GWG Suspends L Bond Payments Indefinitely
GWG’s Marketing of “L Bonds” to Investors
GWG Holdings, Inc. holds a portfolio of assets that it finances with the sale of “L Bonds” (“Liquidity Bonds”) to investors. The L Bonds were purportedly used to finance GWG’s purchase of life insurance assets and other investment activities. L Bonds were marketed to investors as a conservative investment, with a maturity ranging from two to seven years, that would pay a guaranteed return interest rate of 5.50% to 8.50%.
However, that was not an accurate representation of this investment product. While investors may have been under the false impression that L Bonds were a low-risk investment, this non-conventional investment product was noting of the sort. L bonds were speculative, high-risk, illiquid investments, meaning there was and is no public market to resell these investments, making resale extremely difficult and unlikely. The GWG prospectuses states that: “Investing in our L Bonds may be considered speculative and involves a high degree of risk, including the risk of losing your entire investment.” The illiquid characteristic of L bonds meant that if the bond performed poorly, the bondholder still had to hold onto it until maturity or pay a 6% redemption fee to sell it.
Likely unbeknownst to average investors, holders of L Bonds were subordinate to GWG’s other current and future creditors. This means that L Bond holders will be paid last if GWG files for bankruptcy. Further, the “L Bonds” were not bonds, but more akin to an unsecured promissory note. The “bonds” had no credit rating assigned, and thus offered no basis of reliability by any credible independent agency. Despite this, they were marketed to unsuspecting investors as “guaranteed.” Such a guarantee is only as sound as the company making that assertion.
Any company offering a guaranteed return on an investment should be a red flag to investors. There were many other red flags associated with GWG and L Bonds:
· GWG has missed deadlines to file its financial statements with the SEC
· GWG failed to file its 2020 annual report, and then suspended sales of L Bonds on April 16, 2021
· On August 1, 2021, GWG’s board of directors released findings that some of its financial statements, including its annual report for 2019 and the quarterly reports for the first three quarters of 2020, “should no longer be relied upon”
· Grant Thornton LLP, GWG’s accounting firm, notified the company on December 31, 2021 that it is resigning as the company’s accountant
· GWG has indicated that it is not likely to timely file its 2021 annual report
· On January 10, 2022, GWG again suspended the sale of L Bonds, which are a significant source of GWG’s liquidity
GWG Holdings Suspends Payments to L Bond Holders Indefinitely
On January 15, 2022, GWG failed to make the scheduled payments to L Bond investors in the amount of $3.25 million in principal and $10.35 million interest. GWG sent a letter to investors on January 24, 2022 that appears to indicate that it will in fact default on the payments. See a copy of the January letter here.
GWG again failed to make its scheduled payments in February 2022. On February 14, a letter was issued to informing investors that payments may not recommence and bankruptcy may be forthcoming. See a copy of the February letter here.
While GWG may suspend payments indefinitely and could declare bankruptcy, investors in GWG may still have an avenue to recover their losses. The Financial Industry Regulatory Authority (FINRA) requires brokers to make a “suitable” investment recommendation for their customer. Brokers also have a duty to perform a due diligence investigation to determine that an investment is sound before they recommend it to a customer. Failure to comply could allow investors to hold their financial advisor liable for investment losses.
L Bonds were likely not suitable for most investors, especially those with a low-risk tolerance or investors who had liquidity needs. If you purchased L Bonds and would like to discuss, please call me at (800) 767–8040 or contact me here for a free consultation.
