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Lawsuit brought by a shareholder of Life Partners Holdings, Inc. on behalf of LPHI against the Board of Directors of LPHI, including Brian Pardo, Scott Peden, Fred Dewald, Tad Ballantyne and Harold Rafuse.
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2. Case 6:11-cv-00158-WSS Document 1 Filed 06/09/11 Page 2 of
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Exchange Commission (SEC) to issue a Wells Notice (and a subsequent
amended Wells Notice expanding the scope of the SECs initial
inquiry) which indicates the agencys staff plans to recommend that
civil charges be filed against the Company and certain executives
related to, among other things, Life Partners life expectancy
estimates, its revenue recognition policies, the impairment of life
settlements held by the Company for investment, and its policy for
premium advances the Company might make on certain client policies.
Moreover, Life Partners business practices have led to several
lawsuits against the Company by investors under the federal
securities laws and by persons who were damaged by purchasing or
acquiring life settlements pursuant to various state law causes of
action including, among others, fraudulent inducement, negligent
misrepresentation and common law fraud. .
2. Life Partners, through its subsidiary, Life Partners, Inc.
(LPI), operates in the
secondary market for life insurance, generally known as life
settlements, which involves the sale of an existing life insurance
policy of one person (the policyholder) to another unrelated party.
By selling the policy, the policyholder receives an immediate cash
payment to use as he or she wishes. Likewise, the purchaser takes
an ownership interest in the policy at a discount to its face value
and, as a result, receives the policyholders ownership interest in
the death benefit under the policy when the insured dies. The
Company acts as a purchasing agent for the life settlement
purchasers and, in this capacity, identifies, qualifies and
purchases policies on behalf of its clients that match their buying
parameters and return expectations. Its operating revenues are
derived from the fees it charges for facilitating these life
settlement transactions between the sellers and purchasers. Since
its incorporation in 1991, Life Partners claims to have completed
over 127,000 transactions for its client base in connection with
the purchase of over 6,400 policies totaling approximately $2.8
billion in face value.
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In 2009, questions began to surface concerning the methodology the
Company used in calculating the life expectancies and it affect on
the Companys financial statements. For example, on February 11,
2009, a research firm, Citron Research, published an article that
called into question, among other things, the issues of how Life
Partners determined life expectancies of policyholders, which has a
crucial bearing on the purchase price in a life settlement
transaction and its practice of charging exorbitant fees on these
transactions.
In response to the report, defendant Brian D. Pardo (Pardo) issued
an open letter to the Companys shareholders stating that the report
contained inaccurate assumptions, misinformation and erroneous
facts about our company, and that the Company vehemently
disagree[d] with the conclusions reached by the author of the
report and believe strongly that our business model will continue
to demonstrate the sustainable growth we have exhibited over the
last 18 years.
Almost two years later, on December 21, 2010, The Wall Street
Journal published an article also questioning the Companys
life-expectancy estimates and business practices, noting that Life
Partners has made large fees from its life-insurance transactions
while often significantly underestimating the life expectancies of
people whose policies its customers invest in. In particular, the
article emphasized that the Company relied solely on life
expectancy calculations provided by a doctor in Reno, Nevada, who
is paid a monthly retainer by Life Partners, and that an analysis
of his calculations shows that he regularly provides the Company
with estimates that are significantly shorter hence, more
profitable for the Company than calculations provided by
independent firms.
Approximately one month later, on January 20, 2011, The Wall Street
Journalpublished an article disclosing that the SEC was
investigating Life Partners business practices,
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particularly how it estimated the life expectancies. According to
the article, investigators were probing allegations that the data
used by Life Partners may be inaccurate, with many of the insured
people living longer than the original estimate casting doubt on
Life Partners claims of returns of as much as 15% to purchasers of
policies. Later that same day, the Company issued a press release
in which it confirmed that the SEC was conducting an investigation
into the business of LPI.
On this news, shares of Life Partners declined by $2.52 per share,
more than 17%, to close on January 20, 2011, at $12.17 per share,
on unusually high volume, and further declined another $0.63 per
share, more than 5%, to close on January 21, 2011, at $11.54 per
share, also on unusually high volume.
One week later, on January 27, 2011, The Wall Street Journal
published another article revealing that Life Partners had
drastically changed how it would market its products to purchasers.
According to the article, Life Partners would now market their
product as having an estimated return of 7% over seven years,
instead of the targeted 12% to 14% annual returns over shorter
periods, typically four to six years, it had previously
promoted.
On this news, shares of Life Partners declined by $1.14 per share,
9.60%, to close on January 28, 2011, at $10.70 per share, on
unusually high volume.
Thus, throughout the relevant period, the Director Defendants
caused the Company to make false and/or misleading statements and
failed to disclose material adverse facts about the Companys
business, operations, and prospects. Specifically, the Director
Defendants made false and/or misleading statements and/or failed to
disclose: (1) that the Company had routinely used unrealistic life
expectancy data that produced inaccurately short life expectancy
reports, which were subsequently used to sell life settlement
policies to investors; (2)
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that the Company had purposely concealed the historical rate in
which individuals insured by life settlement policies sold by Life
Partners had lived past the life expectancy rates previously
provided to investors, such that the Companys investors were unable
to assess the accuracy or reliability of such data; (3) that by
underestimating the life expectancy data to investors, the Company
was able to charge substantially larger fees when brokering life
settlement policies; (4) that the Companys revenues had been
significantly increased through the employment of such business
practices; (5) that, as a result, the Companys financial statements
were false and misleading at all relevant times; (6) that such
business practices, when they were discovered, would initiate an
investigation by the SEC into the Companys business practices; (7)
that the Company lacked adequate internal and financial controls;
and (8) that, as a result of the foregoing, the Companys statements
about its financial well-being and future business prospects were
lacking in any reasonable basis when made.
The Director Defendants failed to take necessary corrective
measures, despite their knowledge of the serious, long-standing
practice of under estimating the life expectancy of people it buys
policies from.
During the relevant period of wrongdoing, which began in at least
2007 (the Relevant Period), the Director Defendants also caused
numerous filings to be made with the SEC, which concealed from the
investing public its wrongful business practice and the consequent
risks to Life Partners. Life Partners and defendant Pardo also have
been named as defendants in several shareholder class action
lawsuits alleging violations of the federal securities laws for
disseminating misleading statements to investors, policyholder
class actions alleging fraud and breach of contract, and at least
one complaint for violations of the Racketeer Influenced and
Corrupt Organization Act (RICO). In addition, following its
investigation, the
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SEC issued a Wells Notice to the Company recommending that it bring
a civil injunctive action against Life Partners and defendants
Pardo and R. Scott Peden (Peden), for violations of Section 17(a)
of the Securities Act of 1933, and Sections 10(b) and 13(a) of the
Securities Exchange Act of 1934.
On June 6, 2011, Life Partners announced that it received an
amended Wells Notice on June 3, 2011 expanding the scope of the
recommendation for the civil action. The amended Wells Notice also
includes allegations about the Companys disclosures regarding the
propriety of certain accounting policies and practices, including
revenue recognition, the impairment of life settlements held by
Life Partners for investment and the stated policy for premium
advances the Company might make on certain client policies. The
expanded Wells Notice also adds to the initial notice David A.
Martin (Martin), Life Partners Chief Financial Officer since 2008,
as another target of the investigation as well as Section
13(b)(2)(A) and B of the Securities Exchange Act as additional
claims. These various lawsuits and regulatory actions will cause
Life Partners and its shareholders to suffer additional injury and
damages.
The Director Defendants dereliction of their duties and grossly
reckless mismanagement has been disastrous for Life Partners and
Life Partners shareholders. Life Partners shareholder equity and
its common stock market capitalization have plunged as a result of
the Companys illegal conduct.
Additionally, as a result of the Companys wrongful business
practices, on May 31, 2011, the Company disclosed that it had
encountered unanticipated delays in completing its annual report
because of a re-examination of our revenue recognition policies
with our independent auditor. This unexpected disclosure comes on
the heels of the Companys Form 12b-25, notification of late filing,
which was filed with the SEC on May 16, 2011, requesting a
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delay in the filing of its annual report while management
reassesses the value of its life policies it holds for its own
portfolio. According to the filing, the Company estimated that it
would take an impairment charge of about $8 million, some of which
will apply to prior quarters.
