SEC Alleges Western and Five Brokers Violated Reg BI with Improper GWG Bond Sales

The Securities and Exchange Commission has charged registered broker-dealer Western International Securities and five of its registered representatives – Nancy Cole, Patrick Egan, Andy Gitipityapon, Steven Graham, and Thomas Swan – with violating Regulation Best Interest when they recommended and sold GWG’s L Bonds to retirees and other retail investors. GWG Holdings filed for Chapter 11 bankruptcy in April 2022.

GWG’s L bonds were sold through the independent broker-dealer and RIA channels to purchase life-insurance policies on the secondary market. Western sold $13.3 million of L Bonds between July 2020 and April 2021.

The SEC claims that Western and the five brokers recommended and the bonds to retail customers, many of whom were on fixed incomes and had moderate risk tolerances, despite GWG stating in its prospectus that the L bonds were high risk, illiquid, and only suitable for customers with substantial financial resources.

Reg BI, which became effective on June 30, 2020, established a standard of conduct for broker-dealers and associated persons when they recommend securities transactions to retail customers.

The SEC alleges that the defendants violated Reg BI’s “care obligation” both because they did not exercise reasonable diligence, care, and skill to understand the risks, rewards, and costs associated with L Bonds, and also because they recommended L Bonds to at least seven customers without a reasonable basis to believe the bonds were in their customers’ best interests.

Western is also accused of failing to comply with Reg BI’s “compliance obligation” because it did not adequately establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with the regulation.

“Reg BI is clear: broker-dealers must act in the best interest of their customers,” said Gurbir Grewal, director of the SEC’s Division of Enforcement. “When they fail to do so, as we allege happened here, they put retail investors at risk and we’ll hold them accountable.”

GWG’s L Bonds had a minimum investment of $25,000 and paid fixed interest rates of between 5.5 percent and 8.5 percent, depending on the maturity period which range from two, three, five, or seven years. As of September 30, 2021, GWG had $1.3 billion in L Bonds outstanding.

According to the complaint, Western received a commission of 3.25 percent to 5 percent of the value of each L Bond sold by its registered representatives. The registered representative received approximately 85 percent to 90 percent of that commission, and Western received approximately 10 percent. In addition, Western received a fee of 0.75 percent of the total value of each two- and three-year L Bond it sold and 1 percent of the total value of each five- and seven-year L Bond.

The SEC claims that Cole, Egan, Gitipityapon, Graham, and Swan received total commissions each of between approximately $5,400 and $32,500 for their post-June 30, 2020 sales of L Bonds. Western received approximately $187,000 in commissions and fees during the same period.

Last year, GWG suspended the L bond offering for eight months after missing the SEC filing deadline for its 2020 annual report. The company reopened the offering in December 2021 and then suspended sales in January 2022 while it “[worked] with its advisors to identify and evaluate options available to the company.” In addition, GWG failed to make its $14 million interest and principal payment to L bondholders for January.

On April 20, 2022, GWG filed for Chapter 11 bankruptcy. The firm indicated in its bankruptcy filings that an ongoing SEC investigation, particularly its focus on how bonds were sold by brokers, impacted its ability to raise capital.

Click here to visit The DI Wire directory page.