SEC Charges Life Partners Holdings with Life Settlements Investment Scheme
The SEC charged Texas-based financial services firm Life Partners Holdings, Inc., and three of its senior executives with engaging in an alleged accounting fraud and life settlements investment scheme. According to the Complaint, Life Partners, through its officers Brian D. Pardo (CEO), R. Scott Peden (general counsel), and David M. Martin (CFO), misled company shareholders about the company’s profitability and sustainability. They also allegedly misled shareholders about consumer demand for the company’s brokered products: life settlement investments.
The Complaint further alleges that Life Partners "systematically uses life expectancy estimates that the Company knows to be materially short in brokering life settlements" in order to "artificially inflate the Company’s revenues and profit margins." According to the Complaint, Pardo and Preen personally profited from the Company’s fraudulent actions by concealing the information from shareholders, and using that same information to sell shares of the Company "at artificially inflated prices."
"The senior-most executives at Life Partners concealed significant risks to the business, manipulated financial statements with improper accounting, and knowingly profited from their misconduct by executing insider trades based on information that was not available to the public," said David Woodcock, Director of the SEC’s Fort Worth Regional Office.
Life insurance settlement transactions are financial transactions in which a policyholder sells his or her life insurance policy to an "investor" for a lump sum payment, which is heavily influenced by the insured’s estimated life expectancy. The "investor" then takes over the monthly payments and receives the death benefit when the insured dies. The Complaint alleges that, like almost all life insurance settlement brokers, Life Partners makes its profit by finding a number of "investors" to purchase interests in a policy, and then keeping the difference between the amount the "investors" pay and the amount the policyholder receives for the sale.
According to the SEC Complaint, Life Partners began using a new doctor, Dr. Donald Cassidy, to estimate their policyholders’ life expectancies in 1999. The Complaint alleges that Cassidy had no experience estimating life expectancies, no qualifications to do so, and performed no research into the methodology used by most life settlement underwriters. The Complaint further alleges that Dr. Cassidy was paid "$500 for each policy Life Partners successfully brokered using the life estimates that Cassidy provided," plus (starting in 2008) $15,000 per month. According to the Complaint, the manner in which Life Partner’s estimated policyholder life expectancies "constituted a material risk to the company’s revenue."
According to an SEC representative, Life Partners manipulated shareholders by hiring an unqualified doctor who "assigned baseless life expectancy estimates" which led investors to believe that Life Partners was a legitimate company when it fact it was using an illusion to generate revenue.
The SEC is seeking disgorgement of all ill-gotten gains plus interest, payment of civil penalties, and Orders banning the officers from serving as an officer or director for any securities industry-related firm in the future.