Let the Regulation Best Interest arbitration claims commence.
In what appears to be the first action of its kind, Chicago-based Stoltmann Law Offices filed a claim against Cabot Lodge Securities LLC on behalf of 18 investors last week alleging that the firm violated Reg BI’s care obligation and conflict of interest provisions when it sold retirees in their 60s and 70s high-risk bonds.
The claim, which follows the first Reg BI civil case the Securities and Exchange Commission filed against Western International Securities in June, alleges that Cabot Lodge advisors sold investors controversial two-year GWG L-Bonds between 2020 and 2022 that exposed them to complete loss of their principal. A bond index fund would have been a better “reasonably-available alternative investment,” Stoltmann Partner Joe Wojciechowski told Financial Advisor magazine.
The SEC accused Western International, a subsidiary of Atria Wealth Solutions, of selling $13.3 million worth of troubled alternative asset manager GWG Holdings’ L Bonds between July 2020 and April 2021 without having a “reasonable basis” to believe the investments were in clients’ best interests.
The 18 investors Wojciechowski is working with allege that by early 2020, Cabot Lodge lacked any reasonable basis to continue offering GWG L-Bonds to their clients, in violation of Reg BI.
The attorney said Stoltmann Law Firm is working on filing a second arbitration claim against Cabot Lodge by early next week on behalf of at least 15 additional investors.
“I haven’t seen any other filing under Reg BI. But with the civil complaint against Western international, the SEC provided a blueprint about how they will interpret and enforce the rule. That was a big step by SEC and paved the way and showed us how it needs to be done. And that’s what we’re going to run with,” Wojciechowski said.
"It is the duty of every brokerage firm to perform reasonable due diligence on investments prior to offering them to their clients to ensure the brokerage firm understands the risks, characteristics, benefits and costs of any security…and to be aware of red-flags which may undermine the investment's ability to perform,” he said.
Cabot advisors failed to fulfill Reg BI requirements when they offered financially distressed GWG’s “two-year bonds yielding 5.5% to investors who were immediately exposed to the loss of 100% of their principal, he said. "That’s not compensated risk. That’s just a nonsense recommendation,” Wojciechowski added.
Cabot and its advisors earned 5% to 7% on the risky L-bonds, while a bond index fund would have paid little to nothing, he said.