Business Development Companies (“BDCs), Non-traded Real Estate Investment Trusts (“REITs), and most other alternative or direct investments are illiquid investments, not listed on public exchanges and with little to no secondary market trading.
GWG Holdings, Inc. is a Delaware corporation headquartered in Minnesota, which through its subsidiaries, purchases life insurance policies on the secondary market at a discount to the face value of the policies. Once GWG purchases a policy, it has the obligation to keep the policy in effect by paying the policy premiums until the insured passes away. Upon the insured’s death, GWG collects the face value of the insurance benefit. The objective of this business is to earn returns by collecting more money upon the insured’s death than the amount that GWG pays to purchase, finance, and service the policies.
As of even date, a Trustee has been appointed. Third party auctions suggest that these securities may be substantially worthless.
However, it was disclosed that at the time of sale, and stockbrokers or investment professionals recommending these securities to their customers, either knew, or should have known, as was disclosed in the limited offering materials, that:
a) GWG had a very limited operating history;
b) GWG purchased almost all of the policies it owns with funds borrowed from financial institutions or investors.
c) the GWG bonds were “illiquid, speculative, investments that involve a high degree of risk-including the risk of losing the entire investment;
d) there was no trading market for the GWG bonds and investors cannot access their principal prior to maturity absent death, bankruptcy, or total disability;
e) the GWG bonds are not directly secured by life insurance policies; and that
f) the underlying life insurance policies are not direct collateral for obligations under the GWG bonds. Instead, those policies have been separately pledged to a bank as collateral for the line of credit used by GWG to purchase the policies.
Yet, many stockbroker and investment professionals, ostensibly because of the compensation associated with the sale of these securities, exclusive of due diligence fees and marketing expenses, sold these securities anyway.
As the US Securities & Exchange Commission, in its approval of the consolidated FINRA Suitability Rule observed:
Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.
In general, what constitutes reasonable diligence will vary depending on, among other things, the complexity of and risks associated with the security or investment strategy and the firm’s or associated person’s familiarity with the security or investment strategy.
A firm’s or associated person’s reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy.
See Securities Exchange Act Release No. 63325 (November 17, 2010).
Investors in GWG Class L Bonds should consult with qualified counsel to determine their legal rights.
Guiliano Law Group
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