If you lost money due to your broker’s fraud or negligence, we may be able to help you recover your losses. Contact Chapman LLC today at 1-877-410-8172 for a free no-obligation consultation
According to a recent FINRA hearing decision, Jeffrey Noard was fined and suspended for recommending unsuitable GWG securities to a client. Jeffrey D. Noard first learned of GWG Holdings, Inc. in late 2010 from James Hintz, who was at the time the chief compliance officer and president of Allied Beacon. Noard then began doing some due diligence on the company. He learned the general nature of GWG’s business and spoke to a number of GWG’s officers, including its president, Jon Sabes. Based on what he learned, Noard allegedly began selling GWG securities to some of his more wealthy clients. The notes were offered in private placements that were exempt from registration under the Securities Act of 1933. Noard recommended the notes because they were paying a ”very good interest rate” (5.5%) because of their risk.
In or about January 2012, GWG began offering another debt security called renewable secured debentures to raise funds to purchase more life insurance policies, service GWG’s existing debt, and pay operational expenses. The GWG Debentures had varying maturity terms and interest rates, from six-month debentures offering an annual interest rate of 4.75% to seven-year debentures offering 9.5%. Noard allegedly began selling the first issue of Renewable Secured Debentures in early 2012. The May 2012 Prospectus (“Prospectus”) for the GWG Debentures states that GWG expected to net approximately $229 million from the offering, the majority of which would be used to purchase additional life insurance policies in the secondary market. The GWG Debentures were high-risk securities suitable only for persons with substantial financial resources who could afford to lose their entire investment. One of Noard’s clients was not such an investor.
The Prospectus highlighted 31 risk factors related to GWG, its business, and the offering. Among the most significant:
GWG had a limited operating history, and it had never made a profit. It had lost more than $3 million through December 2011.
GWG’s entire business was financed by debt, and its continuing business assumed continued access to its line of credit.
GWG was not obligated to redeem the GWG Debentures before their maturity date, and the GWG Debentures were illiquid; no public market existed for the GWG Debentures.
GWG life insurance policies were not collateral for the GWG Debentures; they were pledged collateral for the Autobahn/DZ Bank credit facility.
The high degree of risk associated with the GWG Debentures is further underscored by the suitability standards in the Prospectus that restricted investment in the GWG Debentures to persons that had either: (1) a net worth (not including home, furnishings, and personal automobiles) of at least $70,000 and an annual gross income of at least $70,000, or (2) a net worth (not including home, furnishings, and personal automobiles) of at least $250,000. GWG imposed these suitability standards due to the long-term nature of an investment in the GWG Debentures and their relative illiquidity.
Noard allegedly discounted the risk disclosures in the Prospectus. In recommending the GWG Debentures to investors, he substituted his own judgment that the securities bore moderate short-term risk. Noard clarified that he gave little importance to the Prospectus because it, like every other prospectus, contained standard risk disclosures regardless of the nature of the company. In effect, he considered the risk disclosures as nothing more than boilerplate legalese. Noard allegedly substituted his own judgment, which he had formed from speaking to GWG’s executives and from his experience selling other GWG securities. Most notably, Noard rashly marginalized the warning that the GWG Debentures were only suitable for investors who could stand to suffer a complete loss, dismissively arguing that this was a trait common to all securities. Instead of reviewing the Prospectus with his client, Noard gave her a brief summary of the most positive aspects of GWG’s business. Noard allegedly talked about how the total value of the policies in its portfolio had increased. He also talked about the average age of the persons insured by the policies, GWG’s bank debt. Noard did not get into the specifics of GWG’s investment model.
