The Securities and Exchange Commission (SEC) on Monday said it had reached a settlement with Emerson Equity, the managing broker-dealer seller of GWG Holdings Inc. L bonds, which are almost worthless, with the firm agreeing to a penalty of $100,000 for its violation of Regulation Best Interest. The firm also agreed to pay $5,000 in disgorgement and interest.
Based in San Mateo, Calif., Emerson Equity was the dealer-manager for the GWG L bonds, so called because they were backed by life insurance policies.
Close to 40 broker-dealers sold about $1.6 billion in speculative, illiquid GWG L bonds before GWG declared bankruptcy in 2022, leaving customers who bought the product in the lurch. As dealer manager, Emerson Equity not only worked with its financial advisors to sell the bonds, it distributed the product to other broker-dealers so their advisors could also sell it.
At the same time, the SEC said it reached a settlement with Tony Barouti, an Emerson Equity registered financial advisor for violation of Reg BI.
Barouti, who is at the center of dozens of lawsuit from investors who bought the worthless bonds, is widely believed to be the financial advisor who sold most of the bonds. Barouti agreed to pay a penalty of $50,000, plus $50,000 in disgorgement and $12,000 in interest.
One plaintiff’s attorney who is currently suing brokerage firms for damages on behalf of clients who bought GWG bonds was taken aback by the size of the penalties.
“The SEC is giving a slap on the wrist here,” said August Iorio. “These penalties are mind-blowing to me.”
Based in Los Angeles, Barouti marketed the L bonds to investors in the Persian community, according to industry sources, using a radio show to discuss the bonds. According to the SEC, one 70 year old client of Barouti’s with a liquid net worth of $250,000 had a position in GWG L bonds of $180,000, or 72%.
Barouti sold the speculative bonds to investors in their eighties, according to the SEC.
GWG had red flags, including a history of net losses and had not generated sufficient operating and investing cash flows to fund its operations.
GWG was a publicly traded financial services company. In the decade before it declared bankruptcy in 2022, GWG depended on financing – primarily debt financing, such as L Bonds – to fund its operations.
In a 2020 sales prospectus, GWG warned that the L bonds may be considered speculative, were illiquid, and suitable only for clients with a high risk tolerance, according to the SEC.
Both Emerson Equity and Barouti agreed to the settlement with the SEC without admission or denial of the Commission’s findings. An attorney for Emerson Equity did not return a call to comment, and Barouti also did not respond to a phone call seeking comment.
The two SEC orders against Emerson Equity and Barouti did not include information about the amount of commission revenue each generated from the GWG sales.
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