Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) brought a complaint against broker David Escarcega (Escarcega) concerning allegations that Escarcega recommended unsuitable investments in Renewable Secured Debentures of GWG, Inc. (GWG Debentures). Escarcega is not the first Center Street Securities, Inc. (Center Street) broker that has been investigated by FINRA in connection with their GWG sales or the supervision of such sales. As we have reported FINRA recently sanctioned Michael Wurdinger (Wurdinger) concerning allegations that from approximately February 2012, to February 2013, Wurdinger failed to adequately supervise sales of GWG Debentures. In a related but separate action concerning Center Street’s supervision of the sale of the GWG debentures, Anil Vazirani (Vazirani) was found to not be appropriately registered with the firm but nonetheless solicited sales of the debentures through communications with prospective customers, discussed the details of the debentures features as an investment, recommended the purchase of the product, and assisted seven customers to complete documents in order to purchase the GWG Debentures.
As a background, GWG Holdings, Inc. purchases life insurance policies on the secondary market at a discount to the face value of the insurance policies. GWG then pays the policy premiums until the insured dies and GWG then collects the insurance benefit making a profit, hopefully, by collecting more upon the maturity of the policies than the payment of the policy and servicing of the premiums. According to FINRA, the company has a limited operating history and has yet to be profitable. 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.
In Escarcega’s case, FINRA alleged that Between March 2012, and January 2013, Escarcega violated the antifraud provisions of the federal securities laws as well as numerous FINRA and NASD rules while selling more than $1.8 million of GWG Debentures to his customers. According to FINRA, Escarcega made false and misleading oral and written statements to seven customers in connection with their purchases of the GWG Debentures. FINRA found that Escarcega falsely told the customers that the Debentures were safe, low-risk, liquid, or guaranteed. For example, on one form, FINRA found that Escarcega described the GWG Debentures as having “a guaranteed interest payment” and providing a “guaranteed rate of return.”