Securities fraud lawsuit against Life Partners Holdings by shareholders may go forward, federal court rules

by Jim Orr

In February and March 2011, six putative securities class action complaints were filed in the U.S. District Court for the Western District of Texas. These actions were ultimately consolidated into the case styled Selma Stone, et al. v. Life Partners Holdings, Inc., Brian D. Pardo, R. Scott Peden, and David M. Martin, Civil Action No. DR-11-CV-16-AM. The consolidated class action complaint asserts claims of securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and for control person liability under Section 20(a). The plaintiffs seek damages and an award of costs on behalf of a class of shareholders who purchased or otherwise acquired Life Partners’ common stock between May 26, 2006, and June 17, 2011.

In response, the defendants filed a motion to dismiss arguing that the plaintiffs had failed to allege sufficient facts to support their claims. To properly state a claim under § 10(b) and Rule 10b–5, a plaintiff must allege, in connection with the purchase or sale of securities, facts suggesting that defendants (1) made a misstatement or omission, (2) of a material fact, (3) with scienter, (4) on which the putative class relied, (5) that proximately caused their injury. In addition, claims under § 10(b) and Rule 10b–5 must also satisfy the enhanced pleading requirements imposed by the PSLRA and Rule 9(b) of the Federal Rules of Civil Procedure. In short, the complaint must: (1) specify each statement alleged to have been misleading; (2) identify the speaker; (3) state when and where the statement was made; (4) plead with particularity the contents of the false representation; (5) plead with particularity what the person making the misrepresentation obtained thereby; and (6) explain the reason or reasons why the statement is misleading.

The district court has now denied the defendants’ motion to dismiss. Stone v. Life Partners Holdings, Inc., No. DR-11-CV-16-AM (W.D. Tex. May 15, 2006). The complaint in Stone alleges that Life Partners was built on a fraudulent business model:

Life Partners, using one doctor with little actuarial experience, routinely underestimated the life expectancies of insured individuals. Its underestimated life expectancies then caused the company to overstate the value-or expected investment return rate-of individual life insurance policies that it brokered to its investors. As a result, the entire company was built on the marketing and selling of what was, in effect, a sham product. Despite having knowledge of this fact, the Defendants held Life Partners out to be a sustainable and publicly traded stocks were worth purchasing.

Stone, at p. 4 (emphasis added).

The district court rejected the defendants’ argument that the plaintiffs had failed to plead enough facts to meet the applicable heightened pleading standard. The court found that the complaint’s allegations were “more than adequate to meet the particularity requirement of Rule 10(b).” Id., at p. 14.

According to the district court, “[t]he Plaintiffs describe in detail Life Partners’ departure from the industry standard in calculating its life expectancy estimates.” Id., at p. 10. The plaintiffs allege that when Dr. Cassidy was hired to render life expectancy estimates, he had no previous experience rendering life expectancies and had not received any actuarial or professional training on the generation of life expectancy estimates. It is further alleged that he failed to receive any such training and that he never researched the methods used by life settlements underwriters in the industry. Id., p. 11. Additionally, the complaint alleges that Cassidy used outdated mortality tables and failed to properly consider significant changes in medical technology when he rendered his life expectancies. Id.

According to the district court:

It is certainly material to a potential investor in Life Partners’ stock to know that Life Partners employed one doctor who hastily reviewed a large quantity of life insurance policies using non-industry standards, and who, in the process, routinely underestimated the LE estimates he generated.

Id., at p. 14.

The court also rejected arguments that the plaintiffs’ claims should be dismissed because the financial information reported in public SEC filings was “technically accurate.” Id., at pp. 25-26. The court noted that the Fifth Circuit has long held under Rule 10b–5, “a duty to speak the full truth arises when a defendant undertakes a duty to say anything.” Id. at 26, quoting Rubinstein v. Collins, 20 F.3d 160, 170 C.A.5 (Tex.),1994. Further, the court emphasized the importance of “context” when determining whether a statement in misleading. Id. In particular, the court noted that Life Partners is a “single-product company” and “[t]he overall value of a single-product company is integrally linked to the value of the product it peddles.” Id., citing Nathenson v. Zonagen, Inc., 267 F.3d 400 (5th Cir. 2001). Thus, the court concluded, “[a]ny reasonable, prudent investor would take into consideration information about the actuarial practices used in calculating the value of the single investment product that it sold.” Id. “Given the allegations that Life Partners was aware that it marketed an overvalued product, the multiple public statements made to bolster the apparent value and stability of the company were entirely misleading. “ Id. at p. 27.

The defendants’ motions to dismiss were denied in their entirety. The defendants will likely now file an answer to the allegations in the complaint and the parties will begin preparing for trial.

Life Partners life settlement lawsuits

Lawsuits have been filed by Heygood, Orr & Pearson on behalf of many clients against the life settlements company Life Partners accusing the company and its executives of misleading investors about the value of the life settlement investments they offer.

According to these lawsuits, Life Partners hired a doctor to provide life expectancy assessments on insured individuals that were far shorter than their true life expectancies. Because a policy with a shorter life expectancy is more valuable than one with a longer life expectancy, the lawsuits allege, among other things, that Life Partners was able to use inaccurate short life expectancies to induce investors to pay much more for life settlement investments than they were worth.

In addition to lawsuits filed against Life Partners by Heygood, Orr & Pearson on behalf of investors—including two class action lawsuits filed by Heygood, Orr & Pearson – the company is also facing lawsuits by the Securities and Exchange Commission (SEC) and the Texas attorney general’s office. These lawsuits have likewise accused Life Partners of fraud in connection with their life settlement investments.

The first lawsuit filed by the SEC against Life Partners Holdings, Inc. and its executives Pardo and Peden went to trial in January 2014. Following almost two days of deliberations, the jury in the case found in favor of the SEC on Section 13(a) of the Securities Exchange Act of 1934, Rules 12b-20, 13a-1 and 13a-13, as well as Section 17(a)(1) of the Securities Act of 1933. The jury in the SEC lawsuit also found that Pardo had falsely certified reports filed with the agency. These reports contained untrue statements of material fact or omitted material facts necessary to make the reports not misleading. The jury found in favor of Life Partners Holdings, Inc. on the SEC’s claims under Section 10(b) and Rule 10b-5 and in favor of Pardo and Peden on the SEC’s allegations of insider trading.

Life Settlements Class Actions filed by Heygood, Orr & Pearson

The lawyers at Heygood, Orr & Pearson have filed lawsuits on behalf of many investors related to life settlement investments, including several class action lawsuits. Our law firm has also filed claims on behalf of life settlements companies who have been denied the death benefit on a life insurance policy due to wrongful claims by an insurance company that it was a STOLI policy. The firm has also represented brokers in life settlement related litigation.

If you or your company has been aggrieved by wrongful conduct related to a life settlement, then you may need a sophisticated and knowledgeable law firm such as Heygood, Orr & Pearson to represent you. For more information and a case evaluation, please contact us by calling toll-free at 1-877-446-9001, or by filling out the free case evaluation form located on this page.