Advisor Heath Goldstein (Goldstein), currently employed by brokerage firm Western International Securities, Inc. (Western International) has been subject to at least 9 disclosures and customer complaints. According to a BrokerCheck report the customer complaints concern alternative investments such as direct participation products (DPPs) like business development companies (BDCs), non-traded real estate investment trusts (REITs), oil & gas programs, annuities, and private placements. In Goldstein’s case at least three of the complaints occurred from the sale of GWG Holdings L-Bonds. GWG went into bankruptcy. The attorneys at Gana Weinstein LLP represented nearly 100 investors who suffered losses in GWG.
GWG’s business focused on the acquisition of life insurance policies in the secondary market. GWG was offered to investors even though the company had no significant operating history and no profits. Until 2018, GWG’s sole business was to borrow money to buy life insurance policies in the secondary market at prices that are less than the face value of the insurance benefits payable upon the death of the insureds. GWG would then hold the policies until maturity and collect the face value upon the insured’s death.
The contours of the GWG bonds are as follows:
- Brokers Earned up to 8% commissions. From GWG’s prospectus “The total amount of the selling commissions…in the course of offering and selling L Bonds will not exceed 8.00% of the aggregate gross offering proceeds….” GWG Prospectus (Sept. 5, 2019).
- GWG bonds are inadequately secured. While GWG claims that the L Bonds are secured by insurance portfolio, in the prospectus, the life insurance policies held by DLP IV and Life Trust “do not serve as direct collateral for the L Bonds” and have been “pledged as direct collateral securing” other debt obligations senior to L Bond investors.
- GWG bonds are “auto-renewable.” Like a magazine subscription, unless an L bond investor gives notice ahead of the maturity date that they wish to redeem their investment, the bond is renewed automatically and replaced with a new one with the same terms and interest rate then being offered by GWG. This feature forces investors to be vigilant as expiration approaches.
- GWG bonds are unlisted. This means the bonds are not tradable on any stock exchange. Because there is no market for the L Bonds there is no way for an investor to regularly gauge the value of an L Bonds or the credit worthiness of GWG based on market sentiment.
- GWG bonds are not rated. L Bonds were not credit rated by any credit rating agency nor were they insured.
GWG was never successful. In FINRA actions as early as 2013, FINRA stated that GWG has a limited operating history and has not yet obtained profits through its strategy. Any review of GWG’s financials would have called into question the company’s business model. For example, in 2017 GWG lost over $33 million. At all times since 2012, GWG needed to issue more L bonds and to encourage investors to “auto-renew” their bonds in order to continue stay afloat. By 2019 GWG admitted that the actuarial mortality estimations that the company used to purchase the life insurance policies and their expected returns were flawed. GWG reported that it had expected to receive approximately $453.8 million cumulative policy benefits as of December 31, 2018, and in fact received only $262.1 million. GWG admitted that its life insurance policies had generated $191 million less than the company had forecasted and modeled or less than 58% of its anticipated revenue.
On January 18, 2018, GWG filed an 8-K with the SEC announcing a strategic relationship with Beneficient . GWG reported that Beneficent was developing a new business line to provide mid-to-high net worth individuals trust services and related liquidity products and loans for alternative assets and illiquid funds. Between August 2018 and December 2019, GWG entered a series of transactions which transferred approximately $359 million in cash to Beneficent and its subsidiaries from funds raised through the sale of L Bonds.
The Beneficent transaction caused GWG to report that its balance sheet went from under $1.5 billion in assets to over $3.6 billion in a single year. The only problem was that over 72% of all of the company’s assets are listed as “Goodwill.” Goodwill is an inherently speculative asset that is subject to being written down if the value does not materialize. GWG’s acquisition of Beneficent, its complexity and opacity, caused GWG’s value and business operations to become extraordinarily speculative.
On October 6, 2020, GWG Holdings received a subpoena to produce documents to the SEC. The SEC’s investigation focuses on accounting matters including goodwill valuation. The existence of the SEC investigation into GWG was not disclosed by GWG until over 1 year later in November 2021. From October 2020 through April 2021 GWG continued to raise over $200 million in funds through the issuance of L Bonds without disclosing the SEC investigation.
Because of GWG’s accounting issues, SEC investigation, and failure to file SEC reports, GWG was forced to discontinue selling L Bonds in April 2021 when it was unable to timely file its 2020 annual report. On August 1, 2021, GWG announced that certain previously issued financial statements including its annual report for the year ended 2019, and the quarterly reports for the first three quarters of 2020 should no longer be relied upon.
Unable to use new funds to repay old investors, GWG immediately ran into liquidity problems. In January 2022, GWG missed a payment of interest and principal due and owing to L Bond holders, and announced its hiring of restructuring counsel. In February 2022, GWG disclosed that it was unable to continue making payments on the L Bonds. Thereafter in April 2022, GWG filed for bankruptcy.
Investors who have suffered losses are encouraged to contact us at (800) 810-4262 for consultation. At Gana Weinstein LLP, our attorneys are experienced representing investors who have suffered securities losses due to the mishandling of their accounts. Claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.