Lead broker-dealer seller of GWG L bonds sues its insurers

Emerson Equity, a California broker-dealer that was the leading seller of L bonds issued by bankrupt GWG Holdings, is suing a network of insurance underwriters in a $5 million dispute over insurance to pay claims by investors who bought the bonds.

Emerson Equity first filed its complaint alleging breach of contract against a network of insurance carriers, including "certain underwriters at Lloyd's London" last month in state court in California before refiling the lawsuit Oct. 13 in U.S. District Court in San Francisco.

Broker-dealers typically buy insurance known as errors and omissions coverage as a defense against potential investor lawsuits and damages related to trading errors and other mistakes that could turn into liabilities. Disputes between broker-dealers and insurance carriers typically occur when insurers deny coverage.

"The issue is, what is this thing, the GWG L bond," said Marc Fitapelli, partner at MDF Law and a plaintiff's attorney. "The insurance companies may be arguing, this isn't a corporate bond, like from General Electric, but it's really a private placement. If you ask me, the GWG bonds are somewhere in between."

"This case signals we’re in for a fight with Emerson Equity but also more broadly, too," Fitapelli said. "No one is going to want to settle with broker-dealers over GWG claims until the bankruptcy is resolved."

After huge blowups of alternative investments during the 2008 credit crisis and its aftermath, insurers that underwrite E&O for broker-dealers started exercising greater authority in approving the alternative investments that their brokerage clients sell, changing the market. According to the Emerson Equity lawsuit, the policy in question provides a limit of $5 million of liability coverage.

GWG Holdings Inc., which sold $1.6 billion in bonds backed by life settlements through a network of independent broker-dealers, said in April it had voluntarily filed for Chapter 11 bankruptcy protection. Since that case is ongoing, it's incredibly difficult, if not impossible, to determine what the GWG bonds are actually worth, according to attorneys and industry executives. Emerson Equity was the top seller of GWG bonds.

An attorney for the insurance company defendants, Louis Harrison Castoria, said Tuesday morning that he was not allowed by his clients to comment at this point on the matter. Executives at Emerson Equity, including Dominic Baldini, president and owner, did not return calls to comment.

In the annual audited financial statement it filed with the Securities and Exchange Commission, Emerson Equity reported in March that problems related to an unnamed offering, widely believed to be the GWG bonds, potentially could harm the firm.

Emerson Equity reported total revenue of $107 million and net income of $9.4 million in 2021, according to its filing with the SEC, more than double the firm’s total revenue and net income a year earlier.