Noard did reassure his client that the GWG Debentures were a good investment by describing his familiarity with the company. He was alleged to have told her that he talked to persons at GWG weekly and that he had quite a bit of money invested. Noard allegedly referred to GWG as a seed and discussed the company’s good potential down the road. To the extent he discussed risk, he downplayed its severity. For example, he allegedly claimed that he discussed the actuarial risk caused by people living longer. But at the same time he reassured her that the life expectancy of the insureds in the portfolio was over 80 years and therefore the risk would mitigate over time as the average age increased. It is alleged that Noard did not explain to his client that many of his assurances referred to GWG’s long-term prospects, while her investment window was short-term. Preprinted information on the Client Profile Form showed that the client was 82 years old with an annual income of $40,000. Her estimated net worth was $150,000, and her liquid net worth was $40,000. Her investment objective was income, which she planned to use to partially fund her retirement. Under the heading ”Current Clients/Holdings,” the preprinted entries reflect that she had $50,000 in cash and equivalent, $2,000 in bonds, and what appears to be $9,000 in ”Other.” Handwritten changes on the form included the addition of $10,000 in equities, $200,000 in “Properties,” and $3,000 in an annuity. The “Other” category was deleted. With the handwritten changes, the form disclosed that the client had “Holdings” totaling $265,000.41.
Noard claims that the handwritten changes to the preprinted data reflected his independent knowledge of his clients’ finances. Noard did not claim that the client or her son provided the updated information. And she could not remember anything about the June meeting; thus, she could not shed light on the various alterations on the form, including who made them or when. The handwritten changes under “Current Clients/Holdings” conflict with other preprinted information on the form and otherwise appear to be inaccurate in part. Most importantly, the entry for “Properties” in the amount of $200,000 is inaccurate. Noard allegedly added the ‘’Properties” valuation to the form based on his unverified understanding that his client owned the home her son lived in next to her residence. But she had transferred that property to her son and his wife approximately seven years earlier. In fact, she did not own any real estate at the time she purchased the GWG Debentures. Thus, the client had assets totaling no more than $65,000, far less than the specified minimum required under the Prospectus.
Noard defended his decision to recommend the GWG Debentures to his client based on her family’s aggregate financial resources. He maintained that he allegedly knew from his dealings with his client’s family over the years that the family members residing with the client had a liquid net worth of more than $1 million. Thus, he concluded that her investment of $20,000 was reasonable because it represented a very small percentage of the entire family’s net worth. In other words, Noard based his suitability determination on the financial condition and resources of other family members, not the client’s alone. Noard further defended his recommendations by pointing out that his client had little or no need for the money she had. Noard drew that conclusion from his general knowledge of her lifestyle. Noard explained that she had very limited living expenses, the vast majority of which were paid by her children.
Noard also justified his recommendations by suggesting that he was protecting her from making irresponsible choices about how she spent her money. During his on-the-record interview in May 2013, Noard stated that his client regularly called him to ask that he withdraw money from her account to fund gifts to her children. Noard often tried to talk her out of giving her money away. He characterized at least one of her children as “moochie.” Noard further implied that investing in GWG Debentures was better than her wasting her money as she had when she bought her son a motorcycle after she redeemed the GWG Debentures. Thus, at least in part, Noard’s motive in recommending that she purchase the GWG Debentures was to prevent her from gifting more money to her children and not because he deemed it a suitable investment.
The FINRA panel suspended Jeffrey D. Noard from associating with any FINRA member firm in all capacities for ten business days and fined him $2,500 for making unsuitable recommendations to his customer in violation of NASD Rule 2310 and FINRA Rule 2010.
In addition, Noard was ordered to pay costs in the amount of $3,017.49.
Oftentimes brokerage firms can be held liable for their brokers’ misconduct if they failed to supervise them while registered at the firm. If you lost money due to Jeffrey D. Noard’s unsuitable investment advice, you may be able to recover from him or Allied Beacon Partner, Inc., the brokerage firm where he was registered. Since 1998, the experienced attorneys at Chapman LLC have been fighting for victims of investment fraud and broker misconduct. Call us today at 1-877-410-8172 for a free consultation. You will speak directly to an attorney who will fight for you.