The former CEO of Prime Automotive Group is fighting in court to regain control of the New England auto dealership chain from its majority owner, an investment fund management group that is under investigation for securities fraud.
Ousted CEO David Rosenberg – son of the late Ira Rosenberg, a colorful and longtime Maine auto dealer – has filed an amended legal complaint against New York-based GPB Capital Holdings that accuses the investment firm and its affiliates of violating several pre-existing dealership franchise agreements with auto manufacturers when it fired him in September. The complaint says those dealerships are now at risk of losing their franchise status, and that Rosenberg is seeking reinstatement along with monetary damages.
GPB Capital is at the center of several other legal actions involving charges of fraud and operating a Ponzi scheme. Company spokeswoman Nancy Sterling responded to Rosenberg’s latest allegations in an emailed statement.
“GPB strongly denies Mr. Rosenberg’s accusations and intends to vigorously defend against them,” she said. “As a standard good governance practice, we therefore proactively engaged an independent law firm to investigate.”
Rosenberg was fired a few months after he sued GPB Capital in July in a Massachusetts court, accusing it of financial misconduct. An amended complaint filed by Rosenberg on Nov. 26 in Norfolk (Massachusetts) Superior Court alleges GPB Capital had contractually agreed to retain him as the dealerships’ sole decision-maker and could not legally remove him without prior authorization from the auto manufacturers, which it did not obtain.
According to the amended complaint, GPB Capital and its affiliates purchased a controlling interest in Saco-based Prime Motor Group in May 2017, which the investment firm later combined with other dealerships it owned and renamed the company Prime Automotive. In order to retain the Prime Motor dealerships’ existing franchise agreements with auto manufacturers, the manufacturers insisted that Rosenberg remain the dealer operator, and that he continue to have overall responsibility for running the dealerships, it says.
“Some manufacturers required that GPB Capital and its affiliates grant Mr. Rosenberg an ‘irrevocable proxy,’ under which all votes (i.e., decision-making authority) regarding specific dealerships were transferred irrevocably to Mr. Rosenberg,” the complaint says. “Others required GPB Capital and its affiliates to commit to allowing Mr. Rosenberg full control of specific dealerships, without being subject to GPB Capital and its affiliates’ control or authority.”
CHARGES OF RUNNING A PONZI SCHEME
After GPB Capital purchased Prime Motor, it also put Rosenberg in charge of running the other Prime Automotive dealerships, according to the complaint. Rosenberg undertook the responsibility of learning the finances of those dealerships, and in the process he discovered a number of “past, ongoing and material financial improprieties,” it says.
For example, Rosenberg discovered that GPB Capital and its affiliates had established a “bogus and self-dealing insurance product relationship” that was being used to siphon money from Prime Automotive that should have been going toward paying GPB Capital investors a return on their investments.
Rosenberg went to the company’s board of managers and gave a lengthy presentation on the financial wrongdoing he had discovered, at which point he urged the managers to rectify the situation immediately and “act in a manner consistent with their contractual and fiduciary obligations to the business,” the complaint says. Rosenberg also disclosed the financial improprieties to an independent auditor, it says.
“In response, defendants had their attorney send Mr. Rosenberg a highly unethical and threatening letter designed to keep him quiet,” the complaint says.
Rosenberg filed a lawsuit against GPB Capital in July, accusing the company of operating an illegal Ponzi scheme. In a legitimate investment fund, money from investors is used to purchase businesses, real estate or securities, and the profits generated from those purchases are used to pay dividends to the investors. In an illegal Ponzi scheme, the investment principal itself is paid out as dividends until the scheme’s operator runs out of money and shuts it down, leaving investors with a fraction of their original investment.
Rosenberg’s lawsuit was triggered in part when GPB Capital failed to pay him $5.9 million on July 1 as part of its buyout of Rosenberg’s stake in a fund that is behind the purchase of dozens of auto dealerships. In 2017, Rosenberg sold a majority stake in Prime Motor for $235 million to GPB Capital, which already owned dealerships in Texas, Pennsylvania, New York, New Jersey and Connecticut.
In retaliation for the lawsuit, GPB Capital fired Rosenberg in September, the complaint alleges. GPB Capital has denied that allegation, but has refused to state its reasons for ousting the former CEO.
Prime Automotive represents 56 dealerships organized into five regional groups across eight states, including nine dealerships in Maine.
UNDER SCRUTINY
GPB Capital, which manages a group of investment funds, has been under investigation by state and federal authorities for several months for potential securities law violations. In April, Automotive News reported that the FBI and a New York City agency had searched the company’s offices in late February. GPB Capital has acknowledged facing inquiries by the SEC.
In August, a group of GPB Capital investors filed a class-action lawsuit against the investment firm for failing to provide timely and accurate financial statements, among other allegations.
In September, a group of lawyers said GPB Capital was at the center of a coming “avalanche” of arbitration cases against brokers that pushed unsuitably risky investments in its funds on retirees and unsophisticated investors in exchange for commissions that were much higher than the industry standard.
In October, a former top official at GPB Capital was indicted on charges of obstructing a federal investigation into allegations that the New York investment firm has been running an illegal Ponzi scheme.
Michael Cohn, GPB Capital’s former managing director and chief compliance officer, was removed from his position in the wake of the indictment, the company has said. Cohn is accused of using his former position as an investigator at the U.S. Securities and Exchange Commission, a job he allegedly left just days before going to work for GPB Capital, to access sensitive information about the investigation and share it with GPB Capital employees.
In November, another GPB Capital investor filed a federal lawsuit accusing the company of operating an illegal Ponzi scheme.
A legal complaint filed Nov. 6 in U.S. District Court for the District of Western Texas mirrors claims made by Rosenberg that the firm has been operating illegally by paying dividends to investors out of their own invested funds.
The lawsuit, which is seeking class-action status, accuses the company of misleading at least 2,000 investors into handing over a total of more than $1.8 billion. The plaintiff, Florida resident Millicent Barasch, invested more than $650,000 in GPB Capital funds, including $150,000 in its automotive fund, according to the lawsuit.
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