Securities Arbitration Lawyer Blog
On September 14, 2022, Western International Securities, Inc. filed its Answer to the Securities and Exchange Commission’s Complaint denying that the firm violated the standards under Regulation Best Interest (“Reg BI”) in approving, recommending, and supervising the sale of speculative, high-risk, and illiquid L Bonds issued by GWG Holdings, Inc.
The case, which is being litigated in the United States District Court of the Central District of California, is being closely watched by investors and the securities industry alike because it is the first substantive enforcement action brought by the SEC against a broker-dealer since Reg BI went into effect on June 30, 2020.
Despite the regulation being in effect for almost two years, Western International’s primary defense appears to be that the SEC violated Western International Securities’ due process rights by failing to provide the firm with fair notice that its conduct violated Reg BI. Specifically, Western International Securities claims that the SEC’s Complaint accuses the firm of violating standards under Reg BI that the SEC has never articulated. However, as many observers have noted, the SEC’s allegations set forth allegations of misconduct that could have been brought under FINRA’s suitability rule, the predecessor standard of care owed by broker-dealers and brokers when recommending a security, because of the many overlaps between Reg BI and the suitability rule.
For example, both Reg BI and FINRA’s suitability rule require that firms and brokers conduct reasonable diligence to understand the products they recommend to retail investors. In recommending a securities transaction, Reg BI requires firms and brokers to exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs associated with the recommendation. Similarly, FINRA’s suitability rule requires firms to have a reasonable basis to believe that a recommended security or investment strategy is suitable for at least some investors. FINRA has stated that “reasonable diligence” means that the firm’s and 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.”
Stated simply, both Reg BI and FINRA’s suitability rule require brokers and firms to understand what they are recommending and selling to retail investors. Accordingly, in our view, Western International Securities and its brokers had ample notice of the standard care expected of them.
The SEC’s Complaint alleged that Western International Securities and five of its brokers misunderstood important issues regarding GWG Holdings, Inc. and the GWG L Bonds, including that GWG significantly changed its business model beginning in 2018 and thus did not understand key risks associated with L Bonds and GWG.
Notably, Western International only required its brokers to take a training course on L Bonds before recommending them to customers, but it did not require its brokers to take any subsequent training regarding L Bonds. The firm also did not provide its brokers with a due diligence report that it had commissioned by a third party. Western International admits these facts in the Answer.
Consequently, brokers appeared to be totally unaware that GWG Holdings had completely changed its business model. In turn, customers were told they were investing in a security issued by a company in the life settlements business, not a company that invested in risky startup ventures, including Beneficient Company Group, L.P, a company that offered liquidity solutions to high net-worth individuals.
Western International Securities’ conduct is consistent with our law firm’s investigation, which has included speaking with over 100 GWG L Bond investors from across the country. That is, brokers did not understand the product they were selling, and there were widespread failures by brokers and firms to provide fair and balanced point-of-sale disclosure regarding fees, costs, and risk to retail investors.
Investors who purchased GWG L Bonds through Western International Securities 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.
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.
In January 2022, GWG stopped making interest and maturity payments to GWG L Bond investors.
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. In its Answer, Western International Securities disclosed that it received a document subpoena on July 9, 2021. The subpoena sought documents from the firm related to the sale of GWG L Bonds.
Last month, the bankruptcy judge allowed GWG Holdings Inc. to enter into a new debtor-in-possession (“DIP”) financing package. The new DIP financing package includes an option for GWG Holding Inc. to sell its portfolio of life insurance policies for at least $610 million, approximately $1 billion less than GWG Holding Inc’s outstanding obligations to GWG L Bondholders.
Even though the portfolio of life insurance policies does not directly secure the GWG L Bonds, this development is significant for GWG L Bond investors because GWG Holdings Inc.’s largest tangible asset is its portfolio of life insurance policies. It is believed that the value of these tangible assets will significantly impact the outcome of GWG Holdings Inc.’s restructuring effort through its filing for Chapter 11 bankruptcy.
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.
See Also:
GWG L Bond Investor Recovers Losses After Filing a FINRA Arbitration Claim
Law Firm Investigating Dempsey Lord Smith, LLC for the Sale of GWG L Bonds and GPB Capital Funds
Law Firm Investigating the Sale of GWG L Bonds to Retail Investors by Aegis Capital Corp
GWG L Bond Investors Seek Recourse After GWG Holdings, Inc. Files for Chapter 11 Bankruptcy
About Iorio Altamirano LLP
Iorio Altamirano LLP, a securities arbitration law firm based in New York, NY, is investigating potential securities arbitration claims or lawsuits against Western International Securities, Inc. for its sale of L Bonds issued by GWG Holdings, Inc. The law firm currently represents a Western International Securities customer to whom the firm sold GWG L Bonds.
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 through Western International Securities, contact securities arbitration lawyers August Iorio at august@ia-law.com or Jorge Altamirano at jorge@ia-law.com. Alternatively, call the firm toll-free at (855) 430-4010.