Additionally, while the stock price was artificially inflated,
defendant Pardos Pardo Family Holdings Ltd. sold over $7.5 million
of stock based on knowledge of material, non-public information
concerning Life Partners business practices and improper
statements. In addition, Peden sold over $300,000 of his personally
held stock based on knowledge of material, non-public information
concerning Life Partners business practices and improper
statements. At the same time, the Director Defendants have been
elected and re-elected to their positions of power, prestige and
profit by means of false and misleading statements in the Companys
SEC filings and received millions of dollars of compensation by
unjust payments and stock awards.
The Director Defendants owed the Company and its stockholders the
fiduciary obligations of candor, fidelity, trust, and loyalty. They
were required to oversee Life Partners affairs in a fair, just and
equitable manner to prevent violation of laws, to act in
furtherance of the best interests of Life Partners and its
stockholders, and not to act in furtherance of their own personal
interests. In addition, each of the Director Defendants owed Life
Partners the duty to exercise due care and diligence in the
management and administration of the Companys affairs and in the
use and preservation of its property and assets. In violation of
their fiduciary duties, the Director Defendants permitted the
Company to conduct its business in an unsafe, imprudent and
dangerous manner by pursuing unsound and illegal practices,
including those specified in this Complaint, thereby wasting its
assets.
The conduct of the Director Defendants complained of herein
involved a knowing and culpable violation of their duties and
obligations as corporate directors, an absence of good
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faith or business judgment on their part, and an intentional or
reckless disregard for their fiduciary duties to the Company and
its public stockholders. The Director Defendants were aware of, or
should have been aware of, the risk of serious damage to the
Company caused by: (1) using questionable and inaccurate short
estimates for how long the insured people are likely to live, a key
part of the investment equation and (2) the improper artificial
inflation of the Companys financial condition and its stock
price.
The Director Defendants ratified and/or endorsed the ongoing
inappropriate business practice and violations of law complained of
herein, and the conduct of Life Partners officers and employees
resulting in the issuance of a Wells Notice to the Company by the
SEC (and a subsequent amended Wells Notice expanding the scope of
the SECs investigation) and being sued by both investors in the
Company as well as purchasers of the life settlements. That
ratification and/or endorsement involved a knowing and culpable
violation of the Director Defendants obligations as corporate
directors, an absence of good faith on their part, and a reckless
disregard for their fiduciary duties to the Company and its public
shareholders. The Director Defendants were aware of, or pursuant to
reasonable inquiry should have been aware of, the ongoing
inappropriate business practices and violations of law in which
Life Partners was engaging and the risks of serious injury to the
Company as a result of inappropriate business practices. The
Director Defendants conduct caused Life Partners to waste its
valuable assets when it was forced to restate its financial
statements and to disseminate publicly false and misleading
information in violation of the federal securities laws.
As alleged in greater detail below, the Director Defendants are
implicated in and legally responsible for the wrongdoing complained
of herein. The Director Defendants are thus interested and lack
independence with respect to the wrongs complained of and the
underlying
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conduct is not subject to business judgment protection. Further,
the Director Defendants, by virtue of pending litigation, would
necessarily be forced to reject any demand by plaintiff that any of
the Director Defendants prosecute this derivative action to avoid
incurring personal liability. Thus, any such demand by plaintiff
would be futile.
II. JURISDICTION AND VENUE
This derivative action is brought pursuant to Rule 23.1 of the
Federal Rules of Civil Procedure (F.R.C.P.). This Court has
jurisdiction under 28 U.S.C. 1332(a)(1). Plaintiff is a resident of
the State of New Jersey and, as set forth in paragraphs 24 through
30 no defendant is a citizen of that state. The amount in
controversy between the plaintiff and the defendants exceeds
$75,000, exclusive of interest and costs. This is not a collusive
action to confer jurisdiction on this Court which it would not
otherwise have.
Venue is proper in this District pursuant to 28 U.S.C.1391(a)
because many of the acts and transactions giving rise to the
violations of law complained of herein, including the improper
conduct by Defendants and the preparation and dissemination to the
investing public of false and misleading information, occurred in
this District.
III. THE PARTIES
A. Plaintiff
23. Plaintiff Harriet Goldstein, a resident of the State of New
Jersey, is a current
shareholder of the Company, was a shareholder at the time of the
misconduct complained of herein, and intends to continue to hold
Life Partners shares at least through the resolution of this
action.
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B. Defendants
Nominal defendant Life Partners is a Texas corporation
headquartered in Waco, Texas. According to its public filings, Life
Partners describes itself as a financial services company and the
parent company of Life Partners, Inc. (LPI), one of the oldest and
most active companies in the United States engaged in the secondary
market for life insurance known generally as life settlements. Life
Partners may be served with process through its Registered Agent,
R. Scott Peden, at 204 Woodhew Drive, Waco, Texas 76712.
1. The Board of Directors
Life Partners Board maintains two standing committees on which the
directors serve: (1) the Audit Committee and (2) the Compensation
Committee. During the fiscal year ending on February 28 2010, the
Board met once and acted seven times by written consent. In
addition, during this period, the Compensation Committee met twice
and the Audit Committee met five times.
Defendant Pardo has served as Chairman of the Board, President and
Chief Executive Officer of the Company since 2000 and, during all
relevant times, was the Chief Executive Officer of LPI, the
Companys primary operating subsidiary. In fact, he has served as
the CEO of LPI since its incorporation in 1991. Pardo has also
served as a director of the Company since 2000. He signed the
Companys Form 10-K for the fiscal years ended February 28, 2010.
For fiscal year 2010, Pardo has received more than $1.061 million
in compensation including salary, bonuses and other forms of
compensation for his service as a director of the Company. As of
June 11, 2010, Pardo beneficially owned 7,499,999 shares of the
voting stock (50.3%) with the voting power to determine elections.
Therefore, he is a controlling shareholder
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of the Company. Defendant Pardo is a citizen of Texas. Pardo may be
served with process at 908 Arlington Drive, Woodway, Texas
76712-3205.
Defendant Peden has served as the General Counsel and Secretary of
the Company and President of LPI since 2000. Prior to 2000, Peden
served as Vice President and General Counsel of LPI since its
incorporation in 1991. Peden has served as a director of the
Company since 2000. Peden signed the Companys Form 10-K for the
fiscal year ended February 28, 2010. In fiscal year 2010, Peden has
received more than $648,000 including salary bonus and other
compensation for his service as President and general counsel of
LPI and as a director of the Company. Defendant Peden is a citizen
of Texas. Peden may be served with process at 1117 Charing Cross
Drive, Woodway, Texas 76712.
Defendant Fred Dewald (Dewald) has served as a director of the
Company since 2003. In addition, Dewald is currently a member of
both the Compensation Committee and Audit Committee. Dewald signed
the Companys Form 10-K for the fiscal year ended February 28, 2010.
In fiscal year 2010, Dewald received $28,750 in director fees (two
quarterly payments of $6,250 and two quarterly payments of $8,125
following an increase in director fees) and reimbursement of
expenses incurred in attending Board and Committee meetings for his
service as a director of the Company. Defendant Dewald is a citizen
of Texas. Dewald may be served with process at 428 Riverview Drive,
Woodway, Texas 76712-7606.
Defendant Tad M. Ballantyne (Ballantyne) has served as a director
of the Company since 2001. In addition, Ballantyne is currently
serving as the chairperson of the Audit Committee and is a member
of the Finance Committee. Ballantyne signed the Companys Form 10-K
for the fiscal year ended February 28, 2010. For fiscal year 2010,
Ballantyne has received $28,750 in director fees and reimbursement
of expenses incurred in attending Board and
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committee meetings for his service as a director of the Company.
Defendant Ballantyne is a citizen of Wisconsin. Ballantyne may be
served with process at 5118 Hunt Club Road, Racine, WI
53402-2333.
Defendant Harold E. Rafuse (Rafuse) has served as a director of the
Company since 2006. In addition, Rafuse is currently serving as
chairperson of the Compensation Committee and is a member of the
Audit Committee. Rafuse signed the Companys Form 10-K for the
fiscal year ended February 28, 2010. In fiscal year 2010, Rafuse
received $28,750 in director fees and reimbursement of expenses
incurred in attending Board and Committee meetings for his service
as a director of the Company. Defendant Rafuse is a citizen of
Texas. Rafuse may be served with process at 111 Laurel Oaks Lane,
Crawford, Texas 76638-2767.
Defendants Pardo, Peden, Dewald, Ballantyne and Rafuse comprise the
current directors on the Board, and are collectively referred to as
the Director Defendants.
