UPDATE–Continuing Investigation Developments: GWG RENEWABLE SECURED DEBENTURES and JON R. SABES and STEVEN F. SABES
Further Investigation Into GWG Renewable Secured Debentures
Have you invested in GWG Renewable Secured Debentures? We have previously written a couple of blog entries regarding actions bought by the Financial Industry Regulatory Authority (FINRA) against financial advisors who recommended that their clients invest in GWG debentures. GWG Holdings, Inc. purchases life insurance policies on the secondary market, at a discount from the policy owner. GWG then hopes to make a profit by collecting the face value of the policy when the insured passes away. However, in order to finance the purchases of these insurance policies, GWG borrows money from financial institutions or investors.
In a July 3, 2014 filing with the Securities and Exchange Commission, GWG revealed that its CEO, Jon R. Sabes, and its President and Secretary, Steven F. Sabes, were the involved in a clawback litigation regarding Thomas Petters. The Sabes brothers own over 94% of the common stock for GWG. A bankruptcy trustee is seeking to clawback money loaned to an affiliated company which is also owned by the Sabes’ brothers, called Opportunity Finance, LLC.
While there are no claims directly against GWG, an adverse result against the Sabes’ brothers could impact GWG negatively, according to the July 3, 2014 filing with the SEC. The July 3, 2014 filing states that if the bankruptcy trustee seeks to sell or transfer equity interests of Jon or Steven Sabes as a result of the litigation, there could be a change in control of GWG, and the business could be materially and adversely affected. The filing further states that:
Such adverse results would likely arise in connection with negative change-in-control covenants contained in our [GWG’s] revolving credit facility agreements, the breach of those covenants and an ensuing event of default under such facility.
See GWG Holdings, Inc.’s Form S-1 filing dated July 3, 2014.
GWG began issuing Renewable Secured Debentures in 2012 to sell to investors. The GWG Renewable Secured Debentures have varying maturities, from six-months to seven-years, and are purported to pay annual intererest rates fom 4.75% to 9.50%. However, the GWG Renewable Secured Debentures are illiquid, and investors do not have access to their principal investment, with exceptions for death, bankruptcy, or total disability of the investor. There is no secondary market for the GWG Renewable Secured Debentures either. The prospectus for the GWG Debentures states that this investment is generally not suitable for an investor who needs their invested funds to be liquid.
FINRA recently suspended financial advisor Michael M. Ward. Michael Ward, the CEO of 79 Capital Securities was fined $25,000 jointly and severally with 79 Capital Securities and suspended from acting in a principal capacity for 20 days. FINRA alleged that Ward approved the sale of the GWG Debentures to at least two customers, but that he did not adequately investigate whether the customers were accredited to be able to invest in these debentures. FINRA also alleged that Ward failed to ensure that new account applications were submitted for these customers. FINRA mentioned that at least one of the investors had their money refunded by 79 Capital.
This is at least the third disciplinary action that FINRA has brought against a financial advisor or his firm for selling GWG Debentures. FINRA previously suspended Michael Wurdinger of Center Street, who was responsible for supervising the financial advisors who recommended the GWG Renewable Secured Debentures to Center Street Securities clients. FINRA alleged that Wurdinger did not understand the features and risks of the GWG Debentures, and therefore he lacked the requisite understanding to adequately supervise and review the sales of these Debentures. FINRA also alleged that Wurdinger approved sales of the GWG Debentures to many elderly clients, some of whom had investment objectives and risk tolerances that were inconsistent with the GWG Debentures, which were speculative. FINRA further alleged that some Center Street Securities customers had high concentrations of these debentures, which exceeded suitability requirements described in the GWG Debenture disclosure documents. FINRA also recently suspended another advisor at Center Street Securities for selling GWG Debentures.
We are investigating whether clients may have potential claims against Center Street Securities, 79 Capital Securities, or other broker-dealer firms for unsuitable sales and misrepresentations in connection with the sale of the GWG Renewable Secured Debentures. Financial advisors have an obligation to make investment recommendations that are suitable for their clients, considering the client’s investment objectives, risk tolerance, financial resources, age, and other circumstances. Securities broker-dealer firms have a responsibility to adequately supervise all representatives and financial advisors who are registered through their firm, including investments sold by their registered representatives. Broker-dealers also must take steps to ensure that their financial advisors follow all securities rules and regulations, as well as internal firm policies. When broker-dealers fail to adequately supervise their registered representatives, they may be liable for investment losses sustained by customers. If you have invested in GWG Renewable Secured Debentures and want to hear about ALL legal options, please visit https://www.israelsneuman.com/ or call us at 720-599-3505.