GWG L-Bond Investors Seek to Recover Their Losses From Brokerage Firms That Sold the Bonds
The Brokerage firms responsible for soliciting thousands of investors to invest hard eared retirement money into GWG L-Bonds are facing increasing scrutiny over their sales and due diligence practices. Brokerage firms are required to perform “due diligence” on all investments prior to recommending their clients invest in them. This investigation is required so that firms understand the product’s risks, rewards, and costs. If there are red-flags apparent from this investigation, like for example, a company materially altering its business model like GWG did in 2018, then that red flag needs to be vetted. Disclosure is not enough. The brokerage firm’s responsibility is to vet any red flags, to ask questions, and get answers. By 2019, GWG’s largest disclosed asset was “Goodwill” in connection with the conflicted purchase of Beneficient, which lined the pockets of the departing CEO and CFO with approximately $30 million. Brokerage firm clients were entitled to an investigation by their brokerage firms into these facts. Instead, investors were routinely misinformed by the brokerage firms that:
- The L-Bonds were secured by a massive life insurance portfolio;
- The L-Bonds had priority over other debt;
- The L-Bonds were suitable for income-seeking and risk-averse investors;
- The L-Bonds were guaranteed; and
- That GWG’s assets were in excess of its liabilities.
Not one of those facts were true. The L-Bonds were not secured by the company’s portfolio of life insurance policies. The L-Bonds do not have priority, but are regrettably subordinate to hundreds of millions of dollars in higher priority debt. The L-Bonds were at all times speculative, high risk, illiquid, unrated subordinate corporate notes in a penny-stock company. They were not suitable for fixed income investors and were not suitable for risk-averse investors. Further, there was nothing guaranteed with the L-Bonds, and in fact, repayment and interest payments relied almost entirely on GWG’s ability to sell more L-Bonds. Once that stopped, default ensued. Last, GWG is in fact upside down by a factor of three. From 2019-2021, almost two-thirds of GWG’s assets were comprised of intangible “good will”, which cannot be sold, used to secure loans, or spun off.
GWG has been selling L-Bonds to retail investors through a nationwide network of FINRA Brokerage Firms and Registered Investment Advisors since approximately 2012. In total, there have been four different formal issuances of these bonds:
- An offering of up to $250 million in L-Bonds beginning January 2012;
- An offering of up to $1 billion in L Bonds beginning in January 2015;
- And offering of up to $1 billion in L-Bonds beginning in December 2017; and
- An offering of up to $2 billion in L-Bonds beginning in June 2020.
The L-Bonds sold in these offerings, generally, had terms of two, three, five, and seven years, and paid fixed interest rates of between 5.5% and 8.5%. Since 2012, GWG has sold nearly $2 billion in L-Bonds, and raised $453 million through the fourth offering. As of September 2021, GWG had $1.3 billion in L-Bonds outstanding. Prior to maturity, investors had to decide whether they wished to take their principal at maturity or simply “renew” their bond for another term.
In 2018, things began to change at GWG. The company’s business model of buying life insurance policies from the secondary market through life settlement contracts, began to crumble under the weight of rising insurance premiums and the basic fact that the insureds on the life insurance policies were simply living too long. So, GWG sought a new road and with L-Bond investor money, entered into a massive transaction with a company called Beneficient.
Beginning in 2019, things began to go awry for GWG Holdings, just in time for its then CEO and COO Jon and Steven Sabes, to cash-out their GWG common stock through a non-public transaction to an entity called AltiVerse Capital Markets which was owned by Thomas Hicks. Mr. Hick would soon become a Director of GWG through this transaction, in exchange for $25 million. This transaction was actually circuitous: the $25 million originated from GWG, but was transferred through Beneficient to AltiVerse. Essentially, the Sabes Brothers sold their stock to an affiliated entity and took $25 million that originated with GWG. GWG now had a new Board of Directors and new chief executives.
GWG has a history of net losses and has not generated sufficient operating and investing cash flows to fund its operations. For the year ending December 2019, GWG posted a net loss from operations of $79.6 million and negative operating cash flow of $142.8 million. GWG depends on financing – primarily debt financing such as the L-Bonds – to fund its operations. Similarly, Beneficient generated net losses from operations of $166 million in 2018 and $167 million in 2019.
GWG’s largest asset as of December 31, 2019, was Beneficient’s “Goodwill”, marked as $2.4 billion or 65% of GWG’s consolidated assets. Goodwill is intangible – you can’t sell it, spin it off, or monetize it – and it is derived from the excess consideration paid by a buyer for the business over the acquired business’s identifiable assets. Beneficient recorded this goodwill when GWG obtained control of it on December 31, 2019. Taking away goodwill, which again, cannot be used to pay down debt, GWG’s liabilities are well in excess of its assets.
GWG’s largest tangible asset is its portfolio of life insurance policies, which had a fair value of $796 million as of December 2019. Critically, however, the L-Bonds are not directly secured by GWG’s life insurance portfolio. Instead, L-Bonds are primarily secured by GWG’s equity ownership interests in GWG subsidiaries. Any claims by L-Bond holders to these assets are subordinate to the interests of creditors of those entities. The fair value of GWG’s life insurance portfolio, less amounts owed on the senior debt, is insufficient to repay GWG’s outstanding L-Bond debt.
Financial statements reported that GWG generated losses from operations of another $208.5 million in 2020. On October 6, 2020, GWG received a subpoena from the SEC’s Division of Enforcement seeking information related to accounting practices and the sales of L-Bonds. GWG warned in its Form 10K for the year ending December 31, 2020, that the company’s “inability to raise capital, recurring losses from operations, negative cash flows from operations, delays in executing our business plans, and potential negative implications of the ongoing SEC non-public, fact finding investigation raise substantial doubt regarding our ability to continue as a going concern”. In the first three quarters of 2021, GWG reported losing another $169.8 million. Between 2019 and the third quarter of 2021, GWG Holdings lost over half a billion dollars. GWG began defaulting on L-Bonds in January 2022 and filed for protection under Chapter 11 of the Bankruptcy code on April 20, 2022 where it sought a $60 million lifeline from a debtor-in-possession. The court denied GWG’s request, and approved a $10 million credit facility instead. It is likely that GWG will end up in liquidation and the L-Bond investors – who are behind hundreds of millions in superior debt – will lose substantially as a result.
About sixty brokerage firms aided and abetted GWG’s business plan and culture. Some of those brokerage firms include Centaurus, Cabot Lodge, Center Street Securities, Ausdal Financial, Moloney Securities, and Western International Securities. According to the Securities and Exchange Commission, specifically, Western International violated Regulation Best Interest when it sold L-Bonds to its clients. See US SEC v. Western International Securities, et al., Case No. 22-cv-04119 (C.D. Cal.). Any investor who was solicited to buy L-Bonds from 2018 onward, could have a viable claim against their brokerage firm for unsuitable investment recommendations, misrepresentations, breach of fiduciary duty, and if solicited after June 2020, for violations of Regulation Best Interest.
If you were recommended an investment in GWG L Bonds, please call Stoltmann Law Offices, P.C. at 312-332-4200 for a no-obligation free consultation with a securities attorney. Stoltmann Law Offices is a contingency fee firm offering representation to defrauded investors across the country, which means we do not get paid until you do.