With default on the GWG L Bonds imminent, investors will need to get in line to sue their Broker Dealers in FINRA Arbitration to Recover their Losses
The future looks grim for clients who invested in the GWG L Bonds, and their only chance of recovery may be by suing their broker dealers and financial advisors in FINRA Arbitration. Stoltmann Law Offices is currently representing investors who were sold GWG L Bonds by their brokerage firms and financial advisors. The GWG L Bonds were marketed to investors as safe, conservative investments suitable for investors looking for income. In reality, they were high-risk, high-yield subordinated, unrated corporate debt. Specifically, the bonds were used to finance the purchase of life insurance polices on the secondary market. Most recently, GWG missed the interest and principal payments that were due by January 15, 2022, totaling over $13 million and the maturity payments due January 31, 2021. While GWG has 30 days to remedy this issue, if they do not make the payments by the end of the grace period, default is imminent because the noteholders and trustees can elect to accelerate the liquidation of the L Bonds. This is only the most recent concerning event that has occurred involving the L Bonds and GWG.
Prior to defaulting on the interest payments there is a history of issues revealing financial problems for GWG dating back to October 2020, including accounting improprieties. The Securities and Exchange Division of Enforcement sent a subpoena to GWG in October 2020. Then, in April 2021, GWG halted to sale of L Bonds. The reason for this delay was because they delayed the filing of their 10-K with the SEC while the SEC Office of the Chief Accountant (“SEC OCA”) reviewed their previous financial reports. The SEC OCA’s review resulted in a finding of accounting issues. This forced GWG to admit on August 1, 2021 that their Annual and Quarterly reports previously filed with the SEC were unreliable. In November 2021, GWG filed restated financials and also filed their delayed 2021 financial reports, at which point they resumed selling the L Bonds. Shortly after filing their restated statement, GWG’s auditor, Grant Thornton, resigned as of December 31, 2021. GWG has already notified the SEC that their March 31, 2022 filings will be delayed as a result.
GWG’s problems have rapidly mounted since then. On January 10, 2022, they again suspended the sale of the L Bonds after only resuming sale for two months. When they previously stopped selling the Bonds, GWG spent down its reserves and leveraged their holdings to pay for operations. Without the income from the sale of the L Bonds, GWG does not have enough money to operate or make interest payments. GWG’s balance sheets reveal that they have $327.7 million in senior debt, which has priority over the Bond holders. They have $1 billion in assets, but that is not enough to cover their senior debt and the $1.5 billion GWG has in outstanding L Bonds. GWG essentially admitted in a January 24, 2022 letter to investors that GWG cannot operate unless it sells L Bonds, and they have only sold L Bonds for five out of the last twelve months, with sales still suspended for the foreseeable future.
Based on GWG’s financials, L Bond investors cannot rely on GWG to receive their money back. If a liquidation event is forced, L Bonds owners will suffer a massive loss. However, investors can file an arbitration claim in FINRA arbitration against the brokerage firms and advisors that solicited them to invest in the GWG L Bonds, such as Madison Avenue Securities, Aegis Capital, and Emerson Equity. Pursuant to FINRA Rule 2111, brokerage firms can only recommend investments to their clients that are suitable for them. Determining suitability requires a two-part analysis. First, the brokerage firms must perform an in-depth investigation into the investment, referred to as “due diligence”. This is also referred to as “reasonable basis suitability”, meaning the brokerage firm must have a reasonable basis before it recommends this investment to anyone. If there are red flags about the investment, the company, or its principals, then this may mean it was unsuitable for the brokerage firm to approve and recommend the investment for sale. Client-specific information, such as a client’s risk tolerance, objectives, net worth, investment experience, etc. are irrelevant to reasonable basis suitability. Those factors aren’t even taken into consideration until after the investment passes the due diligence process. Thus, a firm can be held responsible for failing to perform adequate due diligence into the L Bonds, or for ignoring red flags and improperly approving the investment for sale. If an investment is approved for sale, the brokers must disclose all risk and material facts about the L Bonds to their clients when they make the recommendation. So, for example, if a broker sold this investment to the client in December 2021, then they were required to explain to their client that the GWG was under SEC investigation, that its previous filing were found to be unreliable, and that GWG previously halted the sale of the L Bonds for eight months. If the broker did not explain this, then the firm can be held responsible for making misrepresentations the client and omitting material information.
Even if the brokerage firms that sold the L Bonds performed adequate due diligence, they can still be liable for selling an investment to a client that was not suitable for that specific client. That is the second step of the suitability analysis required by FINRA Rule 2111. Factors that must be considered when determining customer-specific suitability include age, investment time horizon, employment status, income, net worth, risk tolerance, and investment objectives. Given the high-risk nature of the L Bonds, it is likely that brokerage firms made many unsuitable recommendations to its client so that they could collect their 5% market price commission. Firms like Emerson, who served as the Placement Agent, received additional compensation for their involvement, such as dealer manager fees, wholesaling fees, and expense allowances, giving them even more incentive to sell GWG L Bond regardless of suitability. This is a conflict of interest that she should have been disclosed when brokers recommended the L Bonds, but likely wasn’t. Given that the L Bonds are a high-risk, illiquid investment, they should not have been sold to Bonds to elderly investors, retired investors, or investors who needed this money to be liquid. Moreover, as part of the customer-specific suitability analysis, the broker should have review their client’s account to determine whether they already owned similar alternative or illiquid investments and, if so, whether adding the L Bonds to their portfolio would result in their assets being overconcentrated in illiquid investments.
If you were recommended an investment in GWG L Bonds, please call Stoltmann Law Offices, P.C. at 312-332-4200 for a no-obligation free consultation with a securities attorney. Stoltmann Law Offices is a contingency fee firm offering representation to defrauded investors across the country, which means we do not get paid until you do.