GWG Holdings, Inc. L Bonds

Giarrusso Law Group LLC continues its investigation into losses suffered by investors nationwide, primarily older and retired or semi-retired securities customers, who were solicited by a financial advisor to invest in certain “L Bonds” as issued by GWG Holdings, Inc. (GWG Holdings, or GWG). Formed as a Delaware corporation in 2008 and headquartered in Dallas, Texas with an additional base of operations in Minneapolis, Minnesota, GWG’s business model (at least in recent years) was predicated on conducting its life insurance secondary market business through certain wholly-owned subsidiaries. As previously stated by GWG Holdings in certain regulatory filings with the Securities and Exchange Commission (SEC), the alternative asset management company is “an innovative financial services company that is a leader in providing unique liquidity solutions and services for the owners of illiquid investments.”

The GWG Business Model in a Nutshell

Put simply, GWG’s business model involved investing in, through secondary insurance markets, existing life insurance policies directly from policyholders. Specifically, GWG Holdings purchased life settlements (sometimes referred to as viaticals, in those instances when the policy owner is facing serious illness) and, in order to do so, sought to raise capital from outside investors. In fact, GWG raised capital through the issuance of its own proprietary alternative investment product, a so-called L Bond. These L Bonds ultimately financed the purchase of life insurance policies on the secondary market, paying policyholders more than the policy’s surrender value.

Unfortunately for many uninformed investors, including many unsophisticated retail investors seeking safety and income, these GWG L Bonds were, in fact, highly speculative and illiquid alternative investments. Nevertheless, L Bonds were marketed to numerous investors nationwide through a network of broker-dealers as safe and secure, and furthermore, as paying higher-than-average interest rates, ranging from 4.25% - 9%, with maturities on the underlying L Bond of six to seven years.

On January 15, 2022, GWG defaulted on interest payments to its L Bond investors. This default has shocked many retail investors who had not been adequately informed of the investment’s highly speculative and illiquid nature.

Risks Inherent to GWG L Bonds

For approximately the past decade (2012-2021) GWG Holdings offered L Bonds to investors nationwide through a network of brokerage firms. Unfortunately, investing in L Bonds carried with it numerous risks for securities customers, including but not limited to the following:

  • Life Settlement Risks: The primary risks associated with purchasing and managing a portfolio of life settlements include longevity risk, liquidity risk, and valuation risk. To be sure, the primary risk with investing in life settlements has to do with longevity risk, which involves the probability that a policyholder will live longer than their actual life expectancy (as may be derived from an actuarial table). Furthermore, as it concerns liquidity risk, a company such as GWG must seek to ensure that at all times it maintains sufficient liquidity, not only to ensure continued prompt payments on existing insurance contracts in its investment portfolio, but also to satisfy any potential redemption requests from investors, such as L Bond investors. Finally, as it concerns valuation risk, the highly nuanced and complicated analysis required to evaluate and assign a monetary value to an existing life insurance contract is quite difficult to perform, and requires excellent analysis from a dedicated team, including actuaries, medical professionals, and the like, to ensure sound and prudent analysis and underwriting. Any deviation from sound analysis may result in severe underperformance in the underlying investment portfolio of life settlements.

  • Private Placement Offering:  GWG L Bonds were sold to investors from approximately 2012-2021 via a private placement offering. In other words, investors who were steered into investing in L Bonds by their financial advisor did not invest in liquid, freely tradeable securities when they purchased L Bonds. Rather, investors who purchased L Bonds did so via private placement, meaning that the alternative investment was extremely illiquid and not easily sold to a third party (in fact, investors could only attempt to sell their L Bonds back to GWG Holdings, which transaction would include a 6% redemption fee). Furthermore, because investors purchased L Bonds via private placement, they received only limited information and disclosures about the underlying investment and its many risk components.

GWG Bankruptcy

In April 2022, GWG Holdings disclosed to the SEC that it had filed a voluntary Chapter 11 petition for bankruptcy protection in federal court in Texas (U.S. Bankruptcy Court, Southern District of Texas). Through its bankruptcy filing, GWG stated that the firm and its affiliate entities “expect to continue their operations in the ordinary course of business.” However, in order to continue to conduct its business operations, GWG will need to secure additional funds for ongoing operations, through securing debt financing under a debtor-in-possession credit facility. Unfortunately for GWG L Bond investors, this means that GWG will need to take on even more debt in order to continue operations, thus further negatively impacting L Bond investors.

Potential Recovery for Investors in GWG L Bonds

Investors in GWG L Bonds may expect to receive some recovery, likely a small or nominal recovery, through a lengthy bankruptcy process under the Chapter 11 reorganization plan. However, investors may also seek to recover losses on their speculative and illiquid L Bond investments through pursuit of a securities arbitration claim before the Financial Industry Regulatory Authority (FINRA).

While some brokerage firms and their affiliated financial advisors may be incentivized to recommend an illiquid and risky private placement investment, such as a GWG L Bond, due to what is most typically a hefty commission structure, brokerage firms and their stockbrokers nevertheless have a legal obligation to conduct adequate due diligence on investments recommended to their customers. In fact, FINRA has provided ample guidance on how a broker-dealer should go about conducting due diligence on a private placement investment, including visiting the issuer’s facilities, inspecting the issuer’s assets, examining third party reports (such as geological reports for an oil and gas private placement), and obtaining expert reports where appropriate.

GWG Holdings sold its L Bonds to investors nationwide through a network of various brokerage firms in the United States. These firms included:

  • Aegis Capital Corp.

  • Ages Financial Services, Ltd.

  • American Equity Investment Corporation

  • American Trust Investment Services, Inc.

  • Arete Wealth Management, LLC

  • Ausdal Financial Partners, Inc.

  • Cabot Lodge Securities LLC

  • Capital Investment Group, Inc.

  • Centaurus Financial, Inc.

  • Center Street Securities

  • Coastal Equities, Inc.

  • Dempsey Lord Smith, LLC

  • Emerson Equity LLC

  • Great Point Capital LLC

  • IFP Securities, LLC

  • Independence Capital Co., Inc.

  • Integrity Brokerage, LLC

  • International Assets Advisory, LLC

  • Intervest International Equities Corporation

  • JRL Capital Corporation

  • Kingswood Capital Partners, LLC

  • Landolt Securities, Inc.

  • Lifemark Securities, Corp.

  • M Stevens Securities, LLC

  • Moloney Securities

  • National Securities Corporation

  • Newbridge Securities Corp.

  • NI Advisors

  • Paulson Investment Company LLC

  • SW Financial

  • TFS Securities, Inc.

  • The FIG Group, LLC

  • Titan Securities

  • Western International Securities, Inc.

  • Westpark Capital, Inc.

The attorneys at Giarrusso Law Group LLC have significant experience in successfully representing investors who have incurred losses in speculative and illiquid private placement offerings. Investors may pursue a claim to recover monies through securities arbitration before FINRA, or in some instances, through litigation. Investors who wish to discuss a possible claim may contact us by telephone at (201) 771-1115, or by email at info@gialawgroup.com for a no-cost, confidential consultation.