Understanding GWG L Bond Losses and How Emerson Equity Allegedly Defrauded Investors Through the Sale of High-Risk L Bonds
Latest News: GWG Holdings Inc filed for Chapter 11 Bankruptcy on 4/20/2022. The time for investors to act is now!
When GWG Holdings Inc. (GWG) defaulted on its L bond interest payments on January 15, 2022, it sent shockwaves through the investment world. Broker-dealers, including principally Emerson Equity LLC of California, had touted GWG’s L bonds as safe, reliable investments that were suitable for retirees and other risk-averse investors. The default left many GWG L bond investors facing substantial losses with virtually no hope of recovery outside of litigation or FINRA arbitration. Our firm had already been monitoring the GWG Holdings investigation, as well as allegations against Emerson Equity. In fact, our investigation dates back nearly a year. As we wrote in July 2021, “GWG L Bonds [are] speculative investments due to the distressed financial condition of [GWG] and [are] not suitable for conservative or even moderate investors, and totally inappropriate for retirees.” GWG’s L bond interest payment default only adds fuel to the fire. Given the current state of affairs, our firm is continuing to probe the GWG Holdings investigation and Emerson Equity, and our attorneys are evaluating several potential claims against each of these firms for the GWG L bond losses.
What Is GWG Holdings? What are the Warning Signs of Alleged Fraud?
GWG Holdings is an alternative asset management and investment firm based in Dallas, Texas. Among its flagship products is the L bond, a supposedly high-yield bond offered to investors through a private placement offering. GWG has offered L bonds to investors for the past 10 years.
Issues related to GWG Holdings started to come to light in 2021. The GWG Holdings investigation has revealed:
- GWG was delinquent in making multiple filings with the U.S. Securities and Exchange Commission (SEC). When it made its delinquent filings, GWG finally disclosed that it was behind on its L bond interest payments and that a decline in the sale of its L bonds had caused a cash shortage.
- GWG’s auditing firm, Grant Thornton, terminated its engagement in December 2021. The auditing firm made its announcement shortly after GWG acknowledged in a public filing that its Quarterly and Annual reports for 2019 and 2020 were unreliable.
- GWG’s promises to amend its unreliable Quarterly and Annual reports in early 2022 have gone unfulfilled.
- GWG’s most recent filings show that while the firm has approximately $1.7 billion in assets, it owes nearly $1.9 billion in outstanding L bonds and senior credit facilities.
- In January 2022, GWG sent a letter to L bond investors which stated, in part, “GWGH has paused L Bond sales retroactively to January 10, 2022 while GWGH works with its advisors to identify and evaluate options available to the Company. While asset sales may provide near-term liquidity, the value the Company expects to receive in those transactions would likely be at a significant discount to the fair market value of the assets, and, without a reliable expectation of when the Company can get back to a sustainable capital raise with the L Bonds, the Company believes it is not in the best interest of GWGH’s investors to pursue these transactions at this time.”
These issues have also caused GWG’s own share price to plummet. After rising above $10 per share in November 2021, the share price is floating around $5 per share as of early March 2022.
Timeline of Events Leading to Investor Losses and the GWG Holdings L Bonds Lawsuit
The series of events leading to our firm’s GWG Holdings investigation began in 2019. The company missed the deadline to file its Form 10-K 2018 Annual Report in March. Shortly after the company submitted its delinquent filing in July, its public accounting firm resigned. The company then missed a quarterly reporting deadline in August, and it continued to miss deadlines throughout 2019 and 2020.
Concerns about the company’s L bonds specifically arose in 2021. GWG Holdings suspended the sale of these bonds in April. Then, on August 1, 2021, after consulting with the U.S. Securities and Exchange Commission’s (SEC) Office of the Chief Accountant, the company admitted that its Annual and Quarterly Reports filed in 2019 and 2020 were unreliable. While GWG Holdings pledged to address the improprieties at the time, this never happened.
