Iorio Altamirano LLP, a securities arbitration law firm based in New York, NY, is investigating potential lawsuits and securities arbitration claims against National Securities Corporation for its sale of L Bonds issued by GWG Holdings, Inc. (GWGH) and limited partnerships created by GPB Capital Holdings, LLC.
On June 23, 2022, the Financial Industry Regulatory Authority (FINRA) ordered National Securities Corporation (“NSC”) to pay nearly $9 million in monetary fines and restitution for violating various SEC, NASD, and FINRA rules, including negligently omitting material facts to retail investors connected with offerings related to GPB Capital Holdings, LLC (“GPB Capital”). NSC consented to the sanctions after FINRA alleged that between April 2018 and July 2018, NSC negligently omitted to tell investors in two offerings related to GPB Capital that the issuers failed to timely make required filings with the Securities and Exchange Commission (“SEC”), including audited financial statements.
Additionally, upon information and belief, National Securities Corporation was a part of a network of broker-dealers who sold the speculative, high-risk, and illiquid GWG L Bonds. GWG Holdings, Inc., which stopped making interest and maturity payments to GWG L Bond investors in January 2022, filed for Chapter 11 bankruptcy in April 2022. Many GWG L Bond investors are skeptical that they will receive any significant portion of their principal back. Investment News has reported that one anonymous GWG L bond investor estimates that the GWG L Bonds may now be worth 20 to 30 cents on the dollar.
Investors who purchased GWG L Bonds or any GPB Capital Funds through National Securities Corporation or any other broker-dealer are encouraged to contact Iorio Altamirano LLP (gwglawyer.com) for a free and confidential consultation and to review their legal rights. We can review and analyze potential claims and advise individuals of their legal rights without obligation or cost.
For the latest on Iorio Altamirano LLP’s investigation of GWG L Bonds, including a key event timeline, visit our firm’s investigation page: Iorio Altamirano LLP’s Investigation of GWG L Bonds.
About GWG L Bonds
An L bond is a financial product created by GWG Holdings, Inc. The L Bonds are speculative, high-risk, and illiquid alternative investment offerings.
Initially, GWG Holdings pooled money from bond investors to purchase life insurance policies on the secondary market, paid the policy premiums, and then collected the death benefit when the insured individual passed away. However, beginning in 2018, GWG Holdings used the investor capital to invest in a new business model, exposing the company to riskier alternative assets. Many GWG L Bond investors were utterly unaware that GWG materially reoriented its business model, which, in our view, made it a much bigger credit risk. Additionally, many GWG L bond investors were not told by their financial advisors that GWG used investor capital to pay out the high distributions owed to other GWG L Bond investors in a Ponzi-like scheme.
GWG Holdings offered the L Bonds with a maturity ranging from 2 to 7 years and paying an interest rate of 5.50% to 8.50%.
GWG L Bonds were likely not suitable for investors with a low-to-moderate risk tolerance or investors who had liquidity needs.
On April 20, 2022, GWG filed for Chapter 11 bankruptcy. According to the bankruptcy filings, the SEC has been investigating the sales practices of brokerage firms related to GWG L Bonds. It has been recently reported that the SEC’s investigation began in May 2021. We believe that this regulatory investigation includes the sales practices of Emerson Equity and its regional broker-dealers, such as National Securities Corporation.
Last month, the SEC’s investigation led to its first lawsuit as the regulator filed a lawsuit against Western International Securities, Inc., and several of its brokers in a federal court in California. The firm is accused of failing to perform due diligence regarding the inherent risks associated with GWG L Bonds and recommending these risky products to customers in situations where they were not in the best interest of the firm’s customers.
Brokerage firms like Western International Securities, Inc. and National Securities Corporation are required to make investment recommendations that are suitable and in the best interest of their customers. Brokerage firms and financial advisors must also disclose all material facts and risks of a security when making a recommendation. Firms and brokers must also conduct reasonable due diligence on products they offer before recommending them to any clients. When a firm or advisor fails to meet these standards of conduct, they can be held liable for damages.
About GPB Capital Funds
GPB Capital is a New York-based alternative asset management firm founded in 2013. GPB Capital serves as the general partner for limited partnerships formed to acquire income-producing companies. GPB Capital had four flagship funds, which were sold as private placement offerings:
- GPB Holdings, LP / GPB Holdings Qualified, LP.
- GPB Automotive Portfolio, LP.
- GPB Holdings II, LP.
- GPB Waste Management, LP.
