Western International Securities Allegedly Violated Regulation Best Interest with GWG L Bonds
Western International Securities is the subject of the first Regulation Best Interest (Reg Bi) action brought by the SEC. According to the SEC, Western International Securities and associated persons violated Reg Bi by recommending unsuitable GWG L Bonds that posed too much risk for their investors.
What is Regulation Best Interest?
Regulation Best Interest took effect in June 2020. The SEC and FINRA designed Reg Bi to increase the transparency between investors and brokerage firms. Reg Bi requires brokers and brokerages to satisfy a “Care obligation,” among other requirements. The care obligation requires brokers to understand the risks associated with an investment. Reg Bi requires brokers to investigate reasonably available alternatives to an investment recommendation.
Why Were GWG L Bonds Allegedly Unsuitable?
According to the SEC, Western International Securities and four associated brokers violated Reg Bi when they recommended high-risk GWG L Bonds to retirees. Many of the retirees who purchased GWG L bonds were simply told that GWG Holdings had a good track record and that L bonds could generate promising returns – certain brokers claimed potential returns as high as 5.5% or 8.5%. Meanwhile, brokers were earning commissions as high as 8%. (For comparison, most broker commissions are 1% to 2%.)
L bonds were so risky that they were not rated by any bond rating agency. Furthermore, GWG Holdings made risky business moves – like acquiring a company called Beneficient for $2 billion, even though Beneficient had no operating history.
The L Bond prospectus stated that L Bonds feature a “high degree of risk, including the risk of losing [one’s] entire investment[,]” and “[i]nvesting in L Bonds may be considered speculative.” It also stated that “L Bonds are only suitable for persons with substantial financial resources and with no need for liquidity in this investment.” If they had upheld their care obligation, Western International Securities brokers would have known that L Bonds were not suitable for many of their investors, especially the retirees.
In their action against Western International Securities, the SEC alleges that prior to recommending them to customers, Western required each of its representatives to take an online training course on L Bonds. However, Western did not require registered representatives to take L Bond training on the current offering if they had completed training on a previous L Bond. Unfortunately for investors, GWG’s business strategy and finances had changed significantly between L Bonds.
What Happened to GWG Holdings?
January 2022 saw GWG Holdings default on $13 million in payments to investors. Today, the issuer owes $1.6 billion to investors. GWG Holdings declared bankruptcy in April 2022, leaving many investors concerned that they may never recover their investments.
Why Did GWG Holdings Fail?
Unfortunately, the actuarial calculations that GWG relied on to turn a profit are allegedly flawed. To make money, GWG Holdings relied on new L Bond investments to make payments to their older investors – a Ponzi-like business model.
One class action suit alleges that GWG Holdings chairman Brad Heppner used GWG Holdings to enrich himself. The suit alleges that a GWG Holdings Heppner controlled Beneficient Company and used Beneficient to execute complex transactions to misappropriate GWG Holdings funds.
Can Investors Participate in a Class Action Suit and Pursue Arbitration?
Often, FINRA arbitration is the better option for investors who stand to recover a substantial amount of money. Class action suits are typically a last resort for investors with claims too small for a FINRA arbitration claim.
Investors who participate in a class action suit against GWG should know that participating in a class action suit does not negate their right to recover their losses via arbitration. If a claimant will not participate in the recovery of funds that may result from the class action suit, investors are free to enter arbitration (see: FINRA Rule 12204).
Western International History of Regulatory Action
This Reg Bi action is not the first regulatory action on Western International’s record. You can read all 17 disclosures on Western International Securities’ detailed BrokerCheck record.
- On January 5, 2021, the firm consented to the entry of findings that it failed to supervise its options trading, in violation of FINRA Rule 3110. The firm consented to a fine of $20,000. You can read a copy of the Acceptance, Waiver and Consent (AWC) here.
- There is an earlier allegation that the failure to supervise. An AWC from April 20, 2020, alleges that Western Securities failed to timely amend forms that disclosed broker liens, judgments, and bankruptcies that totaled $5.6 million. SEC ordered the firm to pay a fine of $325,000. See a copy of the AWC here.
- On July 16, 2021, Western International consented to the findings that the firm did not adequately supervise broker mutual fund recommendations. FINRA alleged that accounts of both retirees and a charitable organization had overpaid for mutual funds. Brokers have a duty to inform investors when they are eligible for mutual fund discounts. The firm consented to a $75,000 fine. You can read the AWC here.
What Should Investors Do Next?
Did you lose money working with Western International Securities? Investors who believe they may have been misled by their brokerage firms should reach out to a securities attorney today. Our attorneys only collect a fee once they have won their case, so they only take cases they feel confident they can win. Call (877) 600-0098 or email firstname.lastname@example.org.