According to Investment News, Tony Barouti, a stockbroker registered with Emerson Equity and based in Los Angeles, California, has been hit with a $1.37 million arbitration claim from customers who lost money in GWG Holdings L Bond investments.

As previously covered in this space, GWG Holdings, Inc., a financial services firm based in Dallas, Texas, filed for bankruptcy on Wednesday, April 20. The bankruptcy followed the company’s failures to make principal and interest payments on its L Bonds series and its missed deadlines to file audited financial statements for the past two years. GWG L Bonds shares have collapsed in the wake of the GWG Holdings bankruptcy filing.

What are GWG L Bonds?

GWG Holdings, through subsidiary GWG Life, LLC, owns life insurance policies. GWG Holdings used these policies to form investments called “L Bonds.” These L Bonds allowed investors to purchase life insurance policies on a secondary market, using payouts from the deaths of the insureds to pay investors.

GWG L Bonds Collapse

GWG Holdings’ L Bonds became popular with brokerage firms, like Emerson Equity, and financial advisors a few years ago, with many advisors soliciting their clients’ purchase of these bonds. According to Investment News, investors purchased a total of approximately $1.6 billion of GWG L Bonds.

GWG Holdings has been under Securities and Exchange Commission (“SEC”) investigation since at least October 2020. GWG’s accountants resigned in December 2021. Shortly thereafter, in February 2022, GWG defaulted after missing a Securities and Exchange Commission imposed deadline to pay investors.

On February 14, 2022, GWG sent a letter to its investors announcing that all sales of L Bonds were suspended, along with all interest, maturity, dividend, and redemption payments to investors. GWG also deferred redemption requests – meaning investors could not pull their money out of the Bonds.

Investment News reports that L Bond investors may lose as much as 80% of their underlying investment. Within the past two weeks, GWG Holdings’ shares had fallen to $4.48 per share, down from $10.90 in October.

SEC Investigation of GWG and Its Broker Network

In October 2020, the SEC opened an investigation into GWG Holdings regarding its accounting and its issuance of L Bonds. The SEC subpoenaed documents related to brokerage firms that were selling GWG L Bonds, investigating sales practices related to the Bonds. GWG reports that L Bonds were typically sold by a seller network made up of approximately 145 brokerage firms. Among the firms believed to be in the GWG network selling L Bonds are:

• Emerson Equity
• Cabot Lodge Securities
• Capital Investment Group
• Centaurus Financial
• Coastal Equities
• Ni Advisors
• Landolt Securities
• Lion Street Financial (Stiba Wealth Management)
• National Securities
• Newbridge Securities Corporation
• SW Financial
• WestPark Capital

Recourse for Emerson Equity L Bonds Investors

In the wake of the GWG Holding bankruptcy, Emerson Equity L Bond investors may be entitled to claim damages. To compensate for their monetary loss, they may file their claim through FINRA arbitration against their financial advisors and brokerage firms.

Brokerage firms, like Emerson Equity, and stockbrokers must comply with industry rules and regulations and only recommend products that they have a reasonable basis to believe are suitable for their clients. This suitability analysis requires advisors to consider factors including a customer’s investment objectives and risk tolerance.

As high-yield debt instruments which financed the purchase of life insurance policies on the secondary market, L Bonds were highly speculative and highly illiquid – meaning there was no way for the bondholders to resell them other than selling them back to GWG Holdings at a redemption fee.

The high risks and illiquidity of these bonds would have made them suitable only for a narrow range of investors who could afford to take on high risks and who did not need access to their cash. These features would have been known to investment advisors even before the L Bonds collapsed and the advisors were obligated to explain the risks to their clients and to only recommend the L Bonds to investors for whom high risk and illiquidity was suitable. Unfortunately, however, many investors used their retirement savings to buy L bonds on the advice of their stockbroker.

How Can Emerson Equity L Bonds Investors Recover Their Losses?

Individual investors still have a way to recover some of their losses. Investors who were sold GWG L Bonds based on incomplete or misleading information, or who needed liquid and relatively safe investments, may have legal recourse to recoup their losses.

Financial Advisors are obligated to understand the risks of investments they recommend to their clients and to disclose material risks to their customers.

If your Emerson Equity stockbroker / financial advisor misled you to believe that the GWG L Bonds were a safe, low-risk, or guaranteed investment, or if your stockbroker / financial advisor failed to explain the risks of GWG L Bonds when recommending them to you, you may be eligible to receive compensation for your GWG L Bonds losses.

Likewise, if you were an Emerson Equity investor who needed liquid and/or low to moderate risk investments, you may be eligible to recover your damages from the investment advisor and/or advisory firm who solicited your purchase of the GWG L Bonds.