Center Street Goes Bankrupt – Cites GWG Holdings Sales

Center Street Securities Inc., a brokerage firm based in Nashville with a history spanning over 30 years, is shutting down. This firm, notable for its involvement in selling bonds backed by the bankrupt GWG Holdings Inc., has filed a termination notice with the Financial Industry Regulatory Authority Inc. Center Street. However, a smaller firm with $336 million in advisory assets is the third company this year to close down after selling GWG bonds, following the paths of Arque Capital Ltd. and JRL Capital Corp.

The Broader Impact and Legal Challenges

The closure of Center Street is part of a larger trend in the securities industry, where approximately 40 broker-dealers have sold around $1.6 billion in GWG L bonds over the past decade. The bankruptcy of GWG last year has left these firms and their clients in a precarious position, with the future value of these bonds uncertain. Center Street, in particular, was facing substantial legal challenges, with 34 clients filing arbitration claims seeking up to $9.1 million in damages for investments that were deemed unsuitable or had lost value.

Need for Regulatory Action

The situation highlights a systemic issue in the securities industry, where the failure of products like GWG bonds can lead to the collapse of brokerage firms, often leaving investors with potential unpaid claims. Plaintiff’s attorney August Iorio points out that Center Street Securities was among the top commission earners from selling L Bonds before GWG’s bankruptcy. He criticizes the current system that allows brokerage firms to close, obstructing justice and compensation for investors, while brokers and controlling persons move to other firms and continue similar practices. Iorio urges the SEC and Finra to take measures to protect investors from such vulnerabilities.

Impact on Investors from the Closure of Center Street Securities Inc.

The shutdown of Center Street Securities Inc., especially in the context of its involvement with GWG bonds, has several implications for investors:

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  1. Loss of Investment Value: Investors who purchased GWG bonds through Center Street may face significant financial losses. Given that GWG Holdings Inc. declared bankruptcy, the value of these bonds is uncertain, and investors might not recover their invested capital.
  2. Legal and Recovery Challenges: The closure of Center Street complicates the process for investors seeking to recover their losses. While legal avenues like arbitration claims exist, the dissolution of the brokerage firm can make it more difficult for investors to pursue compensation.
  3. Insurance Limitations: Although brokerage firms are typically insured, the insurance coverage often falls short of covering all investor claims, especially in large-scale investment product failures. This means that even if investors win their arbitration claims, they might not receive full compensation for their losses.
  4. Systemic Risks in the Industry: The situation underscores a broader risk in the investment industry. When smaller, less-capitalized brokerage firms go under, especially after selling high-risk products like GWG bonds, it exposes investors to the risk of losing their investments without adequate recourse.
  5. Need for Due Diligence: This event reminds investors about the importance of due diligence when selecting investment products and brokerage firms. Understanding the risks associated with certain investments and the financial stability of the firm offering these products is crucial.
  6. Regulatory Oversight and Protection: The closure highlights the need for stronger regulatory oversight to protect investors. It raises questions about the effectiveness of current regulations in preventing such situations and the need for regulatory bodies like the SEC and Finra to enforce stricter measures to safeguard investor interests.

In summary, the closure of Center Street Securities Inc. and its involvement with GWG bonds represent a significant financial risk and a challenging recovery process for investors. It also highlights systemic issues in the securities industry, emphasizing the need for careful investment choices and stronger regulatory protections.

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