The SEC has opened an investigation into brokerage firms’ sales practices related to the GWG Holdings L Bonds. The securities firm, Emerson Equity, sold the bonds to investors on behalf of GWG. It has also been accused by investor plaintiffs of setting up the company’s L Bond distribution platform so that it could profit from it.
The SEC first brought this case under the new “Regulation Best Interest” standard for broker-dealers. It requires brokers to fully understand the investment risks and rewards of any product they sell. Brokers allegedly acted in a conflict of interest by receiving commissions for selling the GWG L Bonds to their clients, despite their lack of knowledge about the risks involved.
A retired NBA player has filed a lawsuit against GWG Holdings and its CEO, Argue Capital Ltd., alleging that the company lacked due diligence and failed to protect players properly. The case has been filed with the Financial Industry Regulatory Authority and is known as 22-01967.
The case focuses on the retirement pension plan. The 1970 plan offered guaranteed monthly benefits for a player up until his death. The plaintiff played in the NBA from 1968 to 1978, so he has eight years toward the retirement plan. The L Bonds were sold by broker-dealers who received high commissions. The company originally invested the money from the L Bond sales in life insurance policies. In later years, it invested it in the Beneficient Company Group, LP.
An investigation by the Securities and Exchange Commission
The SEC investigation of GWG L bonds has highlighted a number of issues with the securities company. These include misleading investors about the risks of investing in such securities. In addition, the company admitted to filing inaccurate reports with the SEC. Furthermore, it failed to disclose information about the company’s deteriorating financial condition to investors.
Before GWG’s L Bonds became a sensation, the company had a string of financial issues. In October 2020, the Securities and Exchange Commission’s Division of Enforcement issued a subpoena to the company, which prompted the company to halt its L Bond sales. The SEC’s Office of the Chief Accountant (OCA) began reviewing GWG’s financial reports. It uncovered accounting irregularities. The company admitted that it had failed to file timely Form 10-Ks.
Investing in bonds is a high-risk proposition. Not only do interest rates fluctuate, but bonds can also default. This means that a 10-year bond that pays 3% interest now could be worth less a month from now. Not only does this mean that you may lose all of your principal, but it also means that your interest payments might not come in at all. Investors should take this into account when making investment decisions.
Before GWG defaulted on its debts, the company had a series of accounting issues. A subpoena from the Securities and Exchange Commission in October 2020 prompted the company to suspend sales of its L Bonds and file an amended 10-K with the SEC. The SEC’s Office of the Chief Accountant reviewed GWG’s financial statements and found errors in their reporting. GWG later admitted that they failed to file their 10-K because the financial reports were not reliable.
GWG Holdings L bonds are a high-risk investment with little liquidity. Investors cannot sell them on the secondary market and must wait until they mature before they can redeem the principal. This is particularly problematic if you need liquidity in your portfolio or don’t want to risk default risk. Redeeming the bonds before the maturity date would incur a redemption penalty of up to 6%.
GWG announced that it is suspending all L Bond sales until the company files its next financial report with the SEC. This means that the company may not be able to sell additional L Bonds in a timely manner or at a favorable price. Furthermore, it may not be able to obtain additional borrowing under its existing debt facilities or with third-party lenders.