In February 2021, the SEC charged GPB Capital, Ascendant Capital, and Ascendant Alternative Strategies with running a Ponzi-like scheme that raised roughly $1.8 billion from securities issued by GPB Capital. In addition, David Gentile, the owner and chief executive of GPB; Jeffry Schneider, the owner and CEO of Ascendant Capital LLC; and Jeffrey Lash, a former GPB managing partner, are all facing criminal and civil fraud charges. The SEC believes that as many as 17,000 retail investors nationwide have been defrauded.
GPB Capital raised capital from private retail investors through private placement offerings that were sold by approximately sixty broker-dealers and investment advisory firms across the country, including National Securities Corporation. In total, the GPB funds have collectively raised over $1.8 million in capital from investors. While GPB Capital and financial advisors used promises of steady, 8% dividends from investment gains to lure investors, “a significant portion of GPB’s distributions were paid directly from investor funds,” according to numerous civil and criminal complaints. There are serious concerns that broker-dealers may have failed to conduct reasonable due diligence about GPB Capital and the GPB funds.
FINRA has stated that “reasonable diligence” means that the firm’s and/or broker’s due diligence “must provide the firm or associated person with an understanding of the potential risks and rewards of the recommended security or strategy.”
Brokerage firms may have failed to conduct reasonable diligence into GPB Capital and the GPB funds before selling the private placement offerings to their customers. The firms’ compliance departments likely ignored or missed many red flags.
For example, according to the SEC’s complaint, beginning in August 2015, GPB Automotive Portfolio LP began to use investor funds to make distributions to other investors. However, GPB Automotive Portfolio’s private placement memorandum stated that distributions would be made from the limited partnership’s operations. The private placement memorandum was updated in June 2016 to disclose that the limited partnership may use investor capital to make distributions, but it had “no present plans to do so,” despite already doing so. These statements were false and misleading. At the time the PPM was issued, GPB Automotive Portfolio had used over $2.5 million of investor capital to pay distributions.
The false statements by GPB Capital were also discoverable by brokerage firms who sold the private placement offering to retail investors for large up-front commissions, including National Securities Corporation. For example, in 2016, GPB Automotive Portfolio’s financial reports revealed that the fund made $14.3 million in distributions to investors; however, it recorded only $5.4 million of income from operations. The significant gap between the amount in distributions paid out to investors and the entity’s operating income should have been a huge red flag to brokerage firms. Instead, the red flag was ignored, and GPB Automotive Portfolio was sold to retail investors by brokerage firms and investment advisory firms. This is just one example of how brokerage firms may have failed their due diligence obligations.
As a result of due diligence failures, or other sales practice violations, GPB investors may have legal claims against brokerage firms or investment advisory firms.
FINRA Letter of Acceptance, Waiver, and Consent No. 2019061652404
FINRA and National Securities Corporation entered into an AWC on June 23, 2022, after FINRA alleged that National Securities Corporation violated various SEC, NASD, and FINRA Rules. As part of the allegations, FINRA alleged between April 2018 and July 2018, NSC negligently omitted to tell investors in two offerings related to GPB Capital that the issuers failed to timely make required filings with the SEC, including filing audited financial statements. By virtue of the foregoing, NSC violated FINRA Rule 2010. Specifically, FINRA alleged:
- From 2013 through 2018, GPB Capital launched several limited partnerships, each focused on acquiring controlling interests in certain private-sector companies.
- As relevant here, the GPB Capital limited partnerships included GPB Automotive Portfolio, LP (Automotive Portfolio), which was formed in 2013 to acquire and operate automotive dealerships, and GPB Holdings II, LP (Holdings II), which was formed in 2015 primarily to acquire and operate companies in the automotive retail and managed IT sectors.
- These GPB Capital limited partnerships raised capital by selling limited partnership interests to retail investors. GPB Capital sold the limited partnership interests through, among other channels, broker-dealers.
- The securities GPB Capital sold, including those issued by Automotive Portfolio and Holdings II, were not registered. Instead, the limited partnership interests were sold pursuant to Regulation D of the Securities Act of 1933.
- As a condition of the offerings, only accredited investors were permitted to purchase the GPB Capital limited partnership interests.
- After conducting due diligence on each offering, NSC approved Holdings II for sale by the firm’s registered representatives in December 2015 and then approved Automotive Portfolio in May 2016.
- Making a negligent misrepresentation or omission of a material fact to customers violates FINRA Rule 2010, as it is inconsistent with just and equitable principles of trade.
