GWG blames SEC investigation of brokers for its collapse

In its bankruptcy filings Wednesday morning, GWG took aim at the Securities and Exchange Commission's questioning of broker-dealers that sold more than $1.6 billion of its life-settlement backed bonds as a significant reason for the company's collapse, including GWG's defaulting on $13.6 million in payments in January to bondholders.

As part of its Chapter 11 filings in U.S. Bankruptcy Court for the Southern District of Texas, GWG Holdings' declaration said that the SEC's investigation of the company, which began in 2020, eventually spilled over to include the sales practice of some of the 145 broker-dealer firms that sold the bonds.

The SEC's questioning of those firms ultimately hurt GWG's status in the marketplace and its ability to raise fresh money from sales of the so-called L bonds to investors, according to the company.

In its bankruptcy filings, GWG Holdings reported $3.5 billion of total assets and almost $2.1 billion in total debt. While its assets reportedly outweigh its debt, GWG Holdings' big hurdle is that many of those assets are illiquid, hard-to-value pools of life settlements, or unwanted insurance policies that consumers sell to investors like GWG Holdings, which can come with risks.

Leading up to the start of this year, GWG Holdings, a publicly traded company with the ticker GWGH, had struggled to file its audited quarterly and annual financial statements on time.

In October 2020, the enforcement division of the SEC served a subpoena to GWG Holdings in connection with an investigation regarding certain accounting matters and the company's issuance of bonds, according to the court filing.

The SEC's questions hurt sales, according to the company.

"The SEC’s investigation, particularly its focus on how the bonds were sold by selling group firms, has had the effect of significantly impacting the company’s ability to access the capital markets," the company noted in its declaration. "In connection with the SEC’s investigation, the SEC has issued subpoenas and document requests to many of GWGH’s broker firms, in some instances issuing information requests on an ongoing, or even daily, individual transaction-level basis."

"As a result, a number of broker firms indicated that they would not resume sale of the bonds until further notice due to concerns of getting involved further in the SEC’s investigation," according to the declaration.

"GWG Holdings stands by the bankruptcy declaration and what’s in it,” a company spokesperson told InvestmentNews.

"They're blaming the SEC?" asked Scott Silver, a plaintiff’s attorney who is also counsel in a potential class-action lawsuit filed in March against the company in federal court in Texas. "It's like saying, if only the government let us keep operating, it never would have been a problem. From my perspective, the bankruptcy prevents more investors from being victimized."

According to GWG’s website, Emerson Equity, a San Mateo, California-based broker-dealer that primarily sells private placements, is the managing broker-dealer for the GWG issuer.

At the start of April, GWG Holdings signaled that the next step for the company was to file for bankruptcy protection. In a filing with the SEC, GWG said it was unable to file its 2021 annual report and additional financial statements because it hadn’t yet hired an auditor to replace Grant Thornton, which resigned at the end of last year.

Investors in the $1.6 billion of bonds could face dire consequences from the GWG bankruptcy; one GWG investor, who asked not to be named, earlier this month said he estimated the L Bonds are worth 20 cents to 30 cents on the dollar.

"This was a train wreck waiting to happen, and there will be plenty of investor complaints against brokers," said Gordon Yale, a forensic accountant specializing in complex financial litigation. "GWG was over-leveraged with reasonably expensive money, and the life settlement business was not profitable enough to overcome the cost of the debt or the preferred stock dividends and operations."

From 2015 forward, GWG Holdings struggled to generate cash flow from operations, Yale noted. "That meant it was always dependent on being able to raise additional capital from debt or equity."