Each non-employee director in fiscal year 2010 received two
quarterly payments of $6,250 and two quarterly payments of $8,125
following an increase in director fees. Non-employee directors do
not receive meeting fees for Board or Committee meeting attendance.
These directors are not provided with any insurance, retirement or
other benefit programs or other benefits as prerequisites. The
Company reimburses all directors for their reasonable expenses
incurred in attending Board and Committee meetings. The Company
does not provide equity compensation for the non-employee
directors.
IV. THE FIDUCIARY DUTIES OF LIFE PARTNERS BOARD
Under Texas law, Life Partners directors have certain fiduciary
duties to the Company and its shareholders, including the duties of
loyalty and care. To discharge their legal duties, the Director
Defendants were required to exercise reasonable and prudent
supervision
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over the Companys management, policies, practices, controls, and
financial affairs. Pursuant to their fiduciary obligations, the
Director Defendants were required to use the same care and
diligence as would an ordinary prudent person in a similar
position. By virtue of this obligation, the Director Defendants
were required to, but failed to, among other things:
To set up protocols and procedures to properly monitor that the
Company adheres to sound business practices when determining life
expectancy estimates;
To ensure that proper policies and procedures are in place and
adhere to Life Partners revenue recognition polices and to ensure
that the Companys revenue recognition policies are consistent with
and compliant with General Accepted Accounting Principles;
To set up protocols and procedure for a regulatory compliance
program to ensure compliance with the laws and regulations
applicable to viatical and senior life settlement companies;
To undertake a proper and adequate investigation and evaluation of
the Companys dissemination of information to the public to ensure
that Life Partners was not violating the federal securities
laws;
To prevent the waste of Life Partners valuable assets and to
manage, conduct, supervise and direct the business and affairs of
Life Partners carefully, prudently and in good faith, in accordance
with the laws, rules and regulations of the State of Texas, and the
Articles and by-laws of Life Partners;
To exercise necessary control and supervision over the officers and
employees of Life Partners and LPI, especially those responsible
for making sure that the
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Company used proper and reasonable estimates of the life expectancy
of people it buys polices from;
To establish guidelines and policies to govern adequately the
structure and organization of the Companys operations, including
its financial and disclosure practices;
Neither to violate, nor knowingly or recklessly permit any officer,
director or employee of Life Partners to violate applicable federal
rules and regulations, including SEC requirements;
Upon receiving notice or information of the use of unreasonable
estimates of the life expectancies of people it buys polices from,
to make a reasonable investigation in connection therewith, and to
take all necessary steps to correct that practice;
To establish and to maintain systematic and accurate books and
records regarding the business affairs of Life Partners and to
implement procedures for the reporting of the business affairs to
the Board of Directors and periodically to investigate, or cause an
independent investigation to be made of, Life Partners books and
records;
To implement and maintain an adequate and functioning system of
internal management information systems such that Life Partners
assets would be safeguarded, its financial statements and
information would be accurately recorded and reported, and its
corporate managers would be given prompt notice of serious problems
or divergences so that risk to the Company would be
minimized;
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To supervise the preparation and filing of any audited financial
statements, reports and other information required by law from Life
Partners, including the Companys SEC Forms 10-K, 10-Q, and 8-K,
annual reports and proxy materials, and to make full and accurate
disclosures of all material facts concerning, inter alia, each of
the subjects and duties set forth above;
To ensure that Life Partners did not engage in unsafe, imprudent or
unsound practices and to become and remain informed as to how Life
Partners was, in fact, operating; and
To refrain from obtaining personal benefit at the expense of Life
Partners and its public shareholders.
34. In addition, Life Partners foundational corporate documents
(such as the Audit
Committee charter and Life Partners Code of Ethics for Directors
& Executive Officers) also expressly detail the Boards duties
requiring, inter alia, that the Board must actively identify and
root out unlawful and/or unethical business practices within the
Company, must report and prevent such misconduct, and must disclose
any deviation from strict performance of these obligations. In
addition, according to the Companys June 2010 Proxy Statement, the
Audit Committee is specifically charged with and responsible in
taking the lead in overseeing enterprise risk management by (i)
timely identifying the material risks that the Company faces, (ii)
communicating necessary information with respect to material risks
to senior executives and, as appropriate, to the Board or relevant
Board Committee, (iii) implementing appropriate and responsive risk
management strategies consistent with our risk profile, and (iv)
integrating risk management into decision-making. In this capacity,
the Audit Committee is required to make periodic reports to the
Board regarding briefings provided by management and advisors as
well
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as the Committees own analysis and conclusions regarding the
adequacy of the Companys risk management processes. In addition to
the formal compliance program, the Board is required to encourage
management to promote a corporate culture that incorporates risk
management into the Companys corporate strategy and day-to-day
business operations. The Board also should work, with the input of
the Companys executive officers, to assess and analyze the most
likely areas of future risk.
Life Partners wrongful business practices and improper revenue
recognition policies which resulted in the Company receiving a
Wells Notice from the SEC, and an amended Wells Notice on June 3,
2011 and several lawsuits by shareholders for violations of the
federal securities law and by policyholders for various violations
of state common law such as fraud and negligent misrepresentation
are completely inconsistent with the fiduciary duties that all Life
Partner directors and senior management undertake as a condition to
accepting their prestigious and well-paying positions with the
Company.
V. FACTUAL BACKGROUND AND THE UNLAWFUL CONDUCT
A. Life Partners Business
Life Partners is a specialty financial services company and the
parent company of LPI. LPI is the oldest and one of the most active
companies in the United States engaged in the secondary market for
life insurance known generally as life settlements, which involves
the sale of an existing life insurance policy of the policyholder
to another unrelated party. By selling the policy, the policyholder
receives an immediate cash payment to use as he or she wishes.
Correspondingly, the purchaser takes an ownership interest in the
policy at a discount to its face value and, as a result, receives
the policyholders ownership interest in the death benefit under the
policy when the insured dies.
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LPI facilitates the sale of life settlements between the sellers
and purchasers, but does not take possession or control of the
policies. Rather, it identifies, qualifies and purchases policies
on behalf of its clients that match their buying parameters and
return expectations. The Company locates potential policy owners
through a network of life settlement brokers and, to a lesser
extent, through insurance, financial and estate planning
professionals, through personal referrals and through Internet and
print media advertising. Brokers are typically compensated based on
a percentage of the face value of the policy sold and this amount
is negotiated between the policyholder and the broker. This
compensation is paid upon the closing of a settlement. To meet
market demand and maximize the Companys value to its clients, Life
Partners made significant investments in proprietary software and
processes that enable it to facilitate a higher volume of
transactions while maintaining quality controls.
The Company categorizes its purchasers of life settlements as
either institutional or retail. Institutional purchasers are
typically investment funds designed to acquire and hold life
settlements. From the beginning of fiscal year 2008, Life Partners
acted as the purchasing agent for one institutional fund, in which
the Company had a $6.5 million investment as of February 28, 2010.
This institutional fund has acquired policies through the Company
having a face value of $278 million accounting for 1%, 8% and 7% of
Life Partners total revenues in fiscal 2010, 2009 and 2008,
respectively. The majority of Life Partners clients, however, are
high net worth individuals.
To purchase a life settlement, a prospective retail purchaser
typically submits a purchaser application, as well as affirmative
representations establishing the purchaser as financially
sophisticated. A purchaser will also submit an agency agreement and
special power of attorney, which appoint the Company as a limited
agent of the purchaser to act on his or her
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behalf in purchasing a life settlement. Unless specifically waived
by a purchaser, the agency agreement limits the Companys authority
to facilitate the sale of policies issued by an insurance carrier
having an A.M. Best Company rating of B+ or better and to policies
beyond their contestable period (generally two years or older). For
most of the policies that Life Partners brokers on behalf of its
clients, the insureds have a life expectancy of between 48 months
and 60 months, although the Company can identify policies with
longer life expectancies or other purchasing parameters if
requested. The Company distributes insurance and current medical
status information on these policies throughout the Company
financial planner network. The Company makes available to each
purchaser, through their financial planner, standard disclosures
discussing the nature and risks of making a life settlement
purchase. Purchasers can then, in consultation with their financial
planner or other professionals, select one or more policies,
specify the portion of the policy or policies to be purchased and
submit a reservation electronically. To diversify their positions,
retail purchasers generally buy fractional interests in one or more
policies and not an entire policy, while institutional purchasers
tend to purchase entire policies.
