Fraud cases make Prime's future unclear

New questions are surfacing about the future of Prime Automotive Group's 41 franchised dealerships following news last week of criminal charges against the chief executive of GPB Capital Holdings, Prime's majority owner, on allegations of defrauding investors through what regulators called "a Ponzi-like scheme."

GPB was under scrutiny even before federal prosecutors charged CEO David Gentile, who stepped down from that post Friday, Feb. 5, and two of his business associates with conspiracy and securities fraud in an indictment unsealed Thursday, Feb. 4. That was the same day the U.S. Securities and Exchange Commission filed a separate civil complaint and seven states brought actions against GPB and individual defendants.

The alternative asset-management firm has been embroiled in lawsuits, including one brought by Prime's former CEO, and is fighting efforts by some automakers to force GPB to sell some Prime stores.

It's unclear whether Prime dealerships will be affected as GPB and the named individuals defend themselves against claims that Gentile and his associates misled roughly 17,000 investors who contributed more than $1.8 billion into the company's investment funds. GPB denied the allegations, saying in a statement that it has cooperated with the government and was "extremely disappointed" in the actions.

Prime Automotive, of Westwood, Mass., which ranks No. 11 on Automotive News' list of the top 150 dealership groups based in the U.S., is not named as a defendant in the federal criminal case nor the SEC complaint. Prime CEO Todd Skelton told Automotive News in a statement last week that the cases "will in no way impact the very successful daily operations of the dealerships."

But two dealership advisers said that GPB could wind up in bankruptcy proceedings, with liquidation of assets possible should investors seek to recover their money. Law firms already have sued GPB on behalf of investors. And the legal troubles could have broader consequences for outside investors seeking to enter auto retail — namely, that it could be harder to do.

It's possible the fallout could lead automakers to review their options related to GPB and Prime and their dealer agreements, said Marc Spizzirri, senior managing director for B. Riley Advisory Services. His firm has worked as a receiver in court cases involving dealerships.

It's also possible GPB could seek bankruptcy protection to "buy some time," Spizzirri said.

"At some point, there's going to have to be a plan of action to take care of those that lost their money," he said. "And I'm not sure what that'll mean. Will they sell the rest of the assets? Will they put somebody in to liquidate the assets? It's hard to say."

Federal prosecutors charged Gentile, 54; Jeffry Schneider, 52, owner and CEO of Ascendant Capital, which helped market GPB funds to investors; and Jeffrey Lash, 51, a former GPB managing partner who also owned dealerships, with conspiracy to commit securities fraud, conspiracy to commit wire fraud, and securities fraud. Gentile and Lash, who prosecutors said also oversaw GPB's investments in dealerships for a time, also were charged with wire fraud.

All three were arrested last week and face up to 20 years in prison if convicted. A lawyer had not yet been identified in court records for Schneider as of Friday. Gentile's lawyer, Gregory Bruch, told Automotive News that his client plans to plead not guilty. "He is looking forward to defending himself," Bruch said.

A message seeking comment was left with Lash's lawyer. That lawyer, Robert Gottlieb of New York, told The Wall Street Journal that Lash was "a good man with a spotless record" and would plead not guilty. Gentile, Lash and Schneider were released on $500,000 bonds last week after initial court appearances, according to the U.S. Attorney's Office.

Prosecutors and regulators say Gentile and Schneider promised investors they would receive monthly payments equivalent to an annualized 8 percent return, paid for with cash generated by GPB's businesses. Instead, they allege, GPB paid monthly distributions using money raised from investors.

Authorities allege Gentile and Schneider, along with Lash, created false financial statements to make it look like GPB's funds were in stronger financial shape than they were.

The SEC, in its complaint, claims GPB and related entities, Gentile, Schneider and Lash violated federal securities laws. Seven states — New York, New Jersey, South Carolina, Alabama, Georgia, Illinois and Missouri — also brought actions against GPB and the defendants. In May, the Massachusetts Secretary of the Commonwealth filed an administrative complaint against GPB, accusing it of violating state securities laws.