GWG Holdings should have worked with its independent auditing firm, Grant Thorton LLP, to come into compliance. However, on December 31, 2021, Grant Thorton, LLP announced that it was withdrawing from its engagement with the company. Shortly after, GWG Holdings publicly disclosed that it would be unlikely to file its Form 10-K Annual Report by the March 31, 2022 deadline.
Less than two weeks later, on January 10, 2022, GWG Holdings announced that it was again suspending its L bonds’ sale. As the company relied heavily on its sale of L bonds to maintain sufficient liquidity, this was a major development that immediately sparked concern for investors.
Then, on January 15, 2022, GWG Holdings filed a report with the SEC indicating that it had missed payments to L bond owners. These payments totaled approximately $13.6 million–$10.35 million in interest and $3.25 million in principal. On January 24, 2022, GWG Holdings retained Mayer Brown LLP and FTI Consulting, Inc. to restructure its debt and evaluate alternative ways to meet its financial obligations. That same day, the company released a statement informing L bond investors that it could be up to six weeks, if not longer, before it would be able to offer a resolution.
While GWG Holdings had close to $1 billion in assets according to its most recent report, this included just $42.2 million in cash on hand. The report also indicated that the company had more than $1.5 billion in outstanding GWG L bond debt and owed approximately $327.7 million under senior credit facilities. On January 27, 2022, The Wall Street Journal reported that GWG Holdings may pursue a Chapter 11 bankruptcy filing if no alternatives prove viable.
Additional Developments in the GWG Holdings L Bond Saga Following The Wall Street Journal’s January 2022 Report
Since The Wall Street Journal reported that GWG Holdings was on the brink of bankruptcy, the firm’s financial situation has only gotten worse. In February 2022, GWG Holdings reported on its Form 8-K that it had defaulted on principal and interest payments owed to L bond investors. The total amount of the default was $13.6 million, consisting of $3.25 million in principal and $10.35 million in interest.
Securities firms must issue Form 8-K to disclose the occurrence of any material event. They must also file regularly scheduled reports with the SEC, including an annual Form 10-K. On April 1, 2022, GWG Holdings announced that it would not be making its annual Form 10-K filing with the SEC in a timely manner. In its filing informing the SEC of the delinquency, GWG Holdings wrote that it was “unable” to make a timely filing because “the Company requires additional time to complete its financial statements and related disclosures to be included in the 2021 Form 10-K.” Rather than taking responsibility, GWG Holdings blamed the delinquency on Grant Thornton LLP’s decision to resign as the firm’s independent auditor—although the firm also acknowledged that it “has not yet engaged an auditor to audit its financial statements for the year ended December 31, 2021, but is in the process of reviewing potential candidates.”
Shortly after GWG Holdings informed the SEC that its Form 10-K filing would be late, the firm received a letter from NASDAQ notifying it that it “was not in compliance with the filing requirements for continued listing under Nasdaq Listing Rule 5250(c)(1).” In another Form 8-K filing, GWG Holdings wrote that “[t]he NASDAQ notification has no immediate effect on the listing or trading of the Company’s common stock on the NASDAQ Capital Market” and that “[t]he Company anticipates that it will regain compliance with the NASDAQ continued listing requirements upon filing its Form 10-K.” However, NASDAQ’s letter only gave GWG Holdings 60 days to come into compliance, and, as discussed below, this 60-day window has long since closed.
LATEST UPDATES: GWG Holdings Files for Bankruptcy and Continues to Delay Mandatory Disclosures
On April 20, 2022, GWG Holdings informed the SEC that it had filed a voluntary bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code. In the filing, GWG Holdings wrote that the firm and its affiliates “expect to continue their operations in the ordinary course of business.” In order to do so, GWG Holdings reported, the firm had secured an additional credit facility as a debtor-in-possession—taking on even more debt that hinders the firm’s ability to repay its investors.
