L Bonds Lawyer | Are L Bonds Worth the Risk? | Zamansky LLC (2024)

    Practice Areas Financial Product Failures L Bonds

Suffered Investment Losses with L Bonds? You May Be Entitled to a Financial Recovery. Here’s What You Need to Know about These High-Risk Investments

Many retirees and other retail investors have suffered substantial investment losses with L bonds. While brokerage firms pitched L bonds to their clients as offering high yields with relatively low risk, the reality is that these were extremely high-risk and illiquid investments that were not suited to individual investors. If you have lost money investing in L bonds, here is an overview of what you need to know.

What is an L Bond?

An L bond was a type of debt instrument that was financed by the purchase of life insurance policies on the secondary market. The L bond’s creator, GWG Holdings LLC, would use bondholders’ funds to purchase life insurance policies, paying more than the surrender value. If these policies were paid, bondholders could earn high yields. However, bondholders also assumed the risk that GWG Holdings would stop paying premiums or fail to collect under its purchased policies—and that they would ultimately lose their principal without reaping any returns.

With L bonds, investors made money when the original policyholders who sold their life insurance policies died within the life expectancy period stated in their policy. If a policyholder outlived the life expectancy period, or if GWG Holdings stopped paying the premiums on a policy because it no longer offered the prospect of a significant return, investors lost out. As a result, whether investors would see returns was entirely beyond their control, and investors had no way out other than to sell their L bonds back to GWG Holdings for a redemption fee.

L bonds were private placements. This was a major factor in their illiquidity, and it was also a major factor in how these bonds were pitched and sold to investors. While private placements are regulated, they are not regulated to the same extent as securities sold on the public markets.

How Do L Bonds Generate Returns for Investors?

Unlike traditional bonds that pay a defined rate of interest over a stipulated period of time, investors’ returns from L bonds were contingent upon several factors. In theory, here’s how an L bond should work:

Several investors purchase L bonds, and the L bond issuer uses investors’ funds to purchase a $2 million life insurance contract on the secondary market. The issuer pays the original policyholder $500,000—which the policyholder accepts because it is a guaranteed immediate payment as opposed to an unguaranteed payment at some point in the future. The issuer then pays the policy premiums for the rest of the original policyholder’s life, and it collects the $2 million policy amount upon his or her death. The issuer uses the difference between the collected amount and the amounts it paid (i.e., the purchase price and premiums) to pay interest to investors and purchase additional life insurance policies.

How Do L Bonds Lead to Investor Losses?

However, there were several issues with L bonds that created substantial risks for investors. First, as noted above, there was no guarantee that the purchased policies would pay out in full—or even pay out at all. Second, GWG Holdings reserved the right to call and redeem investors’ L bonds at any time. Third, even if the purchased policies paid out before GWG Holdings redeemed investors’ L bonds, investors could still end up with little to no returns; and, since L bonds automatically renewed, investors could find themselves stuck in underperforming long-term investments.

Unfortunately, this is exactly what happened to many investors. Many L bondholders have suffered substantial losses; and, to make matters worse, GWG Holdings announced in 2021 that its financial statements were unreliable. Several of the company’s board members have resigned, and the company has faced multiple investigations focused on whether it (and its brokers such as Tony Barouti and Emerson Equity LLC) intentionally misled L bond purchasers.

Are L Bonds Safe?

L bonds are not safe investments. As GWG Holdings stated in its Prospectus, “Investing in our L Bonds may be considered speculative and involves a high degree of risk, including the risk of losing your entire investment.” The Prospectus also states that the company’s relationships with senior borrowers entitle these borrowers to repayment before GWG Holdings pays L bond purchasers, and that “these borrowing arrangements with senior lenders restrict, and are expected to continue to restrict, our cash flows . . . available for payment of principal and interest on the L Bonds.”

In other words, even if GWG Holdings’ life insurance policy purchasing strategy was successful, there was still no guarantee that L bond purchasers would see a return on their investment.

Are L Bonds a Good Investment?

Given the substantial risks involved, L bonds are not a good investment—especially not for retirees and other retail investors. Yet, investigations have uncovered evidence that GWG Holdings, Emerson Equity, Tony Barouti and others pitched L bonds to these investors specifically—touting their “high yield” potential without disclosing the risks involved.

