Two diminutive legal disputes – both with damages in the neighborhood of just $10,000 and involving brokers and firms selling GWG L bonds – highlight significant compliance and sales issues for investors and financial advisors, namely, how to treat older and retired clients.
Both claims involve sales of the illiquid bonds to elderly clients, according to lawyers familiar with the cases. Illiquid investments are particularly precarious for aged investors; they often need access to cash quickly to pay for medical care and emergencies.
And small claims are often neglected by plaintiffs' attorneys because they are not interested in the diminished payday of such claims.
Harm to senior citizens in the retail brokerage marketplace is a persistent issue. The Financial Industry Regulatory Authority Inc. oversees industry arbitration complaints and reported 212 complaints that cited “elder abuse” in 2023 among the variety of reasons why a lawsuit was filed, an increase of almost 13 percent compared to a year earlier.
And both claims involving GWG bonds are recent awards from arbitration claims involving clients suing their financial advisors under the aegis of Finra Dispute Resolution Services, the arm of Finra for legal disputes among clients and financial advisors filing complaints against broker-dealers.
And in these instances, small investor claims can pack a wallop. Not for the amount of cash returned to investors but for highlighting concerns about the sale of alternative investments, which often are illiquid or have limited liquidity, to older clients.
This is particularly concerning as the broad financial advice industry is marketing alternative investments, which generally charge higher fees than mutual funds or exchange-traded funds, with the intensity of a team in the NBA playoffs running a full-court press.
Over the past decade, about 40 broker-dealers sold close to $1.6 billion in GWG L bonds, so-called because they were backed by life settlements. GWG Holdings Inc., the issuer of the bonds, declared bankruptcy in 2022, leaving investors in the lurch, as what remains of the company works through bankruptcy court. It's not clear what value, if any, the GWG L bonds have.
It's been an awful road for investors in GWG bonds. When the financial advisors sold the bonds, there was no viable secondary market for the product, making them nearly untradable.
And that road is not getting any smoother. Last April, one arbitrator overseeing a Finra arbitration claim called the bonds "not a suitable investment for the [client,] or perhaps anyone," in an award that pointed to a broker-dealer and financial advisor ignoring the fiduciary duty owed to a client.
That’s damning language from a Finra arbitrator.
With the calendar turning to 2025, GWG arbitration claims continue to make their way through Finra Dispute Resolution Services.
In December, a financial advisor who sold an elderly client GWG bonds also borrowed money from an elderly client, a behavior that is also a clear red flag, according to the client’s attorney.
A three-person Finra arbitration panel awarded Clifford Tekel $7,000 in compensatory damages and interest in a claim that involved the purchase of GWG bonds and a series of other investments. Two broker-dealers settled the matter but the advisor was found liable.
“We are seeing a rise in elder financial fraud by brokers, primarily those working as independent contractors,” said Scott Silver, a plaintiff’s attorney who represented Tekel. “Those brokers develop close relationships with senior clients and abuse that relationship by borrowing money or otherwise seeking a role in a client's estate, either as a beneficiary or a trustee to financially benefit themselves.”
This month, an elderly client, now deceased, who bought GWG bonds from her advisor saw her Finra arbitration claim carried to its conclusion by her family, according to an industry attorney who advised the family. The woman’s niece took a dispute into her own hands, worked as her own attorney, and won.
The single arbitrator in the matter awarded two people in that family $10,000 in compensatory damages, plus interest, according to the award, which was issued Jan. 8. The firm, American Trust Investment Services Inc., and the financial advisor were liable, according to the award.
The family acted as their own counsel in the matter, appearing “pro se,” according to the award.
“The account holder was in her 90s, and an advisor ingratiated himself and sold this elderly person nontraded [real estate investment trusts] and GWG bonds,” said Craig McCann, president, SLCG Economic Consulting. “She passed away, and the assets were distributed to the family."
“I gave the family free help as she filed a pro se claim,” McCann said. “The arbitrator awarded her share of the estate's GWG purchase plus 10 percent interest since the purchase. The family was outraged."
Kristopher Kessler, managing partner and president of American Trust Investment Services, did not return a call Tuesday afternoon to comment.
The legal claims in these matters may be relatively small but are hardly insignificant. As the financial advice industry prepares to sell and push more alternative investments, it should pay close attention to such tiny but revealing arbitration awards.
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