITH THEFT OF GOVERNMENT PROPERTY WITH A VALUE OF LESS THAN $1,000. ALL OTHER CHARGES WERE DROPPED. MR. COHN WAS SENTENCED ON MARCH 24, 2021 TO 9 MONTHS HOME CONFINEMENT

The speculation that “Cohn cut a deal” seems to have merit when we see four serious felonies dropped to one misdemeanor and 9 months of home confinement. The  Financial Times reported on the charges against Cohn in 2019:

A former employee of the Securities and Exchange Commission was charged on Wednesday for allegedly leaking information about an investigation into a private equity group that he subsequently joined.

Michael Cohn, who was a securities compliance examiner in the SEC’s enforcement division, was accused by federal prosecutors in Manhattan of giving investigative information to senior management at GPB Capital Holdings.

The ADV:

The Brochure: