“And therein lies the conflict of interest problem for Cabot. The firm has to be able to justify the recommendations and that will be very difficult to do,” he added.
Cabot Lodge did not immediately respond to a request for comment.
“There is a selling group of about 65 brokerages that offered GWB L-Bonds. They are not the highest end firms, but they sold a lot of this stuff, just over a billion dollars of bonds, with the biggest problem being the final offering which raised approximately $425 million after the firm was financially insolvent,” Wojciechowski said.
Complicating the case for Cabot is the fact that GWG filed for bankruptcy in April of this year after the company had already signaled it was in financial distress by disclosing that three-fourths of its balance sheet had been marked as goodwill in 2020, which triggered an ongoing SEC investigation.
“GWG’s chief financial officer said in their bankruptcy filing that everyone knew the company was using new L-bond investor money to pay interest, redemptions and principal payments to the existing investors. So, the company was taking money from Peter to pay Paul. I won’t call it a Ponzi scheme yet, but it was Ponziish,” Wojciechowski said.
Heightening the risk for GWG L-Bond investors is the fact that the bonds Cabot sold are not preferred, but subordinate, which lessens the chance that investors will be made whole in the company’s bankruptcy proceedings, he added.
Wojciechowski said he thinks claims based on Reg BI will be “the future of customer arbitration cases. Going forward it’s a pretty good sword for investors in arbitration. In some instances, it’s better than suitability,” he said.
While Reg BI’s “best interest obligation doesn’t say fiduciary, it sounds a heck of a lot like it. And it really applies well to GWB bonds,” he added.