It was supposed to be a safe investment.
In small offices across the country, brokers sold a security called L Bonds. The bonds were backed by life insurance policies and were supposed to provide a steady stream of income.
Many buyers were elderly. Now they’re facing catastrophic losses of up to $1.3 billion.
From a report that broke this morning in The Wall Street Journal:
What many of these retail investors didn’t know was that [bond issuer] GWG’s founders and a board director would each use the money to fund and launch their own startup ventures, then move them out of the investors’ reach, according to people familiar with the matter. The roughly 27,000 individuals who bought GWG’s unique debt securities, known as L Bonds, are now facing huge potential losses – for many, their retirement nest eggs.
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The original business buying life insurance policies quickly ran into trouble. So, bond issuer GWG Holdings cast about for another strategy.
It settled on backing speculative startups run by the company’s founders.
That would be reckless enough a thing to do with small savers’ money. But worse yet, the miscreants running GWG quickly moved those assets out of reach of the L Bond buyers.
Once the top executives had taken the assets, they drove GWG into bankruptcy.
The judge overseeing the court proceedings in Houston said he had never before seen a company give up control of everything it owns before seeking chapter 11 protection.
GWG appears to have operated like a Ponzi scheme. Of the $1.26 billion in L Bonds the company sold, nearly two-thirds went to paying off prior bonds.
Meanwhile, the top executives siphoned off tens of millions of dollars in dividends for themselves.
The SEC began investigating GWG as early as 2020. GWG didn’t disclose the investigation to its investors for a year.
In the mean time, it sold another $200 million in toxic L Bonds.
The law generally prohibits the SEC from disclosing investigations. I think it’s high time to change those laws.
Many elderly put their life’s savings into these bonds.
They should’ve known the company was under federal investigation. The government they pay taxes to should never have kept that a secret from them.
It doesn’t help for the SEC to blow the whistle once the money is already gone.
What do you think of this case and how the SEC handled it? Leave a comment at the bottom and let me know.
See you on Monday!
More on markets:
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