Securities Industry Commentator by Bill Singer Esq

February 5, 2021


GPB Capital Founder and CEO Among Three Individuals Indicted in Private Equity Investment Fraud / The Defendants Allegedly Misrepresented GPB's Performance and Paid Distributions with Investor Funds (DOJ Release)

SEC Charges Investment Adviser and Others With Defrauding Over 17,000 Retail Investors (SEC Release)

Founder Of $90 Million Cryptocurrency Hedge Fund Charged With Securities Fraud And Pleads Guilty In Federal Court / Stefan He Qin Stole and Dissipated Nearly All the Assets of His $90 Million Flagship Hedge Fund and Attempted to Steal Millions of Dollars from a Secondary Fund to Pay Back Investors (DOJ Release)
Setting the politics of the moment aside, the Smartmatic Complaint is one helluva spellbinding read. It's got a lot of high-profile folks on the Defendants' side of the caption and the allegations are frequently jaw-dropping. I'll leave it to you to pick your sides but here's the opening salvo:

1. The Earth is round. Two plus two equals four. Joe Biden and Kamala Harris won the 2020 election for President and Vice President of the United States. The election was not stolen, rigged, or fixed. These are facts. They are demonstrable and irrefutable.

2. Defendants have always known these facts. They knew Joe Biden and Kamala Harris won the 2020 U.S. election. They knew the election was not stolen. They knew the election was not rigged or fixed. They knew these truths just as they knew the Earth is round and two plus two equals four.

3. Defendants did not want Joe Biden and Kamala Harris to win the election. They wanted President Donald Trump and Vice President Michael Pence to win re-election. Defendants were disappointed. But they also saw an opportunity to capitalize on President Trump's popularity by inventing a story. Defendants decided to tell people that the election was stolen from President Trump and Vice President Pence.

4. Defendants had an obvious problem with their story. They needed a villain. They needed someone to blame. They needed someone whom they could get others to hate. A story of good versus evil, the type that would incite an angry mob, only works if the storyteller provides the audience with someone who personifies evil.

5. Without any true villain, Defendants invented one. Defendants decided to make Smartmatic the villain in their story. Smartmatic is an election technology and software company. It was incorporated in Delaware and its U.S. operations are headquartered in Florida. In the 2020 U.S. election, Smartmatic provided election technology and software in Los Angeles County. Nowhere else. Smartmatic had a relatively small, non-controversial role in the 2020 U.S. election.

6. Those facts would not do for Defendants. So, the Defendants invented new ones. In their story, Smartmatic was a Venezuelan company under the control of corrupt dictators from socialist countries. In their story, Smartmatic's election technology and software were used in many of the states with close outcomes. And, in their story, Smartmatic was responsible for stealing the 2020 election by switching and altering votes to rig the election for Joe Biden and Kamala Harris. . . . 

GPB Capital Founder and CEO Among Three Individuals Indicted in Private Equity Investment Fraud / The Defendants Allegedly Misrepresented GPB's Performance and Paid Distributions with Investor Funds (DOJ Release)
-and-, GPB Capital Holdings, LLC's founder/owner/Chief Executive Officer David Gentile; Ascendant Capital LLC's owner Jeffry Schneider; and GPB's former managing partner Jeffrey Lash were charged with one count of conspiracy to commit securities fraud; one count of conspiracy to commit wire fraud; one count of securities fraud, and two counts of wire fraud. As alleged in part in the DOJ Release:

[GPB], founded by Gentile in or around 2013, was a New York-based investment advisor registered with the SEC.  GPB served as the general partner of several investment funds, including GPB Holdings, LP ("Holdings I"), GPB Holdings II, LP ("Holdings II"), GPB Automotive Portfolio, LP ("Automotive Portfolio"), GPB Waste Management, LP ("Waste Management") and GPB Cold Storage, LP ("Cold Storage") (collectively, the "GPB Funds").  The business of GPB Capital was to manage the GPB Funds, which raised and invested capital in a portfolio of private equity investments.  Gentile and Schneider worked closely together on the founding, development, operation and marketing of the GPB Funds.  From 2013 through early 2018, Lash was responsible for overseeing the GPB Funds' investments in car dealerships, which made up a sizable percentage of GPB's portfolio companies. 