40. In fact, with respect to the purchase of a life settlement and
the expected life
expectancies of the insured, the following was noted in the
Companys most recent Form 10-K, filed with the SEC on May 12,
2010:
For most of the policies that we broker on behalf of our clients,
the insureds have a life expectancy of between 48 months and 60
months, although we can identify policies with longer life
expectancies or other purchasing parameters if requested by our
clients. As we identify and qualify policies, we distribute
insurance and current medical status information on these policies
(with the insureds name and other identifying information redacted)
throughout our financial planner network. . . . Purchasers can
then, in consultation with their financial planner or other
professionals, select one or more policies, specify the portion of
the policy or policies to be purchased and submit a reservation
electronically. To diversify their positions, retail purchasers
generally buy fractional interests in one or more
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policies and not an entire policy, while institutional purchasers
tend to purchase entire policies.
After closing the transactions, the Company generally holds title
to the policy as nominee for the purchaser. Responsibility for
policy premium costs passes to the purchaser, who typically funds
the premium costs from the deposits with the escrow agent. A
purchaser will receive evidence of the transfer of ownership of the
policy (which identifies the insured), but will not receive contact
information for the insured. The Company also performs certain
ministerial functions, such as monitoring the insureds health
status and notifying the escrow agent upon the insureds
death.
LPI was incorporated in 1991 and has conducted business under the
registered service mark Life Partner since 1992. Its operating
revenues are derived from the fees it charges for facilitating
these life settlement transactions between the sellers and
purchasers and since its incorporation in 1991, Life Partners
claims to have completed over 127,000 transactions for its client
base in connection with the purchase of over 6,400 policies
totaling approximately $2.8 billion in face value.
The following table shows the number of life settlement policies
the Company transacted, including the aggregate face values and
purchase price of the policies and revenues generate during fiscal
years 2008 through 2010:
1 The revenues derived are exclusive of brokerage and referral
fees.
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B. The Life Settlement Market
Life settlements provide a secondary market for existing life
insurance policies that the owner no longer needs or wants and that
insure a person whose life expectancy can be reasonably estimated.
From the early 2000s and through 2007, the market for life
settlements grew substantially from both the demand and the supply
sides of the transactions with an increase in the average face
amount of policies presented for sale. The larger amount of capital
required to meet the higher acquisition costs of the average life
settlement led Life Partners to seek relationships with
institutional purchasers in addition to expanding its base of
retail clients and increasing the minimum investment amount.
According to the Company, it has devoted substantial marketing and
client development resources to attracting both individual and
institutional purchasers, both directly and through its advisors.
The number of retail purchasers and the amount of their average
investment has increased over the last three fiscal years,
providing Life Partners with a significant market advantage by
enabling the Company to reach the diversification goals of its
clients as well as giving it greater flexibility in purchasing
policies. Institutional purchasers, on the other hand, have played
a less significant role in Life Partners business. For example, in
the fiscal years 2010, 2009 and 2008, Life Partners had one
institutional purchaser that accounted for 1%, 8%, and 7% of its
revenues, respectively. The Company, however, continues to seek
institutional opportunities.
In a 2009 report, the insurance research group, Conning & Co.
(the Conning Report), estimated that the life settlement industry
completed $12 billion in face value of transactions in 2007 and
$11.8 billion in 2008. Based on the Companys research from other
providers, publicly reported data and estimates based on historical
data, Life Partners estimated
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the total amount of face value of transactions completed by the
life settlement industry in 2009 was $7.3 billion. The Conning
report attributed the decline in market size from 2007 to
2008.
C. The Boards Approval of The Manipulation of Life Expectancy
Rates
According to the December 21, 2010 Wall Street Journal article,
Life Partners business model relies on a single doctor, Dr. Donald
T. Cassidy (Dr. Cassidy), to determine the life expectancies of
insureds. Dr. Cassidy has confirmed that he reviews case histories
a mere three days a week for Life Partners, which has sent him 100
to 200 cases weekly, translating to thirty-three to sixty-six cases
per working day and eleven to twenty-two per hour. Dr. Cassidy has
said in a court case that he never checks the accuracy of his prior
predictions. In addition, Dr. Cassidy has an incentive to provide
life expectancy rates quickly and with short life expectancies
because he purportedly receives $500 for every policy bought by
Life Partners clients. This amount is on top of the $15,000 monthly
retainer the Company pays Dr. Cassidy. For this part-time work, Dr.
Cassidy has made more than $1.3 million since 2002.
The accuracy of Dr. Cassidys life expectancy rate predictions are a
key and material factor to the Companys business. An analysis of
Dr. Cassidys life expectancy calculations, however, indicates that
he regularly provides Life Partners with estimates that are
significantly and consistently too short. In fact, The Wall Street
Journal compared the life expectancy rates of twenty individuals as
projected by Life Partners (i.e., Dr. Cassidy) against independent
firms specializing in such estimates. The comparison found the
independent firms life expectancy estimates were greater by 50% to
100%. For instance, in 2002, Life Partners brokered investments in
297 life policies. According to The Wall Street Journal, actuaries
say if life-expectancy calculations on a sample of people are done
well, then half should die by their projected dates. However, Life
Partners life expectancy estimates were too short 95% of the
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time in 2002. This was hardly an isolated episode as policies
brokered after 2002 also showed similar patterns. Indeed, Defendant
Pardo has even explicitly admitted that many of Life Partners life
expectancy rates are probably wrong.
Experts have also recently expressed serious doubts about Dr.
Cassidy's ability to complete such a high volume of life expectancy
reports over such a short period of time. For example, Anna Hart,
an underwriter with ARHart Consulting, reportedly stated "It's one
every nine minutes .... It takes me an hour to an hour and a half
to look at every [medical record]. I don't see how it's possible."
The Director Defendants, however, forced the Company to rely on
unrealistic projections provided by Dr. Cassidy. Thus, by
presenting investors with shorter life expectancies based solely on
Dr. Cassidy's specious calculations, the Director Defendants
successfully peddled life settlements to more investors at higher
rates while steadily increasing the revenue flowing into the
Company.
Based on the direct result of the questionable use of the Companys
expectancy estimates, Life partners is the subject of two Wells
Notices and likely enforcement action by the SEC, multiple class
actions by investors and policyholders, and is now reexamining its
revenue recognition policies.
D. The Boards Approval of the False and Misleading Statements to
Investors
Under the Companys Code of Ethics For Directors And Executive
Officers (the Code), which has been in effect since May 28, 2004,
the Director Defendants are required to [p]rovide full, fair,
accurate, timely, and understandable disclosure in the Companys
public communications, including reports and documents that the
Company files with, or submits to, the SEC. Moreover, the Code
requires the Directors Defendants to [c]omply with applicable
governmental laws, rules, and regulations.
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51. In addition, under the Audit Committees Charter, the Board is
required to: Regulatory Compliance:
Cause to be maintained an appropriate regulatory compliance program
covering the Company and its subsidiaries to aid compliance with
the laws and regulations applicable to viatical and senior life
settlement companies.
Review reports of the compliance officer covering the scope and
adequacy of the compliance program, the degree of compliance and
cooperation, and the implementation of corrective actions (if
necessary or appropriate).
Internal Controls and Procedures:
Review periodically the scope and implications of the Companys
internal financial controls and procedures and consider their
adequacy.
52. The Director Defendants breached their fiduciary duties of
care, good faith, and
loyalty owed to Life Partners by failing to insure that the
Companys public statements fairly presented, in all material
respects, the Companys operations and financial condition,
including accurate information regarding Life Partners life
expectancy rates. In order to adequately carry out these duties, it
is necessary for the Director Defendants to know and understand the
material, non-public information to be either disclosed or omitted
from the Companys public statements.
53. The Director Defendants had ample opportunity to discuss the
Companys life expectancy rates with management and fellow directors
at Board meetings. Despite these duties, the Director Defendants
recklessly, and/or intentionally caused by their actions or
inactions, the following improper statements, including financial
statements, to be disseminated by Life Partners to the investing
public and the Companys shareholders.
54. On May 29, 2007, the Company issued a press release announcing
financial
results for fiscal year ended February 28, 2007. Therein, the
Company, in relevant part, stated:
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Life Partners Holdings, Inc. (NASDAQ GM: LPHI), parent company of
Life Partners, Inc., today announced a 218% increase in net income
for its 2007 fiscal year ended February 28, 2007. The Company
reported net income of approximately $3.6 million or $0.39 per
share compared to $1.14 million or $0.12 per share reported for its
2006 fiscal year. Life Partners also reported a 48% increase in
revenues for the 2007 fiscal year while total business volume, as
measured in policy face values transacted, increased by 73% over
last year to $151 million.
