Articles Tagged with GWG

shutterstock_62862913-259x300Advisor Tony Barouti (Barouti), currently employed by brokerage firm Emerson Equity LLC (Emerson Equity) has been subject to at least 15 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 Barouti’s case many of the complaints totaling over $5 million in claimed damages have 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.
  • 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.

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All brokers and broker-dealers have an obligation to ensure that their investment or investment strategy recommendation is suitable for the customer.  All sales efforts must be reasonable and appropriate for the investor based upon the investor’s risk tolerance, investment objectives, age, financial circumstances, other investment holdings, experience, and other facts or information disclosed by the investor.

With respect to the sale of private placements, regulators have found significant problems in the due diligence and sales efforts of some brokerage firms when selling private placements to investors.  These problems include fraud, misrepresentations and omissions in sales materials and offering documents, conflicts of interest, and suitability abuses.

In order for a brokerage firm to meet its due diligence obligation, the brokerage firm must make reasonable efforts to gather and analyze information both about the private placement and the customer the security is being sold to.  Private Placements are considered “alternative investments” and are inherently speculative.  Consequently, a broker must also ensure that an investment recommendation in a private placement is suitable for the particular customer.  The broker must ensure that the client can withstand the risk taken and not imperil the client’s account by concentrating their assets in speculative investments.

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