SEC Charges Life Settlements Firm and Three Executives with Disclosure and Accounting Fraud
August 8, 2012
The Securities and Exchange Commission today charged Texas-based financial services firm Life Partners Holdings Inc. and three of its senior executives for their involvement in a fraudulent disclosure and accounting scheme involving life settlements. Life Partners is a Nasdaq-traded company that generates virtually all of its revenues from brokering life settlements. Life settlements involve the purchase and sale of fractional interests of life insurance policies in the secondary market. In life settlement transactions, life insurance policy owners sell their policies to investors in exchange for a lump-sum payment. The dollar amount offered by the investor takes into account the insured’s life expectancy and the terms and conditions of the insurance policy.
The SEC alleges that Life Partners chairman and CEO Brian Pardo, president and general counsel Scott Peden, and chief financial officer David Martin misled shareholders by failing to disclose that the company was systematically and materially underestimating the life expectancy estimates it used to price transactions. Life expectancy estimates are used to price life settlements and are relied upon by investors when making their investment decisions. By intentionally underestimating life expectancies, Life Partners was misrepresenting the risk to investors in these financial products.
The SEC alleges that Life Partners and the three executives were involved in disclosure violations and improper accounting that Life Partners used to overvalue assets held on the company’s books and create the appearance of a steady stream of earnings from brokering life settlement transactions. The SEC further charged Pardo and Peden with insider trading in their shares of Life Partners stock while in possession of material, non-public information indicating that the company had systematically and materially underestimated life expectancy estimates.
“Life Partners duped its shareholders by employing an unqualified medical doctor to assign baseless life expectancy estimates to the underlying insurance policies,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This deception misled shareholders into thinking that the company’s revenue model was sustainable when in fact it was illusory.”
According to the SEC’s complaint filed in federal district court in Waco, Texas, beginning in 1999, the company used life expectancy estimates provided by Dr. Donald T. Cassidy, a Reno, Nev.-based doctor with no actuarial training or prior experience rendering life expectancy estimates. The SEC alleges that Life Partners and Pardo failed to conduct any meaningful due diligence on Cassidy’s qualification to act as a life expectancy underwriter and instructed the doctor to use a life expectancy methodology that was created by the company’s former underwriter, a part-owner of Life Partners. Pardo, Peden, and Martin were aware that Cassidy’s life expectancy estimates were systematically and materially short.
(A copy of the Complaint may be found on the SEC website.)
If you have previously purchased a life settlement from Life Partners, you may be entitled to compensation. Heygood, Orr & Pearson is currently prosecuting cases against Life Partners. To find out if you may have a case, contact the lawyers at Heygood, Orr & Pearson by calling toll-free at 1-877-446-9001, or by filling out our free online case evaluation form.