How a free meal cost an investor his retirement savings

George Wilson learned the hard way that there is no such thing as a free lunch — or, in his case, a free dinner that cost him some of his retirement savings.

As a retiree, he regularly received postcards in the mail offering to teach him about finances and how to make money in retirement. They usually involved an introduction to a nice restaurant, and he doesn’t take any of the investment advice into account.

But on one occasion, Wilson took the bait after a brochure he received in 2010 inviting him to an evening at Ruth’s Chris Steak House ended up costing him $158,000.

“It was a very good restaurant. And so, of course, it caught my eye,” Wilson said in an interview.

At that fateful dinner, he enjoyed his favorite sirloin steak, asparagus tips and a “fabulous” chocolate cake. He also met David Escarcega, one of the hosts and a broker who would eventually advise him to invest in so-called alternative uncorrelated fixed income products from the bankrupt GWG company.

Years later, Wilson is still fighting to recoup what he lost from that investment. An arbitration award recently awarded him $267,252 in damages, including emotional distress damages from the last broker who facilitated the transaction. But respondent paid only approximately $103,363.40 in penalties and award. After costs, Mr Wilson will end up with almost no payment, according to his lawyer.

Upscale restaurants with presentations are a common practice in the industry, says financial planner Michael Murray, adding that there are services that offer mailing lists of high-net-worth individuals, and retirees are often on them because that’s where the wealth tends to be concentrated.

But those meals aren’t exactly free, Murray said. They are mainly set up to sell products with high commissions. In the case of GWG, brokers earned up to 8% in commissions. What advisors can earn from one of these events pays for meals and more. Imagine a scenario where an advisor signs $500,000 worth of investments with an 8% commission rate; is a $40,000 payment. The math is very favorable for those who do it regularly, he added.

Meanwhile, guests feel like the hosts have done something nice for them, and there’s an implication that they should do something back, Murray noted. “So I think certain people will go to these dinner seminars and almost feel compelled to work with someone.”

They’re called “free lunch seminars,” said Adam Gana, a securities attorney who worked on Wilson’s case. They are common in industry. But Gana says when brokerage firms offer them, he tells clients to run the other way.

“We see them all the time,” Gana said. “We’ve represented 3,000 investors over the last 15 years, and in many of those cases, when we’re dealing with a horrible product, a non-marketable product, a product that’s just terrible for investors, it usually starts with a free. lunch.”

Risky business

After dinner, Wilson and his ex-wife Jean continued with Escarcega to his office to discuss alternative investment options.

“We sat down with him and he went through various opportunities that he could present to us and we asked for a few,” Wilson said. “And the one who looked the most attractive and whose virtues he praised the most was GWG. And so we thought about it for a few weeks and went back and forth and then we decided to do it.”

The products were not publicly traded so-called LifeNotes, high-yield debt securities that paid 9 percent monthly interest by GWG Holdings, according to documents viewed by Insider. These were based on life insurance policies purchased in the secondary market with the expectation that death benefits would be paid to GWG’s bondholders upon the death of the insured. A brochure, seen by Insider, advertised them as a “guaranteed investment backed by a large portfolio of high-quality life insurance policies””

Escarcega pitched them as a safer alternative to the volatile stock market that could provide steady dividend payments while preserving core investments, Wilson said.

“Of course, we want to leave our own equity to our kids, but have some kind of income from it while we’re still here,” Wilson said. “And so that was very attractive to us, that we kept our equity.”

Wilson initially purchased $180,000 worth of notes using funds from his IRA, according to documents viewed by Insider. He later reduced his investment to $158,000 and reversed it to GWG preferred stock. For the next few years, things looked good. Wilson received monthly payments. In 2017, it decided to renew its investment, according to documents viewed by Insider.

What he didn’t know was that by then Escarcega had been banned from selling securities after misrepresenting investment risks, according to FINRA. So Escarcega used his brother Adrian’s license to file the transactions through AGES Financial Services, according to arbitration documents from Wilson’s attorneys. The Escarcegas could not be reached for comment.

It was one of many details Wilson was unaware of. So far, payments have always been on time, he said. So there was no reason to suspect there was trouble. But they were. GWG’s balance sheet doesn’t add up. FINRA has determined that it has not been profitable for over a decade. The firm sold new bonds to pay dividends to existing bondholders. The underlying collateral did not generate income and several accounting firms refused to audit it, according to the amended debt statement.

The cycle of condemnation would eventually stop due to GWG’s accounting problems, an SEC investigation and failure to file its annual SEC report. By 2021, it could no longer sell bonds, leading to bankruptcy by 2022 and a halt to dividend payments, according to the amended debt statement.

Craig McCann, a consultant who gives expert testimony in investment cases including this one, said GWG’s insurance contracts were overvalued on its balance sheet and the firm assumed people would die sooner. As a result, they estimated that they would receive their death benefits sooner. Simply put, not enough benefits have been paid on the insurance contracts to cover the interest and principal owed.

“There were a lot of signals,” McCann said. “There were a lot of problems with their SEC filings and a lot of reason to think it was going to happen, but most of the investors were very unsophisticated investors.”

In 2019, AGES ended its relationship with GWG due to a change in the company’s business model, according to the firm. But Wilson says he was not informed by the firm, preventing him from selling his shares in time (AGES disputes this). An arbitration panel found that the investment scheme was so egregious that they awarded him $267,252.00 in damages that included emotional distress damages, according to the order. AGES paid $103,000 to all plaintiffs.

Risk reward

Wilson’s situation is a cautionary tale. He used his IRA to make the investment, so he also faces a required minimum distribution, which includes the amount invested in GWG, even though it’s nominal. He told Insider that he had to withdraw from other investments to make the minimum.

His case is not an isolated one. There may have been thousands of brokers selling GWG bonds, based on data extracted from ADV filings, as reported by McCann. Wilson says he lives with the guilt of advising his ex-wife and a friend who also invested in bonds and lost their principal.

Truth be told, it’s difficult for the average retiree who isn’t financially savvy to understand the mechanics of many of these alternative investments, even when there are red flags, Murray said. Non-publicly traded investments take time to build capital before generating free cash flow. For those with smaller cash reserves, they don’t make much sense because they lack liquidity, he added.

But Murray also pointed out that not all alternative investments are bad. He just believes that if you’re considering them, you need to be financially savvy and have the ability to scrutinize offering statements, look at commission structures and related party transactions. Even then, investors should seek a second opinion from a fiduciary advisor, CPA or attorney.

Finally, understand that risk and reward are always tied together. Exaggerated promises of yields that are much higher than, say, the 10-year Treasury are a red flag and mean there is increased risk, Murray said.