The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm 79 Capital Securities, LLC (79 Capital) and broker Michael Ward (Ward) concerning allegations around June and July 2012, 79 Capital and Ward posted on the website of a business networking organization sales material regarding GWG Renewable Secured Debentures (GWG Debentures), an illiquid and high-risk alternative private placement investment that omitted material information concerning the debentures. Additionally, FINRA alleged that the firm and Ward failed to record basic suitability information and create new account forms for customers involved in two transactions for the purchase of debentures. Finally, FINRA found that respondents also permitted an employee whose FINRA registration had not been approved, to sell the GWG Debentures and in doing so failed to enforce the firm’s written procedures requiring the creation of new account forms and prohibiting unregistered persons from effecting securities transactions.
According to our investigation, 79 Capital is the third brokerage firm or broker to be sanctioned by FINRA in the past year concerning the improper sale of GWG Debentures. See Broker Sanctioned Over Unsuitable Sales of Private Placement Securities (FINRA sanctioned Karen Geiger); FINRA Sanctions Michael Wurdinger and Anil Vazirani Over GWG Debenture Sales (FINRA sanctioned brokers associated with Center Street Securities, Inc.).
As a background, GWG Holdings, Inc. purchases life insurance policies on the secondary market at a discount to the face value of the policies. Once purchased, GWG pays the policy premiums until the insured dies and then GWG collects the face value of the insurance hoping to earn returns by collecting more upon the maturity of the policies than it has paid to purchase the policy and service the premiums. FINRA found that the company has a limited operating history and has yet to be profitable.
Beginning in 2012, GWG began selling its debentures with varying maturity terms from six months and interest rate of 4.75% to seven years with 9.5% interest. The prospectus for the offering states that the life insurance policies are not held as collateral for the obligations under the debentures. Instead, the policies are collateral for a line of credit used by GWG to purchase life insurance policies. The prospectus also stated that the investments were speculative and involve a high degree of risk, including the possibility of risk of loss of the entire investment. An investment in GWG is illiquid and investors do not have access to their principal prior to maturity under ordinary circumstances.
FINRA found that Ward, on behalf of 79 Capital, posted descriptions of the GWG Debentures on a password-protected business networking website in or about June and July 2012. FINRA alleged that the internet posting omitted information regarding the debentures and was misleading for three reasons. First, FINRA found that the posting did not provide a sound basis for evaluating the risks of GWG Debentures because it emphasized the GWG Debentures’ interest rates but failed to disclose its illiquidity. Second, FINRA found that the posting failed to disclose the substantial risks involved in the investment. Finally, FINRA alleged that the posting incorrectly stated that the “[u]nderlying investments are a portfolio of life insurance policies purchased in the secondary market” when the debentures are not a portfolio of insurance policies and in fact the policies have been pledged as collateral for a separate line of credit.
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