GWG L-Bond Investors Will Wait At Least Three Years Before Getting Anything From The Chapter 11 Bankruptcy
GWG Holdings is currently in Chapter 11 Bankruptcy which is nearing a “Plan”, But Any Distributions to L-Bond Holders Depends on Numerous Factors, All of Which are Speculative, and The Ultimate Outcome of Which Will Take Years.
For over a year now, the brokerage firms and financial advisor responsible for selling GWG L-Bonds to thousands of retail investors, have told their clients they will be made whole through the Chapter 11 process. That was a lie and there was never any basis for it. The situation in the GWG Chapter 11 case is a dire one for L-Bond investors. The Judge presiding over the GWG Chapter 11 proceeding said during a hearing today “the situation as I read it, is very bad,” when an investor-objector inquired about how much L-Bond holders can expect to receive. The two largest assets that GG owns is a roughly 40% interest in Beneficient, LP, a private company that provides money to other private companies, and whatever litigation GWG can pursue against third parties. These two are in direct conflict, as a close reading for the latest Chapter 11 disclosure statement makes clear. Beneficient’s ability to actually become “something” is dependent on a SPAC transaction that will take it “public.” If that happens, GWG will be the owner of 40% of so of the newly minted publicly traded company’s shares. This transactions is extremely speculative, would lock-up the shares for some length of time, and if its anything like the FOXO SPAC, the shares will be of the “penny stock” variety. The largest potential pot of money for the litigation trust is potential lawsuits against Beneficient. But if GWG sues Beneficient, making accusations of fraud and mismanagement, that would damage Beneficient’s market value. Heads GWG L-Bond holders lose, Tails GWG L-Bond holders lose. To make it worse, it was disclosed today during the hearing that this is, at least, a 3 year plan before any payments are made to creditors or L-Bond holders.
What Should L-Bond Investors Do?
The Brokerage firms responsible for soliciting thousands of investors to invest hard eared retirement money into GWG L-Bonds are facing increasing scrutiny over their sales and due diligence practices. Bringing an arbitration claim against these brokerage firms remains the best option for L-Bond investors to recover some of their losses. FINRA Arbitration is not litigation. It is a private, confidential arbitration process which is operated by FINRA Dispute Resolution. From start to finish, most FINRA Claims are fully adjudicated in about 14 months. For elderly investors, FINRA offers an expedited track, which aims to fully adjudicate the claim in less than nine months.
What Did Your Brokerage Firm or Investment Adviser Do Wrong With GWG?
If when you invested in GWG your financial advisor warned you that the L-Bonds were a speculative, high risk investment that was just as likely to lose all of your money than make it to maturity, then you likely don’t have a case. Absent that extremely rare level of disclosure, any retail investor that was solicited to invest in GWG L-Bonds may have legitimate claims to purse for misrepresentation or material facts, negligent investment recommendations, and breach of fiduciary duty, amongst other potential causes of action. Brokerage firms are required to perform “due diligence” on all investments prior to recommending their clients invest in them. FINRA Rules refer to this as “reasonable basis suitability” and is a requirement so that firms brokerage firms understand the products they sell, i.e, the risks, rewards, and costs, before they recommend it to anyone. If there are red-flags apparent from this investigation, like for example, the company materially altered its business model like GWG did in 2018, then that red flag needs to be vetted. Disclosure is not enough. The brokerage firm’s responsibility is to vet any red flags, to ask questions, and get answers. By 2019, GWG’s largest disclosed asset was “Goodwill” in connection with the conflicted purchase of Beneficient, which lined the pockets of the departing CEO and CFO with approximately $30 million. Brokerage firm clients were entitled to an investigation by their brokerage firms into these facts. As early as 2015, analysts were questioning GWG’s business model, referring to investing in the company’s common stock as a “river boat gamble.” What process did brokerage firms employ, what investigation was performed, what did they know about GWG and when did they know it?
If an investment makes through the due diligence investigation and is cleared to be sold to firm clients, then the second part of the Suitability rule applies, called customer-specific suitability. This requirement means that a broker or financial advisor can only recommend an investment to a customer if the adviser has a reasonable basis to believe that it comports with the investor’s financial background, income, net worth, and investment objectives and risk tolerance. It is important to realize, legally, that risk disclosures contained in prospectuses to not cure an unsuitable investment recommendation. Frankly, those prospectuses can be used against the advisor who surely didn’t spend much time reading it prior to selling GWG L-Bonds to you. All the brokers cared about was the 5% commission it paid, instead of virtually free stock or ETF recommendations.
There were numerous material facts that financial advisors should have made clear prior to any investor buying L-Bonds. Some of those include ensuring the investor knew that:
- The L-Bonds were not secured by a massive life insurance policy portfolio;
- Life insurance policy portfolios are extremely difficult to manage an evaluate;
- L-Bonds were subordinate, or below, massive amounts of other GWG debt;
- L-Bonds were only suitable for investors seeking high income and willing to lose all their money to achieve that objective;
- The L-Bonds were not guaranteed; and
- That GWG’s largest asset – by a factor of five – was purely accounting, called “Good will”.
If these facts are important to you and your decision as an investor, then they are considered material. Failing to adequately disclose these, and other facts, to investors constitute violations of your state’s securities act. Each instance can also be grounds for a common law fraudulent or negligent misrepresentation claim. Further, failing to disclose material facts, and failing to make a suitable investment recommendation are both grounds for a breach of fiduciary duty claim.
I Like My Financial Advisor And She Told Me I Would Get All My Money Back From The Bankruptcy and To Ignore Lawyers
In the many years (collectively 75 of them) the attorneys at Stoltmann Law Offices have represented investors, we’ve never experienced such a vitriolic campaign against lawyers trying to help investors recover investment losses as a result of a blown-up company sold by brokerage firms. First, if your financial advisor is telling you, still, that you will get your money back from the bankruptcy, I strongly encourage you to ask your advisor for the transcript of the hearing that took place in court on April 19, 2023 wherein the range of recoveries for L-Bond holders was disclosed as anywhere between 9% and 100%, with the Judge specifically saying the situation is “very bad.” If your financial advisor is telling you anything different, then they are concealing material facts from you and, because they’re conflicted, not telling you the truth. Ultimately, it was your financial advisor’s brokerage firm that approved GWG for sale to you and failed to supervise the transaction. Legally, brokerage firms are responsible for the acts of their agents performed in the course and scope of their employment. Hence, unless the circumstances warrant it, which are rare, Stoltmann Law Offices does not name financial advisors as parties in FINRA Arbitration claims.
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.