Steven Graham, Thomas Swan, Nancy Cole, Patrick Egan, and Andy Gitipityapon, all registered representatives of Western International Securities (WIS), a registered broker-dealer, have been charged for their violation of Regulation Best Interest (Reg BI) by the Securities and Exchange Commission (SEC). The broker-dealer has also been charged.
The charge relates to their recommendation and sales of the L Bonds of GWG Holdings to retail investors, including retirees. It is now known that GWG has recently filed for bankruptcy protection under Chapter 11 provisions.
In light of GWG Holding’s bankruptcy, Haselkorn & Thibaut, P.A. is attempting to speak with investors who lost money by purchasing GWG L Bonds. We currently represent GWG investors in claims against financial advisors and broker-dealers. Investors of GWG L Bonds and GWG Preferred Stock are urged to get in touch with our knowledgeable investment fraud lawyers for a free consultation at 1-888-614-9356.
GWG L Bonds
GWG L Bonds were issued for a minimum investment of $25,000 and paid fixed rates of interest ranging from 5.5 to 8.5 percent depending on the maturity period which could be as short as two years and as long as seven. The longer the maturity, the higher the rate of interest.
A total of $1.3 billion worth of L Bonds had been issued as of the 30th of September, 2021.
Sales by WIS and its brokers
A total of $13.3 million worth of L Bonds was sold by Western from July 2020 through April 2021 which were sold primarily through independent broker-dealers as well as RIA channels. The purpose of raising the money was to finance the secondary-market purchase of life insurance policies.
For each sale, WIS earned a commission amounting to between 3.25 and 5 percent of the value of the Bond, of which 85 to 90 percent went to the registered representative responsible for the sale with the balance retained by WIS. WIS, additionally, received 0.75 percent of the value of Bonds sold in case of Bonds of 2 and 3-year maturities, and 1.0 percent in case of 5 and 7-year maturities.
For L Bonds sales made after the 30th of June, 2020, Graham, Swan, Cole, Egan, and Gitipityapon individually received between $5,400 and $32,500. For the same period, WIS earned around $187,000 in commissions and fees.
The five named brokers, supported by WIS, are stated to have recommended the L Bonds to retail customers, several of them on fixed incomes and with a profile that was only moderately tolerant of risk. This was despite GWG’s prospectus specifying their illiquidity as well as highly risky nature, even to the extent of stating that they should be considered only by investors with substantial financial resources.
Reg BI violation
A standard of conduct to be followed by broker-dealers and other persons associated with the process of recommending securities-related transactions to retail investors was established with the introduction of Reg BI on the 30th of June, 2020.
A violation of the ‘care obligation’ of the Reg BI by the defendants has been alleged by the SEC, for two reasons:
- Lack of understanding of rewards, costs, and risks associated with the investment through the exercise of reasonable care, skill and diligence
- Recommending the security to at least seven customers without any basis for believing that it would be in their (customers’) best interests
Western was found to be complicit in its failure to adequately establish, maintain and enforce policies and procedures that would facilitate compliance with the Reg BI standard. It was accused of ‘compliance obligation’ failure.
According to Gurbir Grewal, director of the SEC’s Division of Enforcement, “Reg BI is clear: broker-dealers must act in the best interest of their customers. When they fail to do so, as we allege happened here, they put retail investors at risk and we’ll hold them accountable.”
L Bond issuance remained suspended for 8 months in 2021 after GWG missed an SEC deadline for filing the annual report for 2020. The offering reopened in December 2021 only to be suspended again in January 2022 as GWG “[worked] with its advisors to identify and evaluate options available to the company.” Interest and principal repayments amounting to $14 million and due in January 2021 were also not honored by the company.
In its bankruptcy filing in April 2022, GWG sought to blame the SEC for their investigations and focus on the sales processes followed by their brokers, for their inability to raise adequate capital.