Greco & Greco’s Securities Fraud Lawyers are currently pursuing multiple customer claims in FINRA arbitration for losses incurred in GWG L Bonds against the financial advisors and brokerage firms that sold them. These bonds have been recommended and sold to retirees, despite being high risk and illiquid. The FINRA Brokerage firms and investment advisory firms that have sold GWG L Bonds include Centaurus Financial, Kingswood, American Trust, Arete Wealth Management, Ausdal Financial Partners, Emerson Equity, Greenberg Financial, Independent Financial Partners, Krilogy, and Meridian Wealth Management.
L Bonds were corporate bonds offered by GWG Holdings, Inc. (“GWG”), a publicly traded financial services company based in Dallas, Texas. Prior to 2018, GWG, through its subsidiaries, acquired life insurance policies on the secondary market. GWG’s business model substantially changed in 2018 and 2019 when Beneficient Company Group, L.P.’s management gained control of GWG, and Beneficient became a wholly owned subsidiary of GWG. As a result of this, GWG’s business model changed drastically so that it thereafter took on Beneficient’s business model of extending loans collateralized by cash flows from illiquid alternative assets, and providing services to trustees who administered the collateral.
Unlike most corporate bonds, L bonds were not rated by any rating agency – a material risk for the bonds. Rating agencies generally rate corporate bonds with a letter grade system to designate the agency’s evaluation of the credit risk with the bonds.
Although GWG’s largest tangible asset was its life insurance policy portfolio, the L bonds were not secured by this asset. Instead, the L bonds were primarily secured by GWG’s ownership of certain subsidiaries, and the L bond holder’s claims to the insurance policy portfolio were subordinate to claims of creditors of those entities.
The prospectus for the GWG L bonds confirms the high-risk nature of the investment. It states, “An investment in the L Bonds involves significant risks, including the risk of losing your entire investment, and may be considered speculative.”
GWG temporarily ceased its sale of L Bonds in April of 2021 because it was unable to file its 2020 Form 10-K. GWG subsequently filed its Form 10-K for the year ended December 31, 2020 on November 5, 2021 and resumed selling L Bonds.
On January 15, 2022, GWG filed a Form 8-K disclosing that following its resumption of L Bond sales, GWG had “experienced significantly lower L Bond sales than it had experienced previously” and that it “did not make the January 15, 2022 interest payment of approximately $10.35 million and principal payments of approximately $3.25 million with respect to its L Bonds….” In that same filing, GWG stated it had suspended further sales of L Bonds as of January 10, 2022. On April 20, 2022, GWG filed for Chapter 11 bankruptcy. In re: GWG Holdings, Inc., et al., Case No. 22-90032 (Bankr. S.D. Tex.).
Pursuant to FINRA’s suitability rule, 2111, FINRA firms and their advisors were only allowed to recommend high risk investments such as GWG L bonds if they were “suitable” for the customer. After mid-2020, the standard changed to the customer’s “best interest” pursuant to the US SEC Regulation Best Interest (Reg BI). Both standards further required that the recommending firm do proper due diligence on the product to determine its risks and determine if it was suitable to recommend to any customers.