New York Attorney General Letitia James, for instance, claimed Gentile "reaped benefits" of more than $27 million and that he and Schneider used investor funds to aid a lavish lifestyle. Among the alleged spending from GPB and portfolio companies for personal benefit included a $355,000 Ferrari FF for Gentile's use and about $47,000 for private jets. New York is seeking "restitution for investors of more than $700 million defrauded," according to a statement from the Attorney General's Office.

GPB said in a statement that it "intends to vigorously defend itself in court where, for the first time, the firm will be able to present significant evidence in its favor. GPB remains confident that the firm acted in good faith during many years of managing funds for investors."

Gentile stepped down voluntarily, GPB spokeswoman Nancy Sterling said late last week. The company named CFO Rob Chmiel as interim CEO.

The SEC, in its complaint, also contends GPB violated federal whistleblower laws by retaliating against "a senior employee working in automotive operations," named in the complaint as "Employee 3."

Former Prime CEO David Rosenberg, fired from that role in September 2019, confirmed to Automotive News that he is Employee 3.

"I am the whistleblower the SEC alleges in the complaint against whom the defendants retaliated, once I brought forth information now referenced in the complaint," Rosenberg said in a statement. "I brought this information to the authorities at great personal risk and cost to myself out of concern for the many innocent investors and innocent Prime employees. I simply could not in good conscience sit by and do nothing."

Prime Automotive was formed in late 2017 when Rosenberg's Prime Motor Group and GPB's Capstone Automotive Group combined. Rosenberg and Rosenberg family trusts sued GPB in 2019, seeking money Rosenberg says he was owed after he opted in April that year to sell his stake in the dealership group.

Several automakers, citing alleged contract breaches, demanded GPB sell some of its stores, in part over its handling of Rosenberg's departure. GPB and Prime have sold some stores and settled disputes with some automakers; some automaker issues remain unresolved.

If convicted, Gentile, Schneider and Lash would be required to forfeit property obtained from the alleged offenses. If it couldn't be recovered, prosecutors said in the indictment that the government could seek forfeiture of other property.

It's unlikely, however, that the Prime dealerships would be seized under forfeiture procedures, according to a person with knowledge of the case.

Separate from the governmental investigations and actions, Prime is under contract with buyers for five stores in the Northeast: a Subaru, a Chevrolet and three Toyota stores, according to another person briefed on those deals.

Prime's Skelton, in a statement to Automotive News last week, said, "I have been on the phone with manufacturers and lenders over the last 36 hours and they are relieved to hear that I am still in place as the operator and that none of our assets were frozen, nor was Prime placed in receivership."

It was unknown last week whether receivership could become a possibility. An SEC spokesman declined to comment beyond the complaint.

If a receiver was appointed to handle assets, it could give creditors some "peace of mind" that assets were being handled responsibly, Spizzirri said. He added that selling or liquidating assets could be on the table as decisions are made about the best way to recover as much as possible for investors.

Mark Johnson, president of buy-sell firm MD Johnson Inc., said the current business climate is "great for an acquirer."

"It is important, too, for people to understand that the automobile business is a very solid business," Johnson said in an interview. "What happened with GPB's investments in automobile dealerships has nothing to do with the car business. These are all good assets."

Yet GPB's woes could make it more challenging for outsiders to acquire dealerships, said Erin Kerrigan, managing director of Kerrigan Advisors, an Irvine, Calif., dealership sell-side firm. "Our industry continues to see a rise in outside investors interested in committing capital to auto retail largely because dealerships have proven their ability to not only remain profitable but grow profits in a challenging retail environment," Kerrigan said.

"Incidents like this may result in more barriers to entry created by OEMs to ensure that they do not get into a situation where they have approved a dealer that is subject to financial or legal challenges."