Emerson Equity, the broker-dealer that was the top seller of defunct GWG Holdings Inc. L bonds, appears to be tapped out of insurance money to pay any further lawsuits and claims from investors who bought the bonds, with many in the industry fearing the bonds could be worthless.
About 40 broker-dealers sold close to $1.6 billion in GWG L bonds, so-called because they were backed by life settlements, before the firm declared bankruptcy in 2022, leaving investors in the lurch.
Emerson Equity was the lead seller of the GWG L bonds. Broker-dealers typically have insurance to cover errors in trading and other functions, but the history of liability insurance for products when they blow up – like the GWG L bonds – is not nearly as cut and dry and often winds up in litigation between a firm and its insurance carriers.
In this case, the dispute is between Emerson Equity and its insurance carriers, Forge Underwriting Limited, Voltane International and underwriter’s at Loyd’s, London. The broker-dealer sued the insurance companies in September 2022.
According to a court filing this week in federal court in San Francisco, Emerson equity in January “demanded payment” from insurance carriers for costs incurred by the firm in defending itself from investor GWG L bonds lawsuits and claims. The insurers countered that by claiming all the GWG L bond suits “constituted a single claim for liability purposes.”
On Wednesday, U.S. District Court Judge Haywood S. Gilliam Jr., granted the carriers’ motion in the dispute, and concluded that their “potential aggregate liability for the claims [Emerson Equity} asserts in this matter is limited to $1 million, and that limit of liability has been exhausted,” according to the filing.
Rachel Dardashti, an attorney for Emerson Equity in the matter, did not return a call Friday afternoon to comment.
It’s not clear how many investor claims Emerson Equity remains to face over its sale of GWG L bonds; retail investors, like those who were the prime buyers of the bonds, typically file complaints against broker-dealers in an arbitration forum overseen by the Financial Industry Regulatory Authority Inc., a private organization that does not make such information public.
Meanwhile, GWG Holdings, which issued the bonds, remains in bankruptcy. Critics of GWG Holdings point to the company’s struggles to generate cash flow from operations as a red flag for investors and financial advisors who sold the product, making GWG Holdings dependent on raising fresh, additional capital to stay up and running as well as paying investors’ dividends.
“This is terrible for investors with claims against this firm,” said Adam Gana, a plaintiff’s attorney who has sued Emerson Equity in the past on behalf of clients but says he has no current or open claims against the firm.
“Insurance is paramount in the broker-dealer industry, but you have to have insurance that pays,” he added.
These challenges are “changing the economics we see retirement savers face,” said Christopher Ceder of Goldman Sachs Asset Management
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