If you have sustained losses in an investment in GWG Renewable Secured Debentures, an illiquid and high-risk alternative investment, you be able to recover losses in arbitration before the Financial Industry Regulatory Authority (“FINRA”) if the investment was sold pursuant to a misleading sales presentation or the recommendation to purchase the securities lacked a reasonable basis. GWG Holdings, Inc. (“GWG”) began selling what it termed Renewable Secured Debentures (“Debentures”) in 2012. In certain instances, financial advisors and brokers recommending these Debentures reportedly solicited their clients to invest without first fully disclosing the Debentures’ many risks. In fact, in some instances, financial advisors reportedly made false and misleading oral and written statements concerning these investments offered by GWG, describing them as safe, low-risk, liquid and/or guaranteed. Further, some financial advisors may have recommended these Debentures without taking into account a customer’s specific investment objectives, risk tolerance, as well as other relevant factors which all touch upon the suitability of a specific investment.
In actuality, these Debentures were anything but safe, liquid investments. In structuring the Debentures, Minnesota firm GWG purchased life insurance policies in the secondary market at a discount to their face value and then packaged these policies into the Debentures, to be sold to investors. In structuring the overarching investments, GWG planned to continue paying on the insurance policy premiums, while paying investors interest, ultimately hoping to collect more upon maturity of the policies than GWG had initially paid to purchase, finance and service the policies. GWG required a minimum investment of $25,000 – with the optionality to make additional investments at $1000 increments. The Debentures had varying maturity terms and interest rates, ranging from six (6) months at an annual interest rate of 4.75% to seven (7) years at an interest rate of 9.5%.
Significantly, as stated in the GWG Prospectus, the life insurance policies underlying the investments do not serve as collateral for the Debentures, but rather acted as collateral for GWG on a line of credit to purchase the insurance policies, in the first instance. In addition to the risk of default without secure collateral in place, the GWG Debentures are extremely illiquid in nature. This means that investors do not have ready access to their initial capital commitment prior to maturity (unless such a request is due to death, bankruptcy, or disability). Further, there is no active trading market for GWG’s Debentures, making resale extremely difficult.
In February 2016, former broker David Joseph Escarcega (CRD# 4367584), formerly a registered representative associated with Center Street Securities, Inc. (CRD# 26898), was barred from the securities industry following a disciplinary decision handed down by FINRA. In connection with FINRA Enforcement’s findings and a subsequent decision by FINRA’s National Adjudicatory Council (“NAC”), Mr. Escarcega was barred from the securities industry and ordered to disgorge $52,270, plus interest.
FINRA determined that Mr. Escarcega had no reasonable basis to allegedly inform certain of his former customers that the Debentures were guaranteed or safe investments, particularly when the GWG Prospectus for the Debentures contained explicit numerous warnings about the high-risk nature of the Debentures: “INVESTING IN OUR DEBENTURES MAY BE CONSIDERED SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK, INCLUDING THE RISK OF LOSING YOUR ENTIRE INVESTMENT.”
The primary risk associated with investing in life settlements concerns the possibility that the insured (who has sold his or her life insurance policy to the investment sponsor) will outlive the money set aside by the sponsor to pay for continued life insurance premiums. In such a scenario, the investors in the life settlements are then obligated to pay future premiums in order to ensure that the policy remains in force until maturity. When some investors refuse to pay, the remaining investors are left to cover higher premium payments, or else allow the policy to lapse. Additionally, investing in securities such as the GWG Debentures through a private placement carries considerable risk — including the illiquid nature of the investment — and, therefore, is typically only available to accredited and/or sophisticated investors, as explicitly referenced in the GWG Prospectus.
The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in representing investors who have incurred losses in connection with private placement offerings, including investments in oil and gas drilling funds, hedge funds, and other exempt offerings. Investors may contact our office at (866) 966-9598 or via email at firstname.lastname@example.org for a no-cost, confidential consultation.