As its name implies, GWG Life Settlements of Minneapolis is in the business of purchasing life insurance policies on which it continues to pay the premiums in order to collect the face value of the policy when the insured dies.

GWG Holdings, the parent company of GWG Life Settlements, issues debentures (i.e. bonds) to investors.  Part of GWG’s sales pitch to investors is that its bonds are collateralized by the life insurance policies that have been bought by GWG Life Settlements.  These life insurance policies naturally are issued primarily by highly-rated, household name insurance companies. The names and high credit ratings of these well-known companies are highly visible in the GWG literature.

However, according to FINRA, this impression of safety and security created by GWG’s sales literature is just plain false.  In its December 2013 release “Disciplinary and Other FINRA Actions” FINRA reports that its Department of Enforcement has brought an enforcement action against a securities broker in Ohio for utilizing GWG sales literature.  (This follows a similar enforcement action by FINRA in Ohio in October against another broker who utilized GWG sales literature.)

According to FINRA and contrary to the GWG sales literature, the aforementioned highly-rated insurance policies do not, in fact, serve to “secure” the debentures.  As FINRA states in its complaint, “the policies are not collateral for the Debentures and instead have been pledged as collateral for a separate line of credit.” Moreover, FINRA states that the use of the proceeds of the sale of the Debentures, rather than being lock-boxed for the purpose of buying highly-rated insurance policies, is barely restricted at all.  Money received from sales of debentures could be used to make payments on other debentures (making a Ponzi scheme possible) or for general working capital of the company.

These falsehoods that FINRA alleges, therefore, are not marginal, they are egregious.  Similarly, the abuse of investors alleged in FINRA’s complaint is remarkably reprehensible.  One of the several disturbing examples mentioned in FINRA’s complaint is a 90 year old, with an investment objective of preservation of principal and long-term growth, who purchased $200,000 of these debentures, representing an investment of approximately 66% of their liquid net worth.

It is sad and bewildering that this type of behavior by a securities issuer results in only isolated enforcement actions against small brokers by FINRA.  Too often our system of securities regulation serves as a moat to protect and enhance the interests of the highly paid professionals who administer this system.  The small investors, the ostensible beneficiaries of this system, are all too often left to defend themselves against deceptive issuers of securities and unscrupulous brokers.   If you have questions about any of the information discussed in this article, feel free to contact us at dlsecuritieslaw.com.  We will be happy to discuss your situation with you.