Western International Securities Inc., the first broker-dealer to be sued by the SEC for alleged violations of its Regulation Best-Interest fiduciary rule, may end up spending $1 million or more on its defense, securities attorneys say.
The SEC complaint, which was filed against Western and five of its registered representatives in U.S. District Court for the Central District of California, alleges that between July 2020 and April 2021, Western failed to meet its fiduciary obligations by selling $13.3 million in high-risk, unrated junk bonds that were not in the best interest of retirees and other risk-adverse retail customers.
Attorney Brian Rubin, a partner Eversheds Sutherland LLP, estimated Western’s legal fees will cost from several hundred thousand dollars to well over $1 million.
“The SEC believed the conduct violated Reg BI," he said. "The respondents either didn’t believe they did anything wrong or the SEC demanded too much to settle. My guess is the latter. It’s likely that the SEC wanted significant sanctions in connection with this—its first—Reg BI enforcement case."
Western, based in Pasadena, Calif, said it plans to “actively defend” itself against the SEC’s allegations. “The firm takes its clients’ best interests very seriously and believes it complied with Reg BI and the regulatory guidance available during the pertinent timeframe,” the firm said in a statement.
“The cost for this kind of defense can range anywhere from $100,000 upwards to $3 million. It’s dependent on how aggressively Western fights this action and who the lawyers are that they hire,” said attorney Andrew Stoltmann, founder of Chicago-based Stoltmann Law.
“I’m certain that Western worked to negotiate a settlement and a potential fine or penalty on the front end and simply didn’t like the amount the SEC asked for,” he added.
Settling the case was probably complicated by the fact that this is the first complaint related to Reg BI. “It is likely complicated things because there isn’t a matrix for settlement purposes based off of past cases,” Stoltmann said.
One issue that is likely to come up, should the complaint proceed to jury trial, is the many arbitrations that have been filed against firms and reps who have sold the junk bonds in question. GWG Holdings' so-called L bonds were “high risk, illiquid, and only suitable for customers with substantial financial resources,” the SEC said. This year, GWG defaulted on its bond interest and principal payments and filed for bankruptcy.
“Arbitration awards are almost always introduced in this type of complaint. There are a lot of different ways you can do it, including on the cross-examination of experts. It will make it in,” Stoltmann predicted.