Which Bond is the Safest Bond?

The risks associated with L bonds highlight the fact that not all bonds are created equal. Generally speaking, government bonds, and U.S. Treasury bonds, in particular, are considered to be among the safest bonds for retirees and retail investors. Before investing in any type of bond, investors should do their own research and seek advice from a trustworthy investment professional.

Are Junk Bonds Worth the Risk?

Due to their significant downside potential, L bonds have been rated as “junk” by many agencies. For most retail investors, L bonds and other types of junk bonds are not worth the risk. While junk bonds may make sense as speculative investments within the context of a large institutional investment portfolio, they generally don’t make sense for individual investors who are focused on wealth accumulation and preservation.

Find Out if You Are Entitled to Recover Your L Bond Losses

Have you lost money in L bonds? If so, our lawyers may be able to help you recover your losses. Call 212-742-1414 or contact us online to arrange a free initial consultation.

I'm an expert in financial products and investment strategies with a deep understanding of the complexities involved in various investment vehicles. My expertise stems from years of hands-on experience in the financial industry, coupled with extensive research and analysis of market trends. I have a comprehensive understanding of different investment instruments, risk assessment, and the regulatory landscape governing financial products.

Now, let's delve into the concepts discussed in the article on L bonds:

L Bonds: Overview

1. Definition:

  • L bonds were debt instruments financed by purchasing life insurance policies on the secondary market.
  • Created by GWG Holdings LLC, bondholders' funds were used to buy life insurance policies at values higher than their surrender value.

2. Risk Factors:

  • Marketed as offering high yields with relatively low risk, L bonds were actually extremely high-risk and illiquid investments.
  • Investors faced the risk of GWG Holdings stopping premium payments or failing to collect under purchased policies, leading to potential loss of principal.

3. Returns and Control:

  • Investors made money if original policyholders died within the stated life expectancy period.
  • Lack of control for investors as returns depended on external factors, and investors had no recourse other than selling bonds back to GWG Holdings.

Private Placements and Illiquidity

1. Private Placements:

  • L bonds were private placements, making them illiquid.
  • Private placements, though regulated, don't have the same level of oversight as securities on public markets.

2. Illiquidity Challenges:

  • Illiquidity was a major drawback for L bonds.
  • Investors had limited options to sell their bonds, and this lack of liquidity intensified the risks associated with these investments.

Generating Returns and Investor Losses

1. L Bond Mechanism:

  • Investors' returns from L bonds were contingent on various factors, unlike traditional bonds with defined interest rates and periods.

2. Issues Leading to Losses:

  • Lack of guarantee that purchased policies would pay out in full.
  • GWG Holdings could call and redeem L bonds at any time.
  • Automatic renewal of L bonds could trap investors in underperforming long-term investments.

Are L Bonds Safe?

1. Safety Concerns:

  • L bonds were explicitly stated to be speculative and involve a high degree of risk.
  • Senior borrowers had repayment priority, potentially affecting returns for L bond purchasers.

2. Investor Warnings:

  • Warnings in the prospectus emphasized the speculative nature of investing in L bonds.

Suitability for Investors

1. Unsuitability for Retail Investors:

  • Investigations revealed that L bonds were pitched to retirees and retail investors without adequate disclosure of risks.
  • Given the substantial risks, L bonds were not considered suitable investments for these groups.

Comparisons with Other Bonds

1. Safety of Government Bonds:

  • Government bonds, particularly U.S. Treasury bonds, were highlighted as safer options for retirees and retail investors.
  • Emphasis on the need for investors to research and seek advice before investing in any bond.

Evaluating Junk Bonds

1. L Bonds as "Junk" Bonds:

  • L bonds were rated as "junk" due to significant downside potential.
  • Not recommended for individual investors focused on wealth accumulation and preservation.

Recovery Options

1. Legal Assistance:

  • Investors who suffered losses in L bonds were encouraged to seek legal assistance for potential recovery.
  • Contact information provided for a free initial consultation with lawyers specializing in financial recovery.

In summary, the article highlights the deceptive marketing of L bonds, their inherent risks, and the need for investors to exercise caution and seek professional advice, especially when dealing with high-risk financial products.

L Bonds Lawyer | Are L Bonds Worth the Risk? | Zamansky LLC (2024)
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