Income from operations for fiscal 2007 increased by almost 150% to
$4.8 million or 16% of revenues, compared to $1.9 million or 9.5%
of revenues last year. Life Partners reported 2007 pre-tax income
of $4.7 million compared to pre-tax income of $2 million for
2006.
Life Partners Chief Executive officer, Brian Pardo, stated, As we
previously reported, we are exceptionally pleased with these
results and the growth in our revenues and net income. These
results demonstrate our ability to dramatically grow the company
within the fastest growing sector of the financial services
industry. We are confident we will produce equally impressive
growth results for the first quarter of the current fiscal year and
were expecting great things during the remainder of this fiscal
year.
On May 29, 2007, Life Partners filed its Annual Report on Form
10-KSB with the SEC for the 2006 fiscal year. The Companys Form
10-KSB was signed by defendant Pardo and Nina Piper (Piper), Life
Partners Chief Financial Officer from 2002 until approximately
October 2007, and reaffirmed the Companys financial results also
announced on May 29, 2007. The Companys Form 10-KSB also contained
Sarbanes-Oxley required certifications, signed by defendant Pardo
and Piper.
The Companys Form 10-KSB, in relevant part, also stated:
While in the past most insureds have had a life expectancy of 60
months or less, we have expanded this market to include insureds
with life expectancies of up to 10 years or more depending on the
purchasing parameters of each client. As we identify and qualify
policies fitting generally within the purchasing parameters of our
clients, we distribute insurance and current medical status
information on these policies (with the insureds name and other
identifying information redacted) throughout our financial planner
network.
* * *
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The remainder of the market is divided among other competitors,
none of which is believed to have more than 10% of the market.
Unlike some of our competitors, which have more restrictive
purchasing parameters or a single provider of investment capital,
we have developed markets for all types of life expectancies in
order to accommodate the investment goals of our clients as well as
the individual circumstances of the policies presented to us. We
believe this diversified capital business model makes us more
competitive in the market and provides us with greater flexibility.
We also believe that this model provides a stronger platform for
our sustainable growth as a company. Markets are segmented by
length of life expectancy and policy face value. The amount of
competition in these markets varies according to the demand for
such policies.
* * *
Our Purchasers Depend on Our Ability to Predict Life Expectancies
and Set Appropriate Price; If Our Investment Returns Are Not
Competitive We May Lose Purchasers; We Must Purchase In Large
Numbers
A purchasers investment return from a life settlement depends on
three factors: the policy face amount, the settlement purchase
price and the demise of the insured. We price settlements based on
the policy face amount and the anticipated life expectancy of an
insured. For viatical settlements, life expectancies are estimated
based on a medical analysis of the insured. For life settlements,
life expectancies are estimated from medical and actuarial data
based on the historical experiences of similarly situated persons.
The data is necessarily based on averages involving mortality and
morbidity statistics. The outcome of a single settlement may vary
significantly from the statistical average. It is impossible to
predict any one insureds life expectancy exactly. To mitigate the
risk that an insured will outlive his or her predicted life
expectancy, we price life settlements to yield competitive returns
even if this life expectancy prediction is exceeded. In addition,
life settlement purchasers must be able to bear a non-liquid
investment for an indeterminate period of time.
If we underestimate the average life expectancies and price our
transactions too high, our purchasers will not realize the returns
they seek, demand may fall, and purchasers may invest their funds
elsewhere. In addition, amounts escrowed for premiums may be
insufficient to keep the policy in force and it is the
responsibility of the purchasers to pay these additional premiums.
If we overestimate the average life expectancies, the settlement
prices we offer will fall below market levels, supply will
decrease, and sellers may engage in business with our competitors
or pursue other alternatives. Our ability to accurately predict
life expectancies and price accordingly is affected by a number of
factors, including:
25
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27. our ability to anticipate and adjust for trends, such as
advances in medical treatments, that affect life expectancy data;
and 28. our ability to balance competing interests when pricing
settlements, such as the amounts paid to life settlors, the
acquisition costs paid by purchasers, and the compensation paid to
ourselves and our referral networks. To foster the integrity of our
pricing systems, we use both in-house and outside experts,
including medical doctors and published actuarial data. We cannot
assure you that, despite our experience in settlement pricing, we
will not err by underestimating or overestimating average life
expectancies or miscalculating reserve amounts for future premiums.
If we do so, we could lose purchasers or policy sellers, and those
losses could have a material adverse effect on our business,
financial condition, and results of operations.
(Emphasis added).
57. On June 14, 2007, the Company issuing a press release
announcing financial
results for its first quarter ended May 31, 2007. Therein, the
Company, in relevant part, stated:
Life Partners Holdings, Inc. (NASDAQ GM: LPHI), parent company of
Life Partners, Inc., today announced net income of $4.7 million, or
$0.49 per share for its first quarter ended May 31, 2007, compared
to $0.5 million, or $0.05 per share, for first quarter of 2006.
Life Partners also announced first quarter revenues of
approximately $17.6 million compared to revenues of $6.2 million
during the first quarter of last year. Total business volume for
the first quarter, as measured in policy face values transacted
increased by 180% from $28.7 million last year to $80.3 million
this year. Earnings for the first quarter continued an
exceptionally strong trend for the third quarter in a row. Life
Partners attributed increased revenues generally to increasing
interest in the life settlement market while the increase in net
income resulted from the steady trend toward closing fewer policies
with higher face values.
* * *
Brian Pardo, Chief Executive Officer, said, As these results
clearly demonstrate, we believe our outstanding performance this
quarter is a direct result of the continuing growth in the life
settlement market coupled with our unique ability to provide
excellent service within a very reasonable cost structure. Our
proprietary software and processes benefit not only our clients and
shareholders, but the
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thousands of wealthy seniors that are realizing the financial
option we provide by turning their unwanted life insurance into
cash. This increasing market awareness has made the life settlement
market one of the fastest growing segments of the financial
services sector and our expertise and operational efficiency has
made Life Partners one of the fastest growing companies within that
sector.
On July 16, 2007, Life Partners filed its Quarterly Report on Form
10-QSB with the SEC for the 2007 fiscal first quarter. The Companys
Form 10-QSB was signed by defendant Pardo and reaffirmed the
Companys financial results previously announced on June 14, 2007.
The Companys Form 10-QSB also contained Sarbanes-Oxley required
certifications, signed by defendant Pardo and Piper.
On September 26, 2007, the Company issued a press release
announcing its financial results for the second quarter ended
August 31, 2007. Therein, the Company, in relevant part,
stated:
Life Partners Holdings, Inc. (NASDAQ OM: LPHI), parent company of
Life Partners, Inc., today announced net income of $4.3 million, or
$0.46 per share for its second fiscal quarter compared to $0.22
million, or $0.02 per share, for its second quarter last year. Net
income for the first half of the current fiscal year was $9.1
million, or $0.95 per share compared with net income of $0.7
million or $.07 per share for the first six months of last
year.
The Company also announced revenues of $17.6 million for the second
quarter ended August 31, 2007 and $35.2 million for the six months
ended August 31, 2007 compared to revenues of $6.6 million during
the second quarter of the prior year and $13 million for the first
six months of the prior year.
Life Partners attributed its increased revenues to the Companys
steady trend toward closing policies with higher face values and
the increase in both demand for and supply of qualified life
settlement policies, which tracks the continued growth in the life
settlement market generally.
* * *
Brian Pardo, Chief Executive Officer, said, Looking at our
year-on-year performance to date, our financial results clearly
show incredible growth in the life settlement market as well as our
unique ability to provide excellent service within this market at a
very reasonable cost structure.
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As the only publicly traded life settlement provider, our
transparency is very attractive to institutional clients, including
our recently announced relationship with West LB, one of Germanys
leading financial service providers with over $300 Billion in
assets, as well as to our individual accredited investor clients.
The investment we have made in proprietary software and process
development enables us to meet the growing demand in both our
retail (accredited investor) market and our developing
institutional market.
With continuing growth in revenues and earnings from both our
retail market and our rapidly rising institutional market, we
expect a substantial increase in both revenues and earnings during
the second half and for our current fiscal year in general.
We are proud to bring value to thousands of wealthy seniors by
turning their unwanted life insurance into cash they never realized
was available. It is Life Partners expertise and operational
efficiency that has made us very attractive for sophisticated
investors in this rapidly evolving market.
