As a background, GWG Holdings, Inc. purchases life insurance policies on the secondary market at a discount to the face value of the insurance policies. GWG then pays the policy premiums until the insured dies and GWG then collects the insurance benefit making a profit, hopefully, by collecting more upon the maturity of the policies than the payment of the policy and servicing of the premiums. According to FINRA, the company has a limited operating history and has yet to be profitable. The prospectus for GWG stated that the investments were speculative and involve a high degree of risk, including the possibility of risk of loss of the entire investment. An investment in the GWG Debentures, as a private placement, is illiquid and investors will not have access to their principal prior to maturity.
In Escarcega’s case, FINRA alleged that Between March 2012, and January 2013, Escarcega violated the antifraud provisions of the federal securities laws as well as numerous FINRA and NASD rules while selling more than $1.8 million of GWG Debentures to his customers. According to FINRA, Escarcega made false and misleading oral and written statements to seven customers in connection with their purchases of the GWG Debentures. FINRA found that Escarcega falsely told the customers that the Debentures were safe, low-risk, liquid, or guaranteed. For example, on one form, FINRA found that Escarcega described the GWG Debentures as having “a guaranteed interest payment” and providing a “guaranteed rate of return.”
In addition, FINRA alleged that Escarcega made unsuitable recommendations to purchase the GWG Debentures to twelve customers. FINRA found these recommendations to be inconsistent with his elderly and retired customers’ investment objectives and risk tolerances. In each case, FINRA found that the recommendations resulted in either an excessive concentration of the customers’ total investable assets in a speculative and risky investment or were otherwise inconsistent with the customers’ specific investment objectives and risk tolerances.
Further, FINRA alleged that Escarcega distributed a misleading sales brochure regarding the GWG Debentures to numerous customers. The brochure stated, for example, that the GWG Debentures are secured by GWG’s portfolio of life insurance policies when, in fact, the prospectus stated that the life insurance policies are pledged as collateral for a line of credit and are not collateral for the GWG Debentures.
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