Litigation Release No. 22219 / January 4, 2012
Accounting and Auditing Enforcement Release No. 3351 / January 4, 2012
SEC v. Life Partners Holdings, Inc., Brian D. Pardo, R. Scott Peden and David M. Martin, Case No. 6:12-cv-00002 in the United States District Court for the Western District of Texas
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 a significant risk to Life Partners’ business: the company was systematically and materially underestimating the life expectancy estimates it used to price transactions. Life expectancy estimates are a critical factor impacting the company’s revenues and profit margins as well as the company’s ability to generate profits for its shareholders.
The SEC further 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.
According to the SEC’s complaint filed in federal district court in Waco, Texas, Life Partners misrepresented and failed to disclose in public filings with the Commission that the company’s systematic use of materially underestimated life expectancy estimates constituted a material risk to the company’s revenues. 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. The SEC also alleges that Pardo, Peden and Martin were aware that the Cassidy-rendered life expectancy estimates were systematically and materially short.
The SEC alleges that Life Partners materially misstated net income from fiscal year 2007 through the third quarter of fiscal year 2011 by prematurely recognizing revenues and understating impairment expense related to its investments in life settlements. The SEC alleges that Life Partners improperly accelerated revenue recognition from the closing date to the date it obtained a non-binding agreement with the policy owner to sell a life settlement. Life Partners’ use of Cassidy’s life expectancy estimates as part of its impairment calculations caused the company to understate millions of dollars in impairment expense.
The SEC further alleges that during this time, Pardo and Peden sold approximately $11.5 million and $300,000 respectively of Life Partners stock at inflated prices while in possession of material non-public information about the company’s dependency on short life expectancy estimates to generate revenues.
The SEC has alleged Life Partners, Pardo, Peden and Martin committed direct violations or aided and abetted violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder. The SEC has also alleged that Life Partners, Pardo and Peden violated Section 17(a) of the Securities Act; that Life Partners, Pardo and Martin committed direct violations or aided and abetted violations of Section 13(b)(2)(B) of the Exchange Act; that Pardo, Peden and Martin violated Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2(a) thereunder; that Pardo violated Rule 13b2-2(b) of the Exchange Act; and that Pardo and Martin violated Rule 13a-14 of the Exchange Act. The SEC’s complaint seeks repayment to the company of stock sales profits and bonuses received by Pardo and Martin pursuant to Section 304 of the Sarbanes Oxley Act of 2002.
The SEC’s investigation is continuing.