On October 15, 2007, Life Partners filed its Quarterly Report on
Form 10-QSB with the SEC for the 2007 fiscal second quarter. The
Companys Form 10-QSB was signed by defendant Pardo and Piper, and
reaffirmed the Companys financial results previously announced on
September 26, 2007. The Companys Form 10-QSB also contained
Sarbanes-Oxley required certifications, signed by defendant Pardo
and Piper.
On January 14, 2008, the Company issued a press release announcing
financial results for its third quarter ended November 30, 2007.
Therein, the Company, in relevant part, stated:
Life Partners Holdings, Inc. (Nasdaq: LPHI) today announced a 515%
increase in net income of $5,215,695 or $0.44 per share for the
three months ended November 30, 2007, compared to $847,606 or $0.07
per share reported for the same period last year. Revenues
increased by 164% over the same period last year while total
business volume, as measured in policy face values transacted,
increased by 257% over last year to just over $35 million. For the
nine months ended November 30, 2006, the company reported an 826%
increase in net income of $14,280,752 or $1.19 per share compared
to $1,542,341 or $0.13 per share during the period last year.
28
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Brian Pardo, Chief Executive Officer, said, This has been our
strongest quarter ever and we are very pleased with the continuing
and substantial growth in revenues and net income. Because we serve
investors in the alternative investment market and our business
plan does not rely on debt, we expect Life Partners to remain
insulated from the current credit trouble of other financial
service companies and we believe that investors will find our
company to be one of the few bright spots within the financial
sector.
On January 14, 2008, Life Partners filed its Quarterly Report on
Form 10-QSB with the SEC for the 2007 third fiscal quarter. The
Companys Form 10-QSB was signed by defendant Pardo and reaffirmed
the Companys financial results announced that day. The Companys
Form 10-QSB also contained a Sarbanes-Oxley required certification,
signed by defendant Pardo.
On March 26, 2008, the Company issued a press release where the
Company, in relevant part, stated:
Life Partners Holdings, Inc. (NASDAQ GM: LPHI), parent company of
Life Partners, Inc., today announced it will hold a conference call
to discuss its preliminary operating results for its fiscal year
ended February 29, 2008. The company expects to report a 143%
increase in revenues and a 431% increase in net income for its 2008
fiscal year over the same period of the prior year. For the fiscal
year, Life Partners expects to report revenues of $72.5 million
compared to $29.8 million for its 2007 fiscal year. Net income for
the current fiscal year was $19.1 million, or $1.59 per share
compared with net income of $3.6 million or $0.31 per split
adjusted share during the previous year.
On the same day, the Company held a conference call with analysts
to discuss its preliminary financial results for the 2007 fiscal
year financial results announced earlier that same day. During the
conference, defendant Pardo stated:
But the key is that life settlement as a product are not correlated
to any other event, whether its geo-political, oil, or market
related, interest related, whatever. Its only relates to the
mortality on the lives we underwrite, and as such. Two things as
such, were growing very rapidly as investors are seeing these
attributes, and are not are not coming out of other investment
stocks, bonds whatever, that are related. And putting their money
into the life settlement which produced a very good and actually
high rate of return without those risks and in fact without much
risk at all.
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* * *
Well, its [bad economic news] good for Life Partners because we are
not correlated to any other industry or any other product out
there, and weve kind of been the baby thrown out with the bath
water here, when it related to our stock price. We are not affected
by any turn down in the market. We are not affected by the
liquidity of the market. We are not affected by interest rates -
down, up, sideways. We are not affected by oil. We are not affected
by whether we are going to go to war with Iran, or any other - or
anybody else for that matter. Our business is uniquely driven on
the profitability, based upon our ability to adequately underwrite
the lives of the policies that we buy, and I think weve
demonstrated that we do that pretty well. And therefore, we, our
business is growing, in terms of our primary business, which is
supplying those policies as investments to our client base. And we
expect that to continue, and is not affected by anything
else.
On May 15, 2008, Life Partners filed its Annual Report on Form 10-K
with the SEC for the 2007 fiscal year. The Companys Form 10-K was
signed by defendant Pardo and Martin and reaffirmed the Companys
financial results previously announced on March 26, 2008. The
Companys Form 10-K also contained Sarbanes-Oxley required
certifications, signed by defendant Pardo and Martin.
The Companys Form 10-K filed with the SEC on May 15, 2008, in
relevant part, also stated:
While in the past most insureds have had a life expectancy of 60
months or less, we have expanded this market to include insureds
with life expectancies of up to 10 years or more depending on the
purchasing parameters of each client. As we identify and qualify
policies fitting generally within the purchasing parameters of our
clients, we distribute insurance and current medical status
information on these policies (with the insureds name and other
identifying information redacted) throughout our financial planner
network.
* * *
Unlike some of our competitors, which may have more restrictive
purchasing parameters or a single provider of investment capital,
we have developed markets for all types of life expectancies in
order to accommodate the investment goals of our clients as well as
the individual circumstances of the policies presented to us. We
believe this diversified capital business model makes us more
competitive in the market and provides us with greater flexibility.
We also believe that this
30
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74
model provides a stronger platform for our sustainable growth as a
company. Markets are segmented by length of life expectancy and
policy face value. The amount of competition in these markets
varies according to the demand for such policies.
* * *
Our Purchasers Depend on Our Ability to Predict Life Expectancies
and Set Appropriate Price; If Our Investment Returns Are Not
Competitive We May Lose Purchasers; We Must Purchase In Large
Numbers
A purchasers investment return from a life settlement depends on
three factors: the policy face amount, the settlement purchase
price and the demise of the insured. We price settlements based on
the policy face amount and the anticipated life expectancy of an
insured. For viatical settlements, life expectancies are estimated
based on a medical analysis of the insured. For life settlements,
life expectancies are estimated from medical and actuarial data
based on the historical experiences of similarly situated persons.
The data is necessarily based on averages involving mortality and
morbidity statistics. The outcome of a single settlement may vary
significantly from the statistical average. It is impossible to
predict anyone insureds life expectancy exactly. To mitigate the
risk that an insured will outlive his or her predicted life
expectancy, we price life settlements to yield competitive returns
even if this life expectancy prediction is exceeded. In addition,
life settlement purchasers must be able to bear a non-liquid
investment for an indeterminate period of time.
If we underestimate the average life expectancies and price our
transactions too high, our purchasers will not realize the returns
they seek, demand may fall, and purchasers may invest their funds
elsewhere. In addition, amounts escrowed for premiums may be
insufficient to keep the policy in force and it is the
responsibility of the purchasers to pay these additional premiums.
If we overestimate the average life expectancies, the settlement
prices we offer will fall below market levels, supply will
decrease, and sellers may engage in business with our competitors
or pursue other alternatives. Our ability to accurately predict
life expectancies and price accordingly is affected by a number of
factors, including:
34. our ability to anticipate and adjust for trends, such as
advances in medical treatments, that affect life expectancy data;
and 31
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our ability to balance competing interests when pricing
settlements, such as the amounts paid to life settlors, the
acquisition costs paid by purchasers, and the compensation paid to
ourselves and our referral networks.
To foster the integrity of our pricing systems, we use both
in-house and outside experts, including medical doctors and
published actuarial data. We cannot assure you that, despite our
experience in settlement pricing, we will not err by
underestimating or overestimating average life expectancies or
miscalculating reserve amounts for future premiums. If we do so, we
could lose purchasers or policy sellers, and those losses could
have a material adverse effect on our business, financial
condition, and results of operations.
(Emphasis added).
On June 16, 2008, the Company issued a press release announcing
financial results for its first quarter ended May 31, 2008.
Therein, the Company, in relevant part, stated:
Life Partners Holdings, Inc. (NASDAQ GM: LPHI), parent company of
Life Partners, Inc., today predicted record earnings as it issued
guidance for its first fiscal quarter ended May 31, 2008. Life
Partners expects to report first quarter earnings of approximately
$0.52 per share compared with earnings of $0.40 per share last
year. Results for the quarter are expected to show a 33% increase
in earnings over the same period last year and a 40% increase over
the immediately preceding quarter. All earnings per share
calculations are adjusted to account for the 5-for-4 stock split in
September 2007.
For its first quarter ended May 31, 2008, Life Partners expects to
report over $24 million in revenues, a 39% increase over the $17.6
million it reported for the first quarter of last year.
