Then the company crashed and burned.
The L Bonds, as they were called, required patience from investors. After all, the policy payout would come when the original policyholder died.
Last August, the company temporarily halted the sales of their L Bonds, leading to a series of events that ended with GWG Holdings declaring bankruptcy in April of 2022. Investors in L Bonds were left with nothing.
So, what happened to the investor’s funds that were going to earn them great returns?
GWG Recovery Options
Emerson Equity LLC was the managing broker-dealer for these bonds. They used a nationwide network of brokerage firms to sell the L Bonds to interested investors.
Policy sellers were offered more than the face value of the policy as an incentive for cashing out. Many policy sellers were elderly and couldn’t continue paying premiums but didn’t want to lose what they paid. Others simply wanted the cash-in-hand and didn’t want or need the policy anymore.
Many investors who bought this alternative and illiquid investment were also elderly themselves. Sold in $1,000 denominations, investors were required to invest a minimum of $25,000. Over $1.26 billion flowed into GWG Holdings for L Bonds, according to The Wall Street Journal.
Many of these investors gambled their retirement savings on the risky and speculative bonds. Unfortunately, the bonds weren’t suitable for retail investors, many of whom were retired and had more conservative investment objectives.
In the end, GWG Holdings resembled a Ponzi scheme, with new investor money being used to pay the prior investors. Eventually the company’s plans began to disintegrate.
From November 2021 to March 2022, GWG Holdings’ stock price dropped 49%, from $10.51 down to $5.14. Then GWG missed principal and interest payments of $3.25 million and $10.35 million on their L Bond issues on the January 15, 2022, due date. The company publicly stated that it was “evaluating restructuring alternatives” to conserve and maximize its assets.
GWG Due Diligence Claims
What investors did not know was that during GWG’s heyday, the owners had other plans. One board member and the founders began using some of the company’s funds for their own, personal startups. These companies are independent of and away from the control of GWG Holdings.
The first thing they did was to change GWG’s business model in 2019 to invest in these additional assets, including startups created by the company’s executives. Investors in the company were not notified of this change, although the company claims that it did.
Two startups came out of GWG:
- Beneficent, Brad Heppner’s alternative finance company startup, which received $230 million from GWG to assist wealthy and institutional investors in cashing out illiquid investments
- FOXO, a tech company owned by Brad Sabes and his brother, Steven, which received $28 million from GWG, which purports to predict when a person will die based on the DNA from a saliva sample
Both startups, controlled by Heppner, the Brothers Sabes, and their associates became entities independent of GWG prior to the April bankruptcy filing.
Additionally:
- The Brothers Sabes received cash payments and dividends worth $43 million, cashing them out of GWG Holdings
- Lost operating expenses totaled $197 million
- Interest payments to investors totaled $817 million
Paul Capital Advisors was the private equity firm that began working with Beneficient to gain control of GWG and buy out The Brothers Sabes. With the help of banker Murray Holland, who became GWG’s CEO after voting to replace the board, GWG then stopped buying policies while continuing to sell the L Bonds. Heppner became chairman of the board, and GWG’s proceeds then went to support and develop Beneficient.
Unfortunately, during the transition, it was discovered that Beneficient’s business model included a problem with their accounting.
The SEC and Investment Fraud Attorneys
The US Securities & Exchange Commission began investigating GWG and the affiliated companies in October of 2020. This included a subpoena and questions about the L Bonds, accounting practices and the merger with Beneficient.
But the company continued to sell these L Bonds and didn’t notify its investors until more than a year later. The company stopped selling the L Bonds after the third company auditor, Grant Thornton, waited to file financial information until it received guidance from the SEC on Beneficient’s assets.
In July of 2021, the SEC notified GWG and Beneficient that charitable trust should have been listed as assets and not as a loan receivable. Less than a year later, GWG and Beneficient separated.
GWG tried again to sell more L Bonds. But brokers who previously sold the bonds weren’t interested in selling them again, so the next try failed. By this time, the SEC had also begun investigating the brokers themselves as well.
GWG Investor Claims and Finra Arbitration
The three companies are still connected, but their relationships aren’t clearly defined.
In July, the SEC charged broker-dealer Western International Securities, Inc. They allege that the company recommended and sold these L Bonds to retail customers without due diligence or considering that they might not be right for their clients. Other broker-dealers and brokers are facing investigation.
Investors who believed that the L Bonds would be suitable are hoping that they will eventually see some of their money. But because the L Bonds are tied to life insurance policies, they pay on the death of the original policy holder. But the proceeds will first be used to repay the institutional investors who lent GWG in excess of $380 million.
The Brothers Sabes FOXO company is currently 80% owned by GWG. However, once the company goes public with an acquisition filing their stake will be reduced to 12% of voting power and 9.4% economic interest, according to a securities filing.
Beneficient, the alternative finance firm now located in Kansas, was sued by Paul Capital, the private equity firm that helped the firm get started. Paul Capital also sued Holland, now CEO of GWG. Paul Capital alleges that Beneficient did not pay them as expected when the firm transferred assets to Beneficient, who disputes the claims.
A spokesman for Beneficient stated that the company is “experiencing strong momentum,” and continues to follow its path, which they anticipate will bring benefit to GWG, stakeholders, and L Bond holders. However, Beneficient has yet to produce any audited financial statements, or clarified its relationship with GWG. The company now has a loan portfolio of more than $520 million, according to a company statement made in March of this year.
Silver Law Group Represents GWG L Bonds Investors On A Contingency Fee Basis
If you invested in L Bonds, contact Silver Law Group at (800) 975-4345 or by email at ssilver@silverlaw.com. Silver Law Group is a nationally-recognized law firm with experience representing investors in securities arbitration and investment fraud cases. Scott Silver, Silver Law Group’s managing partner, is the chairman of the Securities and Financial Fraud Group of the American Association of Justice.
Our attorneys are admitted to practice in New York and Florida and represent investors nationwide. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today at (800) 975-4345 for a no-cost consultation.