The Securities and Exchange Commission on Friday said it had reached a settlement of $437,900 in total penalties with mid-sized broker-dealer Maloney Securities Co. Inc. and three of its financial advisors, for violating Regulation Best Interest in sales of bonds issued by GWG Holdings Inc., which declared bankruptcy in April 2022.
Based in suburban St. Louis, Maloney Securities has 125 financial advisors on its platform. Under the settlement, the firm agreed to pay disgorgement of $58,700; interest of $8,200; and a penalty or fine of $250,000, for a total of 316,900.
About 40 broker-dealers over the past decade sold close to $1.6 billion in GWG L bonds, so-called because they were backed by life settlements.
At the moment, no one knows what the GWG bonds are worth, with some executives and attorneys fearing they could be valued close to pennies on the dollar.
“Moloney Securities is glad to have finally resolved this matter,” wrote Ted Moloney, the firm’s president and chief operating officer, in an email Monday morning. “Our firm cooperated with the Commission and its staff concerning these issues, and we are pleased to have the matter behind us and look forward to continuing to serve our clients.”
The three Maloney Securities financial advisors that were part of the settlement collectively paid $121,000 in disgorgement, interest and penalties to resolve the matter.
They are: Donald R. Hancock, a total of $58,300; David F. La Grange, $35,700; and Laura B. Barnes, $27,000.
“We’re glad this is behind us,” Hancock said Monday afternoon, echoing the firm’s statement to InvestmentNews.
La Grange and Barnes did not return calls seeking comment about the matter.
Maloney Securities and the three financial advisors neither admitted or denied the SEC’s findings in the matter, according to the settlement.
The SEC alleged that the firm and its advisors failure to comply with Regulation Best Interest in connection with recommendations of corporate bonds, specifically “L Bonds,” offered by GWG Holdings Inc. to retail customers between June 30, 2020, the compliance date for Regulation BI, and approximately January 15, 2022.
The bonds were high-risk, according to the Commission. According to GWG’s disclosures during the relevant period, L Bond investments involved a high degree of risk, including the risk of losing an investor’s entire investment, according to the SEC.
L Bond investments may be considered speculative and were only suitable for investors with substantial financial resources and no need for liquidity in the investment, according to the SEC. Also, GWG would use a portion of the L Bond proceeds to repay existing L Bond holders.
In addition, in November 2021, GWG disclosed that several factors raised substantial doubt regarding its ability to continue as a going concern.
According to the SEC, despite these disclosures, in recommending the purchase of L Bonds to certain retail customers, Moloney Securities failed to exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs associated with the recommendations.
“Moloney also recommended the purchase of L Bonds to certain retail customers for whom it did not have a reasonable basis to believe that the recommendations were in the customers’ best interest based on the customers’ investment profiles and the potential risks, rewards, and costs associated with the L Bonds,” according to the SEC.
At the end of 2022, Moloney Securities agreed to pay restitution of $268,000 to settle with the Financial Industry Regulatory Authority Inc. that GPB Capital Holdings had not submitted audited financial statements while the firm sold the high-risk securities to clients.
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