On July 9, 2008, Life Partners filed its Quarterly Report on Form
10-Q with the SEC for the 2008 fiscal first quarter. The Companys
Form 10-Q was signed by defendant Pardo and Martin, and reaffirmed
the Companys financial results previously announced on June 16,
2008. The Companys Form 10-Q also contained Sarbanes-Oxley required
certifications, signed by defendant Pardo and Martin.
On July 14, 2008, the Company held a conference call with analysts
to discuss the Companys 2008 fiscal first quarter results announced
on June 16, 2008. Therein, defendant Pardo, in relevant part,
stated:
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Well, Life Partners, first of all designed and is marketing a
product that is non-correlated. And so its an alternative
investment. Its safe and throws off a better than average return.
So, we have value and service to a large client base, and more and
more and especially now, theyre recognizing that there is extreme
safety in the investments that are acquired by us for our client
base, and which are life settlements. But let me hasten to say life
settlements which are properly and carefully underwritten and meet
a very carefully thought out, and long, long-term period of
underwriting standards that allows us to keep the purity of the
product as, I guess, I should say as it is. As for the numbers
themselves, I think that we should probably go there.
(Emphasis added).
On September 18, 2008, the Company issued a press release
announcing financial results for its second quarter ended August
31, 2008. Therein, the Company, in relevant part, stated:
Life Partners Holdings, Inc. (NASDAQ GM: LPHI), parent company of
Life Partners, Inc., today announced another quarter of record
earnings as it issued guidance for its second fiscal quarter and
first half ended August 31, 2008. For the quarter, Life Partners
expects to report a 56% increase in net earnings, which were $6.6
million or $0.56 per share compared with earnings of $4.3 million
or $0.36 per share for the same period of last year. For the six
months ended August 31, 2008, the company expects to report
earnings of $12.9 million or $1.08 per share compared with $9.1
million or $0.76 per share for the same period last year.
For the quarter ended August 31, 2008, Life Partners expects to
report $25.9 million in revenues, a 47% increase over the $17.6
million it reported for the same period last year. For the first
half of the year ended August 31, 2008, the company expects to
report revenues of $50.4 million, which is a 43% increase compared
to $35.2 million for the same period last year.
On October 10, 2008, Life Partners filed its Quarterly Report on
Form 10-Q with the SEC for the 2008 fiscal second quarter. The
Companys Form 10-Q was signed by defendant Pardo and Martin, and
reaffirmed the Companys financial results previously announced on
September 18, 2008. The Companys Form l0-Q also contained
Sarbanes-Oxley required certifications, signed by defendant Pardo
and Martin.
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72. On October 17, 2008, Life Partners held a conference call with
analysts to discuss the Companys 2008 fiscal second quarter results
announced on September 18,2008. Therein, defendant Pardo, in
relevant part, stated:
Well, right now, I can only say that the future looks very
positive. More and more people, of course now, particularly in view
of the difficulties in the marketplace, are realizing that life
settlements are - properly underwritten and properly analyzed, are
in fact a very powerful instrument to not only make an
above-average return on your investment, but also an above-average
return with a very high level of confidence and safety on the
capital invested.
* * *
[John Nobile - Analyst]
Hi, good morning, and once again, congratulations on pretty
impressive results. I wanted to get to the topic of, I guess youre
aware, the 21st Services had lengthened life expectancies. Im
curious to see your opinion on how this would affect Life Partners?
I know that National Financial Partners recently said it would
negatively impact the pricing of Life Settlements.
[Defendant Pardo]
Well, let me ask Scott to address that, but first, let me say that
we do not agree with that statement at all. If youre - unless youve
locked your funding, youre underwriting into that one company, but
I dont know anybody that would be that foolish. But if they would,
then, of course, it could be detrimental. What do you think
Scott?
[Defendant Peden]
Yes, I think the issue the 21st has had more to do with other
companies. I dont see it effecting Life Partners at all. In fact, I
think that it probably will help us, because in instances where
there were other companies that were locked in, sometimes it could
sort of skew the market. And so I think that it is overall good for
the general market and allows us to be even more competitive as far
as that goes, because you want to make sure that every life
expectancy underwriter has their own methodology and that sort of
thing. And ultimately, what we use more than the life expectancy is
the discount. Thats how were able to return the kinds of returns to
our clients that they expect. Its not so much the precision of the
life expectancy as it is the discount at which we purchase.
* * *
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[David Foster - Analyst]
Hello. Nice job on the quarter. I just had another sort of
accounting question. I was looking at your premium advances for the
quarter which were up a bit, and I read that in the Q that said
that the settlements most of which were made before 1990 allegedly
lacked sufficient disclosure about the purchasers obligation to pay
premiums in order to maintain the acquired policy. So these are
older policies that you guys are having to make the advances on?
And I was just curious. If a policy has been outstanding for more
than 10 years, what kind of return does that suggest to the
investor?
[Defendant Peden]
Obviously, now, the kinds of policies we are talking about in that
time frame are completely different from the kind of policies that
we are doing right now. Life settlements typically are on an
individual who as Mr. Pardo said earlier is between 78 and 80 to
years old. The average face value right now is about $3.8 million
or so.
[Defendant Pardo]
Yes. But it would still be -- excuse me for interrupting, Scott. It
would still be -- the way those are underwritten -- would be 4 or
5% return. And so thats about what were looking at, and we will --
with regard to that, you know, as we carry it on our balance sheet
under other items, we dont actually put it on our balance
sheet.
[David Foster - Analyst]
Right. Its fully reserved against. I see that.
* * *
[Defendant Pardo]
Thats right but we do get that money back. And so its kind of like
Christmas, when we get it paid back. It is merely an issue that had
to do with the policies that were did have longer life
expectancies.
And we thought like there was -- a disclosure was adequate, but the
Attorney General felt like it wasnt. And so rather than argue about
it because we are going to get the money back anyway, we said,
Okay, we will advance it. And its paid and we will get the money
paid back. Basically its not really at this point a material issue
anymore for the Company.
[R. Scott Peden - General Counsel of Life Partners]
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So because of the discount on there, certainly the returns are
still positive even with (multiple speakers). Very positive,
yes.
[David Foster - Analyst]
You are saying 4 to 5%. What is a kind of -- what kind of return
are you suggesting or indicating to potential investors these days?
What should they expect?
[Defendant Pardo]
We like to tell our clients to be looking for a low double-digit
return.
[David Foster - Analyst]
Okay. 11, 12%? That kind of return?
[Defendant Pardo]
Yes. And I think if they are expecting that, they will not be
disappointed. [Defendant Peden]
The other aspect of it is it is completely not correlated and
especially in todays market. Thats almost more valuable than the
return.
[David Foster - Analyst] Right.
[Defendant Pardo]
Yes. And -- but, anyway, we want our marketing people to be very
conservative in how they state returns. And we have not had any
since 19 -- since 2000, especially just to give -- just to pick a
date out of the (inaudible). We got little or no complaints
concerning returns.
* * *
[Unidentified Analyst]
Okay. And just the question I asked earlier, I just wanted to get
back to that. Obviously you didnt agree with, I guess it was
National Financials statement about the lengthening of life
expectancies. I know, I looked in the K, it says you used both
in-house and outside experts. I was just curious, the outside
experts,
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because I think theres only a handful, which ones in particular if
you could disclose that, you might actually use and what percentage
that is?
[Defendant Pardo]
No. We cant get into that level of detail with how we do business,
because its proprietary. But all were saying, if it was
misunderstood possibly, is that the changes that were implemented
by 21st Services had no affect at all on anything involving
LPHI.
(Emphasis added).
On December 15, 2008, the Company issued a press release announcing
financial results for its third quarter ended November 30, 2008.
Therein, the Company, in relevant part, stated:
Life Partners Holdings, Inc. (NASDAQ GM: LPHI), parent company of
Life Partners, Inc., today announced another quarter of record
earnings as it issued guidance for its third fiscal quarter and
nine months ended November 30, 2008. For the quarter, Life Partners
expects to report a 38% increase in net earnings which were $7.3
million or $0.61 per share compared with earnings of $5.2 million
or $0.44 per share for the same period of last year. For the nine
months ended November 30, 2008, the company expects to report
earnings of $20.1 million or $1.69 per share compared with $14.3
million or $1.19 per share for the same period last year.
For the quarter ended November 30, 2008, Life Partners expects to
report $28.1 million in revenues, a 46% increase over the $19.3
million it reported for the same period last year. For the nine
months ended November 30, 2008, the company expects to report
revenues of $77.3 million, which is a 42% increase compared to
$54.5 million for the same period last year.
