Articles Tagged with GWG L-Bonds

The securities attorneys at Chicago-based Stoltmann Law Offices are representing investors in FINRA arbitration actions against multiple brokerage firms that recommended GWG-L-bonds to their clients. Our investigation into GWG, which includes monitoring and being involved in the Chapter 11 bankruptcy, is focused on two issues: First, GWG L-Bonds were speculative, high risk, unrated debt instruments. One of the biggest issues with this bond program is, the bondholders were subordinate to hundreds of millions of dollars other debt.  The debt owed by GWG in these bonds are not the first priority to be paid back by the company on the “capital stack”.  These were very high risk investments, so unless that was made clear to you by your financial advisor, you may have a claim to pursue for misrepresentations and commissions and for recommending an unsuitable investment.  Either of these are actionable.

The other main issue here from the brokerage firm perspective is the failure to perform reasonable due diligence. Although 160 brokerage firms sold GWG Financial, this is actually a super-minority, roughly 5%, of all brokerage firms nationwide. In reality, very few firms approved GWG for sale to their customers.  GWG was allowed to borrow up to 90% of its listed assets. Its assets are almost all illiquid and subject to “fair valuation” which is an extremely dangerous financial situation for investors.  Big firms like Merrill Lynch and Morgan Stanley don’t go anywhere near unrated speculative bonds like this. But a lot of firms do because GWG paid brokers massive 8% commissions to sell these bonds which were the financial life-blood of GWG.  Even through the US government began investigating GWG in October 2020, and brokerage firms still continued to sell them.  As early as march 2020, GWG was reporting publicly about “several material weaknesses” with respect to the company’s accounting processes.  By 2020, there were more Red Flags about GWG than a Soviet May-Day parade and yet brokerage firms continues to sell it, and one reportedly BOOSTED sales.

It was reported this week that Centaurus Financial, with 640 brokers nationwide, actually increased the amount individual investors could invest in GWG from $100,000, to $150,000. Brokers went on the sales push to recommend their clients increase their investment in the GWG L-Bonds in April 2020, after GWG reported material issues with accounting and after it entered into a highly questionable transaction with the Beneficient Company, alleged now to have been securities fraud.

Chicago-based Stoltmann Law Offices is representing clients who’ve suffered losses from investing in GWG Holdings bonds.  The news has been bitter for GWG investors this year. GWG (Nasdaq: GWGH) stated on April 6 that it received a letter from the Nasdaq Stock Market notifying the company that it was not in compliance “as a result of not having timely filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2021.”

In January, the company stated that it would miss nearly $14 million in interest payments on “L” Bonds that were due on January, 15, 2022. GWG is a financial services firm based in Dallas that owns and manages a diverse portfolio of life insurance policies that included some $1.8 billion in face value of life insurance policy benefits.

GWG has told investors it isn’t paying interest on its bonds — or dividends — on its Redeemable Preferred Stock and Series 2 Redeemable Preferred Stock. L Bonds are unrated bonds that based on life insurance settlements. They are created to purchase life insurance contracts and have yielded between 1% and 5% of the market price as broker commissions. The company has been selling high-yield bonds since 2012. The 2020 offering of $2 billion in L Bonds of a value of $2 billion was sold by advisors from 127 firms.

Chicago-Based Stoltmann Law Offices, P.C. is a securities investor arbitration and litigation law firm that focuses its efforts on representing investors in claims seeking recovery of lost funds. We have been monitoring and representing investors who invested in various GWG bond holdings in arbitration actions against brokerage firms responsible for soliciting them too invest in GWG. Since January, GWG has failed to make interests payments to its investors in its L-Bonds and according to reports in both the Wall Street Journal and InvestmentNews, the company is now planning to file for Chapter 11 Bankruptcy protection.

Once again, GWG failed to file its annual report with the SEC because it still had not hired an auditor to replace Grant Thorton, who resigned at the end of 2021. For a public-reporting company like GWG to go more than three months without an auditor is a bad sign and means that bankruptcy is likely right around the corner. According to InvestmentNews, this filing could come as early as this week.

Stoltmann Law Offices has written previously on the issues related to the GWG bonds. Although a purported class action lawsuit is now pending against GWG, the best and surest way for investors to attempt to recover their losses, which will be substantial in the event of a bankruptcy filing, is through individual FINRA Arbitration claims against the brokerage firms responsible for selling GWG bonds to investors.  Due diligence on offering like the L-Bonds by the broker/dealers that sell these investments is of paramount importance to investors and compliance with FINRA Rules and securities regulations. Pursuant to FINRA Rule 2111, a brokerage firm cannot offer an investment to a client unless it first has a reasonable basis to believe the investment is suitable for at least some clients. This due diligence requirement has been expounded upon for many years through FINRA Regulatory Notice 10-22, NASD Notice to Members 05-26 and 03-71.  If a brokerage firm offers a security like the GWG L-Bonds without performing industry standard due diligence, then the firm can be liable for breach of fiduciary duty, negligence, or state securities act violations.  Further, even if the firm did perform industry standard due diligence, but ignored red flags that the offering was destined to fail and had no reasonable chance at success, then the brokerage firm can be liable for negligently approving the investment for sale to clients, despite the existence of red flags.

Chicago-based Stoltmann Law Offices is representing investors who’ve suffered losses from investing in GWG Holdings L-Bonds. The company stated recently that it would miss nearly $14 million in interest payments on “L” Bonds that were due on January, 15, 2022. On Monday (Feb. 14), GWG issued a statement that “We know many [investors] will have questions, and we don’t yet have all the answers, but we are committed to finding the best path forward,” according to Investment News.

In the interim, GWG isn’t paying interest on its bonds — or dividends — on its Redeemable Preferred Stock and Series 2 Redeemable Preferred Stock. L Bonds are unrated bonds that are based on life insurance settlements. They are created to purchase life insurance contracts and have yielded between 1% and 5% of the market price as broker commissions. Yet the maturity of GWG Bonds has ranged from 2 to 7 years, yielding 5.5% to 8.5%.

“A reader of GWG’s communication would gather that they had no intention of making the missed payments even within the grace period of 30 days,” noted alphabetastock.com. “This could lead some holders of the L Bonds and trustees to accelerate their bonds, which would make them due immediately, and as a result, payable, further stretching the company’s resources. There is growing concern that this acceleration could create a ‘run’ on the company that could be financially ruinous not only for GWG but its L Bondholders as well.”

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