Despite informing the SEC that it intended to correct its Form 10-K filing deficiency in order to satisfy NASDAQ’s listing requirements, and despite stating that it expected to continue operating in the ordinary course of business, GWG Holdings has failed to do so. As of late August, GWG Holdings is yet to file its Form 10K, it has delayed the filing of two Form 10-Qs (mandatory quarterly reporting forms), NASDAQ has delisted the firm’s stock, and the firm has restructured its debtor-in-possession credit facility “in the event [its affiliate] does not have sufficient cash to make payments in respect of policy premiums.”
Breaking Down the GWG Holdings Investigation & Claims Against Tony Barouti and Emerson Equity Due to GWG L Bond Losses
Zamansky’s investigation has also uncovered evidence that suggests that many GWG Holdings L bond investors may have claims against Emerson Equity LLC and Tony Barouti, a lead broker-dealer in California, as well. Emerson Equity is a brokerage and investment advisory firm that entered into a Soliciting Dealer Agreement (SDA) with GWG Holdings in 2020 pursuant to which the firm agreed to use its “best efforts” to sell $2 billion worth of GWG Holdings’ L bonds to investors.
Shortly after Emerson Equity signed the SDA, the façade of GWG Holdings began to fall. GWG Holdings missed filing deadlines with the U.S. Securities and Exchange Commission (SEC) and disclosed that its reports from 2019 and 2020 were unreliable. The firm’s independent accounting firm quit shortly thereafter. GWG Holdings was forced to halt the sale of its L bonds multiple times, and then in 2022, it began falling behind on its interest payment obligations to investors.
Based on these facts, among others, it appears that L bond investors may have multiple grounds to pursue claims against not only GWG Holdings but also Emerson Equity, in FINRA arbitration. These claims may include:
- Fraudulent Misrepresentations and Omissions Regarding GWG L Bonds – There is evidence to suggest that GWG misrepresented the risks associated with its L bonds. While the firm promoted these bonds as stable, low-risk investments for conservative investors, this is not the case. Additionally, as noted above, the firm has admitted to filing inaccurate reports with the SEC, and there is additional evidence to suggest that the firm withheld information about its deteriorating financial condition from L bond investors as well.
- Fraudulent Misrepresentations and Omissions By Emerson Equity – It appears that Emerson Equity may have also misled investors in order to sell GWG Holdings’ L bonds under its SDA. Our firm’s investigation has uncovered evidence suggesting that Emerson Equity knew, or at the very least should have known, of the financial risks associated with investing in L bonds yet failed to disclose these risks to investors.
- Unsuitable Investment Advice By Emerson Equity – Given the high-risk and illiquid nature of GWG Holdings’ L bonds, these bonds were unsuitable investments for conservative investors. As a result, by recommending these bonds to conservative investors, it appears that Emerson Equity breached its duty to provide suitable investment advice.
- Failure to Supervise By Emerson Equity – Given that Emerson Equity brokers, like Tony Barouti, were able to provide unsuitable investment advice to such a large number of investors, it appears that the firm may have violated its supervisory obligations as well. Notably, the firm consented to sanctions from FINRA in December 2021 related to allegations of inadequate supervision. It is unclear whether these allegations related specifically to the firm’s sale of GWG Holdings’ L bonds.
- Conflicts of Interest By Emerson Equity Brokers (which Falls on Emerson Equity) – Due to the high-risk and illiquid nature of its L bonds, GWG Holdings offered substantial commissions to selling brokers. Exceptionally high commissions create an inherent conflict of interest for brokers, and based on our investigations, it appears that this was a factor in Emerson Equity brokers’ sales of L bonds.
Contact Us About Filing a Claim About GWG L Bonds Against Emerson Equity or Tony Barouti
Are you considering a GWG Holdings lawsuit due to fraudulent L bonds purchased through Emerson Equity and/or Tony Barouti? If so, we strongly encourage you to contact us about filing to recover your losses through FINRA arbitration. For a free and confidential consultation, call 212-742-1414 or send us a message online today.