Additionally, defendant Pardo was quoted in the press
release:
There is no question that investors are more wary now than they
have been in a generation. Thats why the demand for our services
continues to grow. Investors are looking for asset-based
investments which are not correlated to the financial markets. Life
Partners deals exclusively with assets that have an inherent value
and do not rely on future market performance to realize gains.
During this time of extreme market volatility, our clients
investments in life settlements have remained completely unaffected
and that is the kind of diversification that investors want in
todays market.
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On January 9, 2009, Life Partners filed its Quarterly Report on
Form l0-Q with the SEC for the 2008 fiscal third quarter. The
Companys Form 10-Q was signed by defendant Pardo and Martin, and
reaffirmed the Companys financial results previously announced on
December 15, 2008. The Companys Form 10-Q also contained
Sarbanes-Oxley required certifications, signed by defendant Pardo
and Martin.
On January 13, 2009, the Company held a conference call with
analysts to discuss the Companys 2008 fiscal third quarter results
announced on January 9, 2009. During the conference, defendant
Pardo, in relevant part, stated:
So first of all, when somebody decides they are going to invest
money with us. In other words, to buy a policy. They do not write a
check to Life Partners. They write a check to an independent escrow
agent and an account is set up there. We act as an
instruction-driven agent to pick out. We are kind of the Coldwell
Banker of the insurance world.
And so our job is to find policies, source policies that are
qualified, underwrite them, make sure that they meet the
underwriting and the investment criteria that the clients are
looking for and that we know they are looking for to produce the
kinds of returns that we are wanting, double-digit returns, and in
a reasonable timeframe -- four, five, six years. And so we dont
collect a dime of money. It stays in the escrow account until a
policy or a piece of a policy has been selected and chosen by the
client and the client authorizes us through a written document to
make that buy on their behalf. Then its actually the escrow company
that ends up taking the money, paying the owner of the policy,
paying the fees -- now that is when we get paid only on the event
of the occurrence of the transaction. We dont get paid beforehand
and we dont get paid afterwards. We dont get paid success fees. We
dont get paid percentages of -- if we run over certain boundaries.
We dont get paid anything except what we are paid to do the
transaction.
Notwithstanding the Companys reporting of record revenues, research
analysts raised concerns about the Companys business practices,
especially with respect to the determination of life expectancies
and accounting issues. On February 11, 2009, Citron Research
published an article that called into question Life Partners
business practices,
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specifically those relating to the determination of life
expectancies and the Companys practice of charging egregious fees
on their transactions. The article addressed numerous red flags
concerning the Companys questionable business practices, including
the following:
Red Flag # 2. Are those fees sustainable?
Is this high fee level sustainable? Or in other words, how does
LPHI get away with their egregious fees and still provide higher
than market IRRs to their investors?
In our opinion, they are not. They can only be carving out such
huge fees by concealment:
Failing to disclose their fees transparently to the investors and
settlors
Preventing the transaction from being priced competitively by any
sort of bidding process
and worst, not disclosing the true actuarial life expectancy of the
insured (the largest single factor impacting the ultimate
percentage IRR on the investment)
(http://www.dora.state.co.us/dora-pages/newsreleases/LifePartnersSummaryJudgement.pdf)
While Life Partners may be better than other providers at finding
attractive policies, with 90% of volume (according to their 10-K)
coming from brokers, it appears that they are partnering with
brokers and insurance agents to thwart a competitive bidding
process.
In the above example, assuming the transaction is completed at 35%
of face value ($1.2mm), LPHIs clients are paying $500k of up front
transaction fees, or over 40% of the gross sale price. Note that
LPHI takes its entire fee up front, while the investor will not
find out how the true investment performance for years down the
road.
According to the May 2007 complaint filed by the Colorado
Securities Commissioner against Life Partners alleging violations
of the Colorado Securities Act, Insurance Commissioner alleges that
LPHI:
failed to disclose to investors the method by which life expectancy
was determined; the high frequency rate in which viators outlived
the life expectancies predicted by Life Partners.
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It is further alleged that Life Partners failed to disclose the
original purchase price of the policy and commissions paid to the
sales agents, making it impossible for an investor to determine the
true market value of the policy.
Therefore investors do not know their cost basis or how much of
their investment is being pocketed by LPHI.
The need to conceal the fee structure is so central to LPHIs
operation that even last week LPHIs CEO would not give any
information on his fee structure to a Wall Street Journal writer
who was doing a puff piece on the company.
Life Partners Chief Executive Brian Pardo declined to give
specifics of the fee structure or the size of lump-sum payments,
which vary according to underwriting factors.
* * *
Red Flag #4. Whos minding the store?
Who is minding the store now? LPHIs auditor is a tiny firm with a
really small public company practice. And we mean really small.
(Emphasis in original).
Murrell, Hall, McIntosh has about 16 other publicly traded
clients[.]
* * *
LPHI has a higher market cap than all the auditors 16 other
publicly clients combined! (Emphasis in original).
Citron notes that the auditor fees paid by LPHI to Murrell et al.
in the last three years are really tiny:
In the wake of the accountants role in the Madoff scandal,
investors and regulators clearly need to be mindful of whether the
protection assumed to be provided by independent auditors is
sufficient to provide investor protection within the given context.
Remember that we're considering a $400 million market cap company
here.
Further the independent director in charge of the audit committee
is Tad M. Ballantyne. Mr. Ballantyne has a colorful background with
a variety of pink sheet
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penny stock companies, one of which is a Republic of Mauritius
corporation plus and a bean canning plant in the Midwest.
We're concerned that this lack of oversight leaves LPHI's
receivables and net revenues open to management.
* * *
Conclusion
Just two years ago, LPHI was an OTCBB stock that had never traded
over $10. With its colorful CEO, lack of management oversight, tiny
30-employee operational footprint and string of regulatory
troubles, it falls far short of the standard of accountability and
transparency required of mid-cap Nasdaq companies. From an
actuarial perspective, we'd say the odds are this one is
terminal.
Following the publication of this article, the Companys shares
declined $2.45 per share, or 13.67 percent, to close on February
11, 2009 at $15.48 per share, on unusually heavy trading
volume.
On February 11, 2009, the Company responded to the research report.
In a press release, defendant Pardo stated:
Earlier today, a negative report was issued about Life Partners
which contained inaccurate assumptions, misinformation and
erroneous facts about our company. As a result of the information
in this report, our stock experienced unusual volatility and
trading volume.
We are confident that our business growth will remain strong
throughout the remainder of this fiscal year and beyond. We
vehemently disagree with the conclusions reached by the author of
the report and believe strongly that our business model will
continue to demonstrate the sustainable growth we have exhibited
over the last 18 years.
We urge all shareholders to focus on our exceptionally strong
business fundamentals and welcome the opportunity to address any
issues or legitimate concerns our shareholders may have.
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On May 29, 2009, the Company issued a press release announcing
financial results for its fiscal year and fourth quarter ended
February 28, 2009. Therein, the Company, in relevant part,
stated:
Life Partners Holdings, Inc. (NasdaqGS: LPHI), parent company of
Life Partners, Inc., today released its preliminary earnings for
its fiscal year and fourth quarter ended February 28, 2009. For the
year, Life Partners expects to report a 46% increase in net
earnings of $27.4 million or $1.84 per split-adjusted share
compared to $18.8 million or $1.25 per split-adjusted share for the
previous year. Revenues for the year are expected to be $103.6
million, a 43% increase over the $72.6 million reported for last
year. All figures are adjusted for the 5-for-4 forward stock split
which occurred on February 16, 2009.
For the quarter ended February 28, 2009, the company expects to
report earnings of $7.2 million on revenues of $26.3 million or
$.49 per split-adjusted share compared with $4.5 million on $18.1
million or $.30 per split-adjusted share for the same period last
year.
On May 29, 2009, Life Partners filed its Annual Report on Form 10-K
with the SEC for the 2008 fiscal year. The Companys Form 10-K was
signed by defendant Pardo and Martin and reaffirmed the Companys
financial results announced that day. The Companys Form 10-K also
contained Sarbanes-Oxley required certifications, signed by
defendant Pardo and Martin.
The Companys Form 10-K filed with the SEC on May 29, 2009, in
relevant part, also stated that:
While in the past most insureds have had a life expectancy of 60
months or less, we have expanded this market to incl