Between August 2015 and December 2018, the defendants, together with others, allegedly engaged in a scheme to defraud investors and prospective investors in the GPB Funds through material misrepresentations and omissions.

Specifically, Gentile and Schneider, both individually and through employees at Ascendant, represented to investors in Holdings I, Holdings II and Automotive Portfolio that the GPB funds would make a monthly distribution payment to investors that would be fully covered by funds from operations, meaning that the companies purchased by the funds would be sufficiently profitable for the monthly payments to be made from the companies' cash flow, without drawing from capital raised by investors. 

In reality, despite the defendants' representations, investor capital was used to pay for a significant portion of the distributions made to investors in each of these funds.  Gentile and Schneider were aware that the GPB Funds were underperforming, and authorized repeated distribution payments that used investor funds to cover income shortfalls, to the obvious detriment of investors., the SEC charged 
  • David Gentile, Jeffry Schneider, GPB Capital, Ascendant Alternative Strategies, and Ascendant Capital with violating the antifraud provisions of the Securities Act and the Securities Exchange Act;
  • Jeffrey Lash with aiding and abetting certain of those violations;
  • GPB Capital and Gentile with violating the antifraud provisions of the Investment Advisers Act of 1940; and GPB Capital with violating the registration and whistleblower provisions of the Exchange Act and the Advisers Act's custody and compliance rules.  
As alleged in part in the SEC Release:

[D]avid Gentile, the owner and CEO of GPB Capital, and Jeffry Schneider, the owner of GPB Capital's placement agent Ascendant Capital, lied to investors about the source of money used to make an 8% annualized distribution payment to investors.  According to the complaint, these defendants along with Ascendant Alternative Strategies, which marketed GPB Capital's investments, told investors that the distribution payments were paid exclusively with monies generated by GPB Capital's portfolio companies.  As alleged, GPB Capital actually used investor money to pay portions of the annualized 8% distribution payments.  GPB Capital and Gentile with assistance from Jeffrey Lash, a former managing partner at GPB Capital, also allegedly manipulated the financial statements of certain limited partnership funds managed by GPB Capital to perpetuate the deception by giving the false appearance that the funds' income was closer to generating sufficient income to cover the distribution payments than it actually was.

The SEC's complaint further alleges that GPB Capital and Ascendant Capital made misrepresentations to investors about millions of dollars in fees and other compensation received by Gentile and Schneider.  As alleged, the fraudulent scheme continued for more than four years in part because GPB Capital kept investors in the dark about the limited partnership funds' true financial condition, failing to deliver audited financial statements and register two of its funds with the SEC.  GPB Capital allegedly violated the whistleblower provisions of the securities laws by including language in termination and separation agreements that impeded individuals from coming forward to the SEC, and by retaliating against a known whistleblower.
Stefan He Qin,  the founder of cryptocurrency hedge funds the Virgil Sigma Fund LP ("Virgil Sigma") and the VQR Multistrategy Fund LP ("VQR") pled guilty in the United States District Court for the Southern District of New York to one count of securities fraud. As alleged in part in the DOJ Release:  

STEFAN HE QIN is a 24-year-old Australian national.  Between 2017 through 2020, QIN owned and controlled two cryptocurrency investment funds, Virgil Sigma and VQR, both of which were located in New York, New York.  Since its creation, Virgil Sigma purported to employ a strategy to earn profits from arbitrage opportunities in the cryptocurrency market, specifically, by using a trading algorithm to take advantage of price differences for a number of cryptocurrencies, including Bitcoin and others, in approximately 40 different exchanges around the world, including three exchanges located in the United States.  This strategy was touted by QIN to the investing public as "market-neutral," meaning the fund was not exposed to any risk from the price of cryptocurrency moving up or down and therefore provided a relatively safe and liquid investment.  QIN exercised day-to-day control over Virgil Sigma and was responsible for tracking the fund's balances at different trading exchanges, designing the algorithms to implement arbitrage trading, and preparing monthly investor statements.  QIN also regularly participated in calls with Virgil Sigma investors and other forms of public communication where he touted the growth and success of Virgil Sigma.  Until recently, Virgil Sigma purported to have over $90 million under management from dozens of investors, including many in the United States.  According to its public marketing materials, Virgil Sigma has been profitable in every month from August 2016 to the present, with the sole exception of March 2017.

