FINRA found that in order to purchase the GWG Debentures, Center Street customers were required to complete an account application, GWG subscription forms, and a “Compliance Alternative Investment (Non-Reg D) Suitability.” FINRA found that the compliance form required brokers to obtain information about customers’ existing assets, the concentration of the alternative investment as percentage of net worth, the customer’s age, and the customer’s investment objectives. Once completed, FINRA alleged that these documents were submitted to Center Street’s compliance department for supervisory and suitability review.
FINRA found that these forms were the only items the firm relied upon in reviewing and assessing Debenture sales. FINRA determined that Center Street had three employees of in their compliance department who conducted supervisory and suitability review of all transactions recommended to customers. FINRA alleged that the primary employee responsible for conducting the review of GWG Debenture received no training from the firm regarding the unique characteristics and risks of the GWG Debentures. The employee was also unaware of the firm’s guidelines concerning concentration of alternative products as well as state specific suitability requirements.
FINRA found that Center Street brokers made 34 unsuitable recommendations. Further, recommendations to purchase the investments to another 28 investors contained misrepresentations, including elderly customers and retirees. FINRA found that these recommendations were unsuitable because the investments were inconsistent with the customers’ stated conservative investment objectives, need for safety of principal, the customers’ ages, and because the investments were an excessive concentration of the customers’ net worth in a speculative security, or included material misrepresentations about the GWG Debentures.
FINRA also found that Center Street also approved GWG Debenture sales where forms contained inconsistencies concerning the customer’s net worth, investment objectives, or other information pertaining to suitability, or where certain information was missing from the documentation. According to FINRA, Center Street did not document why these transactions were approved with missing or incorrect information. FINRA also found that Center Street brokers placed information on customer account documentation and forms relating to suitability that overstated the customers’ net worth or assets.
FINRA also found that between February 2012, and November 2012, Center Street and its brokers distributed a GWG sales brochure to more than 100 customers that stated that ”Renewable Secured Debentures are secured by the corporate assets of GWG, which consist primarily of investments in life insurance policies purchased in the secondary market.” A table stated that GWG held “Insurance Policy Benefits” of over $489 million. However, first, the statement was not true in that the GWG Debentures were not secured by the insurance policies and second the $489 million value was the face value of the benefits of the policies and not their current market value.
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