- On July 10, 2017, GPB Capital filed a lawsuit in New York against one of its former operating partners who had allegedly failed to acquire certain automotive dealership interests (the New York Litigation). In connection with the New York Litigation, the former partner asserted various counterclaims against GPB Capital and alleged that GPB Capital had falsified financial statements to conceal that GPB Capital was defrauding its investors. GPB Capital denied the former partner’s allegations, and the litigation remains pending.
- On April 27, 2018, GPB Capital released what it characterized as important updates regarding the audited financial statements for certain of its limited partnerships, including Automotive Portfolio and Holdings II. The letters, which were sent to broker-dealers that sold GPB Capital-related investments, including NSC, stated that GPB Capital was in the process of registering certain classes of securities issued by certain of the limited partnerships, including Automotive Portfolio and Holdings II, with the SEC. As part of that process, Automotive Portfolio and Holdings II were required to file audited financial statements. The letters further stated that the delivery of Automotive Portfolio’s and Holdings II’s audited financial statements (which were due to be filed by April 30, 2018) would be delayed pending the completion of a forensic audit. Specifically, GPB Capital disclosed that it and its auditors “determined that it would be prudent to hire a third-party firm to complete a forensic audit in order to endeavor to put [the former partner’s] counterclaims and other allegations to rest.” The offering documents for Automotive Portfolio and Holdings II were not timely amended to disclose that the partnerships would be delayed in filing their audited financial statements with the SEC.
- While NSC received the letters from GPB Capital notifying it of the delays and GPB Capital’s stated intention to complete a forensic audit, it sold 115 limited partnership interests in Automotive Portfolio and eight limited partnership interests in Holdings II after that announcement. The principal value of those sales, which occurred between April 30, 2018, and July 11, 2018, totaled approximately $8.7 million. NSC received a total of $701,480 in commissions from the sales.
- In connection with these sales, however, NSC representatives did not inform the customers that Automotive Portfolio and Holdings II had not timely filed their audited financial statements with the SEC or the reasons for the delay. The delay in filing audited financial statements was material information that should have been disclosed.
- Therefore, by negligently omitting material facts, NSC violated FINRA Rule 2010.
National Securities Corporation (CRD No. 7569)
National Securities Corporation (NSC) has been an SEC-registered broker-dealer and FINRA member since 1947. The firm, which is based in Boca Raton, Florida, is licensed to sell securities in 53 U.S. states and territories. NSC currently has a roster of approximately 574 registered brokers across the country and 119 branch offices.
The broker-dealer has also used the names Nat’l Securities Corp, Washington National Securities Corporation, NTL Insurance Agency, NSC Insurance Agency, National Securities of Washington, and National Securities Corp of Washington State to conduct business.
NSC has 82 different regulatory disclosures, according to the firm’s public disclosure report with FINRA.
In April 2022, NSC was censured, fined $300,000, and ordered to pay $363,447.67 in disgorgement (AWC No. 2019064508801). NSC contravened Section 17(a)(3) of the Securities Act of 1933 and violated FINRA Rules 2010 and 3110 by deceiving investors in connection with its sales of a “pre-IPO” private placement offering, failing to reasonably enforce its written supervisory procedures (WSPs), and failing to reasonably supervise the head of its “pre-IPO” offering business.
In May 2011, NSC was censured and ordered to pay $175,000 in partial restitution to investors in a private offering (AWC No. 2009019068201). NSC violated NASD Rules 2310, 3010, and 2110 and FINRA Rule 2010 when it failed to conduct reasonable due diligence and have a reasonable basis for recommending two private offerings.
Financial institutions like National Securities Corporation must supervise financial advisors and customer accounts properly. Brokerage firms must establish and maintain a reasonably designed system to oversee account activity to ensure compliance with securities laws and industry regulations. When a brokerage firm fails to supervise its financial advisors or the investment account activity sufficiently, it may be liable for investment losses sustained by customers.
About Iorio Altamirano LLP
Iorio Altamirano LLP is a securities arbitration law firm located in New York, NY. We represent investors nationwide and vigorously pursue FINRA arbitration claims on behalf of investors to recover investment losses.
We have nearly 20 years of combined experience as securities arbitration lawyers and have helped investors recover investment losses in over 1,000 cases. Our firm will file a FINRA securities arbitration claim on your behalf on a contingency fee basis to try to recover your losses. If we do not obtain a recovery, you do not owe us a legal fee.
If you have invested in GWG L Bonds or GPB Capital Funds through National Securities Corporation, contact securities arbitration lawyers August Iorio at email@example.com or Jorge Altamirano at firstname.lastname@example.org. Alternatively, call the firm toll-free at (855) 430-4010.