In or about February 2020, QIN founded VQR.  VQR employed a variety of trading strategies and was poised to make or lose money based on the fluctuations in the value of cryptocurrency and was not market neutral.  QIN was the sole owner of VQR's general partner, but was not involved in VQR's day-to-day operations.  Instead, VQR had its own trading staff, including a head trader (the "Head Trader") and other investment professionals.  Until recently, VQR had at least approximately $24 million under management from investors. 

Qin's Scheme to Steal Assets from Virgil Sigma

Since 2017, QIN engaged in a scheme to steal assets from Virgil Sigma and defraud its investors.  Rather than investing the fund's assets in a cryptocurrency arbitrage trading strategy as advertised, QIN embezzled investor capital from Virgil Sigma and used the funds for purposes other than the purported arbitrage trading strategy, including: (a) using a substantial portion of investor capital stolen from Virgil Sigma to pay for personal expenses such as food, services, and rent for a penthouse apartment in New York, New York; (b) using a substantial portion of investor capital from Virgil Sigma to make personal, often illiquid, investments in other entities that had nothing to do with cryptocurrencies (for example, in or about October 2018, QIN invested hundreds of thousands of dollars stolen from Virgil Sigma in a real estate investment); and (c) using a substantial portion of investor capital from Virgil Sigma to invest in crypto-assets that had nothing to do with the fund's stated arbitrage strategy (or example, in or about 2018, QIN invested funds from Virgil Sigma in certain initial coin offerings, a speculative form of investing in new issues of cryptocurrency).  As a result of these and other fraudulent activities, QIN dissipated nearly all of the investor capital in Virgil Sigma.

In the course of stealing assets from Virgil Sigma, QIN regularly lied to the fund's investors about the value, location, and status of their investment capital.  These lies included an array of investor and public communications, including:

(a) QIN prepared and disseminated monthly statements to investors purporting to record the value of their holdings in Virgil Sigma.  The amounts recorded in these statements did not accurately reflect the results of cryptocurrency trading.  Instead, the amounts were made up by QIN and did not disclose the dissipation of assets by QIN.

(b) QIN also periodically prepared marketing materials for the investing public, including summary reports known as "tear sheets" that fraudulently reported that Virgil Sigma was earning remarkable profits, often with double-digit returns in a single month, month after month.  For example, in or about February and in or about April 2017, QIN falsely reported that Virgil Sigma had earned 48.7% and 35.5% returns, respectively.

(c) On an annual basis, QIN prepared spreadsheets that purported to show Virgil Sigma's balances at the approximately 40 exchanges where Virgil Sigma purportedly traded in order to prepare tax forms for the fund's investors, also known as schedule K-1s.  As QIN well knew, however, these spreadsheets and the resulting schedule K-1s were false and substantially overstated Virgil Sigma's balances and trading activity on the exchanges. 

As a result of QIN's lies about the activity and success of Virgil Sigma in these and other communications, QIN was able to steadily attract new capital to Virgil Sigma thereby (a) ensuring that he was able to pay off investors' redemption requests, and (b) projecting to the public the appearance of continued growth.  For example, after QIN and the purported success of his fund were profiled in the Wall Street Journal in or about February 2018, Virgil Sigma experienced substantial growth as new investors flocked to the fund.

Qin Attempts to Steal Assets from VQR to Pay Virgil Sigma Investors

In the summer of 2020, QIN was having difficulty meeting redemption requests from investors in Virgil Sigma.  In order to access funds to make those redemptions, and in order to conceal his fraudulent activities described above, QIN attempted to steal investor capital from VQR to pay redemptions to Virgil Sigma investors.  After a few Virgil Sigma investors requested redemptions that Virgil Sigma could not pay, QIN convinced those investors that rather than redeem the funds outright, the investors would agree to have the funds withdrawn from Virgil Sigma and transferred into an investment in VQR.  After months passed and no funds were transferred to VQR, QIN falsely told these investors that he had requested the transfer of funds from Virgil Sigma, but that the transfer was delayed because of an intermediary bank.  QIN showed some of these investors wire transfer requests in order to bolster the impression that QIN was in fact trying to transfer the funds from Virgil Sigma to VQR.  Virgil Sigma's bank could not, however, effectuate these wire transfers because QIN had dissipated all of Virgil Sigma's assets.

