The Background of GWG Holdings Filing for Bankruptcy
In December 2021, the Securities Exchange Commission (SEC) announced its investigation into GWG Holdings, Inc. The investigation began shortly after the company’s external auditor resigned, likely due to the firm’s admittance of unreliable Annual Reports in 2019 and 2020. Then, on February 14, 2022, following the discovery of insufficient accounting methods, GWG Holdings defaulted on its payment obligations to L Bondholders, ending their 30 day grace period. The company’s inaction on bond sales and payments left investors frustrated and uncertain of the future.
GWG Holdings Bond Investment
According to the Wall Street Journal, on April 20, 2022, GWG Holdings, Inc. filed for Chapter 11 bankruptcy following auditor resignation, accounting difficulties, and failure to pay investors millions of dollars in interest payments after a pause in L Bond sales. As a result, many investors are uncertain whether they will recover their investment in the L Bonds due to GWG’s inability to make interest and maturity payments and the recent bankruptcy filing.
What are GWG Holdings L Bonds?
L Bonds were created and sold by GWG Holdings as a means of financing life insurance policies from policyowners, acting as a secondary market for life insurance. As privately traded investments, L Bonds supposedly offer a higher return than their fixed-income public counterparts to account for the illiquid nature of the bonds and higher market risk. Despite these greater risks, the L Bonds were marketed through a broker-dealer distribution network as low-risk alternative investments. Further, their private nature also means that the bonds aren’t as closely regulated.
GWG Holdings Bond Payments
Policyholders, mainly retirees, would sell their life insurance policies to GWG in the secondary market. As the new owner, GWG would handle the premium payments and receive the payout from the insurer upon the death of the investor. L Bonds, therefore, financed the life insurance policy purchases.
Their original goal was to purchase the assets with hopes it would generate greater return than the cost to purchase, finance, and service. However, the company’s inability to maintain cash flow with the underperforming L Bonds, in addition to illegitimate accounting practices, have left investors with an illiquid investment and significant damages.
Filing a Claim Against Negligent Brokerage Firms
L Bondholders placed their trust and retirement savings in their brokerage firms and financial advisors, who recommended they invest in a low-risk, safe bond. These brokerage firms are required to perform due diligence prior to recommending an alternative investment product. These broker dealers were aware of the private nature and high risk financing of the insurance products. However, some brokers sold these products as a safe alternative to other lower interest paying products. By doing so, these firms have breached their fiduciary duty, jeopardizing their clients’ savings with illiquid investments from a company now filing for bankruptcy. It’s the brokerage firm’s duty to only recommend suitable investments for their clients, consistent with their age, net worth, risk-tolerance, and investment experience.
GWG Holdings L Bonds Fraud
The brokerage firms’ failure to perform adequate due diligence, recommending unsuitable investments, and failing to adequately disclose the risks of the L Bonds was a breach of their duty to clients, and in some cases rose to the level of fraud. These firms should be held responsible for their actions. Many investors, however, are unsure of their legal options following their significant losses. Those who have invested in GWG Holdings’ L Bonds can file individual arbitration claims against their brokerage firms for the misrepresentations, and unsuitable recommendations without impacting their eligibility for potential recovery from the bankruptcy proceedings.