Bankrupt GWG bonds not right for anyone: Finra arbitrator

By 2020, 'GWG had shown years of losses and large negative cash flows,' a securities arbitrator writes.

An arbitrator overseeing a Finra Dispute Resolution Services arbitration claim last week awarded close to $100,000 to a customer who in 2018 and again in 2020 purchased GWG L bonds, calling 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.

Detailed or reasoned arbitration awards related to securities industry disputes historically have been rare but are becoming more common with time, industry sources observed.

In this claim, the sole arbitrator, Richard Kent Mahrle, cited GWG’s weak financial position in 2020 as a warning sign that the broker-dealer, Greenberg Financial Group, and the financial advisor, David Sherwood, missed.

The client, Michael Lombardi, first bought $80,000 of GWG L bonds in 2018 and then rolled them over two years later, according to the claim. The bonds paid 5.5% interest for two years and the principal was to be paid at the end of that period.

“By the time [Greenberg Financial] procured L Bonds for claimant’s account in 2020, GWG had shown years of losses and large negative cash flows,” Mahrle wrote. “It was also in the process of joining with another company with the goal of diversifying its business and bringing in resources.”

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. The firm 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.

Lombardi’s arbitration award was $102,000 in damages plus fees, along with interest. Specifically, the award was made up of $70,000 in compensatory damages, $25,000 in attorney’s fees and $7,500 in costs, all with interest.

Lombardi’s attorney, Mladen Milovic, did not return a call Thursday morning to comment. The attorney representing Greenberg Financial and Sherwood, Thomas McGonigle, declined to comment.

“The arbitrators in these Finra claims over the past decade have been seeing cases around product suitability for the clients,” said Scott Silver, a plaintiff’s attorney. “A lot of them involve these illiquid alternative investments like GWG bonds.

“The question is why anyone would recommend this product to a client,” Silver said. “This case is not about the customer, it’s about the product. The arbitrators appear shocked to hear billions of dollars of this stuff is sold.”

Both sides agreed that Lombardi, the client, was owed fiduciary duties and a duty of loyalty, Mahrle noted, and he found that both the firm and advisor owed those duties to their client.

“Given the financial conditions of GWG at the time [Greenberg Financial] and Sherwood placed GWG L Bonds into claimant’s account in 2020, the arbitrator credits the testimony of Sandler Ressler that the L Bonds were not a suitable investment for claimant, or perhaps anyone,” Mahrle wrote.

Ressler, an industry consultant, was an expert witness in the Lombardi claim.

“Therefore, both [Greenberg Financial] and Sherwood breached their fiduciary duties to claimant when they added the L Bonds to [his] accounts and are liable for his damages that resulted,” according to the award.

Mahrle denied punitive damages against Greenberg Financial and Sherwood, saying there was no factual basis.