In or about December 2020, faced with additional redemption requests that he could not meet, QIN demanded that the Head Trader at VQR wind down all trading positions at VQR and transfer a portion of the funds to QIN so that QIN could use that money to pay off these redemptions to Virgil Sigma investors.  QIN issued the demand even though the Head Trader advised QIN that closing out VQR's then-current trading positions, rather than holding those positions in accordance with VQR's directional trading strategy, would result in losses to VQR's investors.  In the course of those conversations, QIN threatened that if the Head Trader did not sufficiently expedite that process, QIN, as the sole owner of VQR's general partner, would need to take over control of all of VQR's accounts in order to access the funds.  At QIN's direction, the Head Trader accordingly closed out VQR's positions and turned over access to VQR's trading accounts to QIN.  QIN subsequently attempted to take control of VQR's assets in order to enable QIN to meet certain Virgil Sigma investor redemption requests.

Former Nike Marketing Manager Charged in Scheme to Defraud Company (DOJ Release)
In a criminal Information filed in the United States District Court for the District of Oregon, Errol Amorin Andam, a former marketing manager at Nike, Inc., was charged with wire fraud, money laundering, and making false statements on a loan application. As alleged in part in the DOJ Release:

[F]rom 2001 until his termination in 2018, Andam was employed by Nike at its headquarters in Beaverton. Most recently, Andam worked as a manager in the company's North American Retail Brand Marketing division wherein he managed the design, build-out, and operation of "pop-up" retail venues, temporary Nike shops situated near and tailored to sports competitions and other special events around the U.S.

In the summer of 2016, Andam recruited a childhood friend to establish a company to design and build the pop-up venues as an independent contractor for Nike. Andam used his authority as a manager at Nike to ensure that his friend's company was consistently awarded the contracts for these jobs. Though he had no formal role in his friend's company, Andam assumed control of much of the company's financial operations, managing financial accounts and issuing invoices to Nike.

To conceal his role in the scheme, Andam used an alter ego, "Frank Little," to invoice Nike and manage the contract company's account with Square, Inc., a California-based provider of mobile credit-card-processing services. In 2016, Andam also renewed the lapsed registration of an Oregon-based limited liability corporation (LLC) he owned so that he could use the defunct entity as a shell company to funnel the proceeds diverted from Nike and his friend's company to accounts under his personal control.

Beginning in September 2016, Andam caused credit-card sales at various pop-up venues around the U.S. to be run through card readers associated with a Square account owned by his friend's company. These proceeds were transferred to Square in California and then to Andam's LLC bank account in Oregon. Andam represented to both Nike and his friend that the proceeds of these sales were credited against the total amount Nike owed to his friend's company. In truth, Andam simply pocketed the proceeds and, as "Frank Little," invoiced Nike for the full cost of the contracted services.

From September 2016 through December 2018, Andam diverted and embezzled nearly $1.5 million in Nike proceeds for his own use. In July 2018, Andam submitted a fake financial statement from his LLC in support of a residential mortgage loan application. The financial statement falsely reflected as revenue checks for $194,000 drawn on a bank account owned by his friend's business. Andam forged his friend's signature on the check and withdrew much of that money without his friend's knowledge.
On Wall Street, Aegis Frumento is a prominent lawyer. At home, well, you know, Aegis is a dad who just doesn't quite get it. Last weekend, one of his kids wanted to short GameStop (GME). Dad, being dad, gave his son a lecture about the mechanics of shorting, and the challenge of selling and having to buy back what you don't own. But dad, came the plaintive cry, it's just a meme, and it's going to fade, and GME will crater. Ahhh, out of the mouths of Wall Street lawyers' babes!