It is a new year, and GWG Holdings has many investors worried. Last year GWG Holdings stopped paying interest on its L Bond and filed for bankruptcy. The timing couldn’t have been worse for investors already facing a bear market.
GWG is an alternative asset management firm based in Dallas, Texas. Its flagship product is the L bond, which it promoted as a safe and stable high-yield investment.
It sold the bonds to investors through hundreds of regional broker-dealers. Unfortunately, these risky private placements didn’t deliver the expected returns for many people who purchased them.
Many investors have filed claims against financial advisors alleging GWG Holdings were improperly sold to them. The allegation is that many were told the investment was conservative and low risk. However, most investment professionals consider the product high-risk and unsuitable for most retail investors.
There has been a growing trend in the financial services industry to sell private place products to investors. Both FINRA and the SEC have warned investors about these products.
FINRA fined 15 broker-dealer firms $3.47 million for their GPB Capital sales. It pointed to the shortcoming of providing proper due diligence on GPB and informing customers of the risks.
L Bonds
GWG Holdings buys life insurance policies in the secondary market and eventually collects their death benefits. To finance these purchases, the company issues L Bonds to investors.
These bonds come with maturities ranging from two to seven years and pay a higher interest rate than the original policy’s surrender value. They also have a conversion option that lets you redeem them before the maturity date and receive proceeds corresponding to the life insurance policy purchased from the original policyholders.
However, GWG Holdings’ business model changed in 2018, and its accounting problems and multiple changes to its independent auditors put it under pressure.
Consequently, GWG Holdings filed for bankruptcy protection in April 2022. As a result, GWG L Bond investors lost their principal and missed interest payments. Thankfully, bankruptcy protection allows them to recover their investment losses through arbitration against the brokerage firm that sold them the GWG L Bonds.
Investors
GWG Holdings, an alternative asset manager, still needs to pay millions in interest and principal payments to investors who purchased GWG L Bonds. These bonds pooled money from investors to buy life insurance policies in the secondary market.
Many investors invested their retirement funds and life savings in these speculative, high-risk, and illiquid securities. The investments were marketed to retirees and other conservative investors but were unsuitable for them.
Financial advisors and their employing brokerage firms have a legal and regulatory duty to recommend only suitable investments appropriate for their client’s needs and objectives. Failure by the firm to do so can result in liability for losses.
Business Model
GWG Holdings used money from investors to buy life insurance policies on the secondary market, which it then paid out when people died. This was a risky investment strategy, and many investors lost their money.
The Securities and Exchange Commission (SEC) has investigated GWG since 2020. They’ve discovered a series of errors in accounting, and they’ve asked for additional information.
According to the SEC, GWG’s financial statements should no longer be relied on. This comes after they failed to file their Form 10-Q for the first quarter of 2022 in March and after the company’s public accounting firm resigned.
In addition, they’ve filed for Chapter 11 bankruptcy, a restructuring process designed to help companies improve liquidity and enhance their ability to meet financial obligations while maximizing the value of their assets. This is an important step, as it means that the firm has a viable path to recovery and can begin to pay creditors and equity holders again.
Reputation
GWG Holdings is a financial services company that offers liquidity solutions to owners of illiquid alternative assets. It operates in two segments: Secondary Life Insurance and Beneficient.
The company reoriented its business model, which exposed it to riskier alternative assets such as L bonds. Many investors needed to be made aware of this change, which increased the credit risks of GWG Holdings.
As a result, it filed for bankruptcy protection on April 2022. The filing reportedly left the company with $2 billion in debt, including $1.6 billion in outstanding L bonds.
Featured Image: Pixabay
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