The Financial Industry Regulatory Authority (FINRA) in an acceptance, waiver, and consent action (AWC) sanctioned Arque Capital, Ltd. (Arque) concerning allegations that since 2011 Arque has acted as the managing broker-dealer for an alternative investment – GWG Renewable Secured Debentures (the Debentures) offered by GWG Holdings, Inc, In that capacity FINRA alleged that Arque was responsible for conducting due diligence into GWG and the Debentures, and reviewing all advertising pieces related to the Debentures. FINRA found that between March 2012, and November 2012, Arque distributed a GWG Debenture sales brochure that contained misleading statements.
Arque has been a registered broker-dealer since 2002, has its home office in Scottsdale, Arizona, and 23 branch offices located in various states. The firm has approximately 60 registered representatives. In recent months FINRA has brought numerous disciplinary actions against various firms, supervisors, and brokers concerning the improper sale of GWG Debentures including:
- Center Street Securities Broker David Escarcega Investigated Over GWG Debenture Sales;
- FINRA Sanctions Michael Wurdinger and Anil Vazirani Over GWG Debenture Sales (FINRA sanctioned brokers associated with Center Street Securities, Inc.);
- FINRA Sanctions Center Street Securities Over Sales of GWG Renewable Secured Debentures Part I (Center Street fined by FINRA);
- FINRA Sanctions 79 Capital Securities Over GWG Debenture Sales (brokerage firm distributed misleading sales material);
- Broker Sanctioned Over Unsuitable Sales of Private Placement Securities (FINRA sanctioned Karen Geiger);
- Center Street Securities Broker Jason Lamb Sanctioned Over GWG Renewable Secured Debentures (Center Street supervisor sanctioned over failure to supervise sales of GWG).
The notes at issue are part of offerings by GWG Holdings, Inc. (GWG) which purchases life insurance policies on the secondary market at a discount to their face value. GWG pays the policy premiums until the insured dies and GWG then collects the insurance benefit making a profit by collecting more on the payout at maturity than the payment of the premiums on the policy. The Debentures have varying maturity terms and interest rates ranging from six-month at an annual interest rate 4.75% to seven years at 9.50%. The prospectus for GWG 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 the GWG Debentures, as a private placement, is illiquid and investors will not have access to their principal prior to maturity.
FINRA alleged that between March 2012, and November 2012, Arque distributed a GWG Debenture sales brochure to investors which was created by GWG along with the prospectus which stated that “Renewable Secured Debentures are secured by the corporate assets of GWG, which consist primarily of investments in life insurance policies purchased in the secondary market.” FINRA alleged that the GWG brochure further stated that the Debentures “are secured by all the corporate assets of GWG. GWG’s assets consist primarily of the life insurance policies purchased in the secondary market and are summarized in the table below.” In the table, it appears that GWG held over $489 million of life insurance policies.
However, FINRA found that the $489 million value was the face value of the policies and that their current value was significantly lower. Moreover, the prospectus for the GWG Debentures stated that the life insurance policies were not collateral for the Debentures and instead had been pledged as collateral for a separate line of credit used by GWG to purchase life insurance policies and finance its operations. FINRA found that while the correct information was contained in the prospectus that was also delivered to investors, it was not accurately reflected in the GWG brochure.
Thereafter, in November 2012, FINRA found that the inconsistencies between the GWG brochure and the prospectus were discovered and the GWG brochure was changed. FINRA found that between March 2012, and November 2012, Arque sold $3.53 million of GWG Debentures to approximately 40 investors while providing investors the GWG sales kit containing the misleading brochure. FINRA further determined that Arque had an obligation to, but did not, review the brochure and take reasonable steps to ensure that there was a reasonable basis for the statements made therein.
Investors who have suffered losses may be able recover their losses through arbitration. The attorneys at Gana LLP are experienced in representing investors in cases where brokerage firms fail to supervise their representatives sale of unsuitable investments in private placements. Our consultations are free of charge and the firm is only compensated if you recover.