GPB Capital Holdings, an alternative asset management firm and majority owner of Prime Automotive Group, has been accused of violating Massachusetts securities laws in its marketing materials to investors.
William Galvin, secretary of the commonwealth, filed an administrative complaint Wednesday against GPB following an investigation of more than a year and a half. The complaint accuses GPB of issuing marketing materials containing "material misstatements and omissions" to more than 180 Massachusetts investors.
Those investors, who contributed more than $14 million to five GPB investment funds, did so based on false information that they would be compensated from operational profits, Galvin's Securities Division said in the complaint.
Investors were promised a yearly 8 percent distribution paid on a monthly basis from operating profits, but eventually the firm could no longer meet those requirements and turned to investor contributions to meet its distribution promise, according to the complaint.
"While GPB Capital maintained authority to suspend distributions whenever it wished, the firm continued to make its monthly distributions in order to maintain appearances and stay attractive to investors," the complaint said. "In order to keep up with distributions, GPB Capital began dipping into other sources of income, contrary to statements made in its private placement memoranda and marketing materials."
Galvin's office is looking to impose an administrative fine on GPB and permanently ban GPB from registering as an investment adviser in the state. The Securities Division also is calling for GPB to be "disgorged" of all profits connected to any violations and offers of rescission be made to residents who were sold securities connected to any violations.
"We strongly disagree with the allegations in this administrative complaint and will vigorously oppose them," GPB spokeswoman Nancy Sterling said in a statement. "We are confident that the resolution of this Massachusetts matter will be fair and just."
Galvin will appoint an administrative hearing officer to issue a ruling and decide on any fines, a spokeswoman for Galvin said. GPB could agree to a settlement prior to a hearing, she added. The administrative hearing officer's decision could be reviewed in court if GPB wishes to appeal the ruling, the spokeswoman said.
In September 2018, Galvin's office announced an investigation into 63 broker-dealers over sales practices related to GPB's capital raising, saying in a statement that "recent activity within GPB raises red flags of potential problems."
It's one of several federal and state investigations that GPB faces. GPB started investing in dealerships in 2013 and in 2017 purchased a majority stake in Prime Motor Group and formed Prime Automotive Group of Westwood, Mass., now ranked by Automotive News as the nation's 11th-largest new-vehicle retailer with 56 rooftops.
In February 2019, GPB's New York offices were searched by the FBI and New York City Business Integrity Commission, and GPB has said it faces inquiries by the U.S. Securities and Exchange Commission and received subpoenas from the New Jersey Bureau of Securities.
Galvin's complaint also accuses GPB of concealing conflicts of interest and related third-party transactions. One such relationship is with "strategic advisor" Ascendant Alternative Strategies, which is indirectly owned by GPB founder David Gentile and business partner Jeffry Schneider, according to the complaint. Schneider has received "substantial compensation" for his involvement with the firm.
"The line between Gentile, Schneider, GPB Capital and Ascendant Alternative Strategies and Ascendant Capital is blurred beyond recognition," the complaint said. "The only difference between GPB Capital and the Ascendant entities is the email addresses used."
The Massachusetts securities complaint comes as GPB and Prime Automotive face two battles with automakers that could cost them eight dealerships.
Toyota is accusing Prime Automotive of operating dealerships without approved ownership and, in some stores, approved managers. The automaker is demanding the firm sell all five of the Prime Toyota dealerships. The ownership of Prime's three Volkswagen stores is being debated in federal court.
Former Prime Automotive CEO David Rosenberg filed a lawsuit last year in Massachusetts court against GPB and others. Rosenberg, who was fired from his CEO role in September 2019, is seeking money for what he says he is owed after he opted in April 2019 to sell his stake in the dealership group.
In December, Automotive News reported that Volkswagen, Toyota, Subaru and Audi were troubled by GPB's ouster of Rosenberg as Prime's CEO and as dealer principal of most Prime dealerships without notice or approval. Some automakers said contract breaches allegedly made by GPB were grounds for franchise termination.