Investment News reports that GWG Holdings, Inc. is preparing to file for Chapter 11 bankruptcy. The leading cause of bringing the company to the verge of bankruptcy is its failure to pay investors. GWG Holdings, which issues a series of high-yield bonds known as L Bonds, has defaulted on bond payments and missed the deadline to file audited financial statements.
How are Individual Investors Affected by the Bankruptcy News of GWG Holdings?
GWG L Bonds were once a popular choice among brokerage firms and financial advisors a few years ago. As a result of their financial services, many advisors solicited their clients’ purchase of these bonds.
According to Investment News, investors in the $1.6 billion of GWG L Bonds 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.
In the wake of the current situation and the risk of GWG Holding filing bankruptcy, these 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.
Financial advisors are obligated by industry rules and regulations to 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 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 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.