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The Wall Street Journal reported that alternative asset manager GWG Holdings is preparing to file for bankruptcy to address more than $2 billion of liabilities after accounting issues and an auditor resignation GWG Holdings Inc. missed $13.6 million in combined interest and principal payments to investors in the firm’s L Bonds series. The firm has announced to investors that it is pausing all sales, interest, maturity, dividend, and redemption payments to investors.
The Securities and Business Litigation team at Levin, Papantonio, Proctor, Buchanan, O’Brien, Barr & Mougey, P.A. has been representing numerous investors in claims related to GWG L Bonds since 2021, and we are actively investigating claims from investors who have sustained financial losses in this alternative investment. If you suffered losses from these high-yield bonds, our lawyers would help you understand your legal options for recovering damages. Individual investors who were sold L bonds may have a right to file their own claim to recover their losses.
Many L bondholders entrusted their brokerage firms with retirement savings and were recommended by their advisor to invest in the GWG L Bonds, thinking these investments were low-risk and safe. Instead, these firms have jeopardized investors’ (many of them retirees) funds with illiquid investments, leaving them to worry about their financial future.
GWG issued as much as $2 billion of L bonds, and hundreds of brokers sold the debt instruments to trusting investors. Investing in L bonds was speculative and involved a high degree of risk. The L bonds were only suitable for investors with substantial resources and who were willing to accept a speculative level of risk and the other complex features, fees, and risks attendant to the GWG L bonds.
The brokers and broker-dealers that were involved in the sale of the GWG L Bonds received as much as 8% of the investor’s purchase of the L bonds upfront in fees and commissions. This meant if an investor purchased $100,000 in GWG L Bonds, the brokers and brokerage firms involved in the sale would receive as much as $8,000 immediately, reducing the actual principal available for investment by GWG down to $92,000.
Dallas-based GWG Holdings Inc. sold $1.6 billion of high-yield L bonds through a series of independent contractor broker-dealers. GWG Holdings, Inc. was a company that invested in life insurance assets and life settlements. GWG’s stated strategy was to purchase life settlements in the hope that it could generate a greater return than the cost required to purchase, finance, and service the assets it purchased.
The bonds were thus highly dependent on the assumptions and models used in the structuring of the bonds and the purchase of underlying assets, and SEC filings reveal that GWG’s underwriting policies regarding the life insurance policies they purchased were NOT standard.
GWG Holdings created L bonds and issued them from 2012 through April 2021. As privately issued, alternative investments, L bonds were designed to function as high-yielding debt instruments. Here’s how they worked:
Life insurance policyholders would sell their policies in the secondary market. For example, a retiree could sell their $1 million policy to GWG for $250,000. This compensation would be greater than that of the policy’s surrender value. As the new policyholder, GWG Holdings would handle the premium payments–$30,000 per year and receive the $1 million payout from the insurer upon the death of the original policyholder. L bonds financed these life insurance policy purchases.
As Investopedia explains, the high yield for L bond investments was based on the fact that bondholders were taking a risk that insurance policy benefits or premiums might not payout. The trade-off made these investments highly speculative.
L Bonds had no secondary market. This means that bondholders could not resell—the investments were illiquid—trapping investors in a poorly performing bond (unless they chose to pay a 6 percent redemption fee to sell the bond back to GWG Holdings – if such a redemption was even available).
Unrated by any bond ratings agency, L bond investments were described in the GWG Holdings prospectus as “speculative” and involving “a high degree of risk, including the risk of losing your entire investment.”
In January 2022, Investment News reported that GWG Holdings had missed $10.35 million of interest payments and $3.25 million of principal payments to its L Bonds investors.
The firm had a grace period of 30 days in which to make these payments, as per a January 15, 2022, filing with the Securities and Exchange Commission (SEC). Failure to do so could prompt a default.
GWG CEO Murray Holland penned a letter announcing the firm would continue to pause sales, interest, maturity, dividend, and redemption payments.” Holland further explained that asset sales would “not be in the best interests of bondholders” because they would represent a “significant discount to the fair market value of the assets.”
On April 6, 2022, the firm announced it had received notification of non-compliance with requirements of Nasdaq Listing Rule 5250(c)(1) due to failure to timely file its 2021 Annual Report.
GWG delayed in filing financial statements with the SEC (2020 annual report and Form 10-Q for the quarter ending March 31, 2021). In December 2021, Grant Thornton, GWH’s independent auditor, resigned. His resignation came on the heels of the firm admitting to the unreliability of its Annual and Quarterly reports for 2019 and 2020.
On top of these incidents, the alternative asset firm revealed it was experiencing a cash shortage resulting from the drop in L bonds sales.
On April 4, 2022, The Wall Street Journal reported that GWG was preparing for Chapter 11 bankruptcy protection.
Although GWG may be heading to bankruptcy, brokers who misrepresented or made unsuitable recommendations to invest in GWG L Bonds may be held accountable. Claims are typically asserted against the brokerage firm (and not the individual broker) who failed to properly represent the investment, make a suitable recommendation, or conduct due diligence of the investment recommended.
Those who misrepresented and/or omitted facts when pushing these high-yield bonds or who recommend them knowing they were unsuitable for clients could be guilty of misconduct or negligence and may be liable to compensate the investment fraud victims.
The GWG website identifies Emerson Equity as the managing broker-dealer for the L bonds. This San Mateo, California-based broker-dealer was called out by the Financial Industry Regulatory Authority (FINRA) Inc, in December in an unrelated matter. FINRA penalized the firm $1.7 million for its poor supervision of short-term mutual fund trades.
According to Investment News, it is possible that hundreds of other broker-dealers and registered investment advisers also sold GWG L bonds. Among the firms alleged to have sold GWG L bonds include:
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