The Securities and Exchange Commission (SEC) has charged Life Partners Holdings, a publicly traded, Texas based financial services firm, and three of its senior executives: Chairman and CEO – Brian Pardo, President and General Counsel – Scott Peden, and its CFO – David Martin with disclosure and accounting fraud.
Life Partners buys and sells interests in life insurance policies on the secondary market. In these deals, life insurance owners sell their policies to investors in exchange for a smaller lump-sum payment.
A life settlement is a financial transaction in which the owner of a life insurance policy sells an unneeded policy to a third party for more than its cash value and less than its face value. A life settlement is an alternative to the surrender or lapse of a policy, or when the owner of a life insurance policy no longer needs or wants the policy, the policy is underperforming or can no longer afford to pay the premiums.
The SEC alleges that Life Partners executives misled shareholders by failing to disclose a significant risk to Life Partners’ business. The company was underestimating the life expectancy rate used to price its transactions. This estimate is an important and critical factor used to calculate the company’s revenue and profit margins. Additionally, the accounting method used by Life Partners, overvalued the company’s assets creating the appearance of a steady stream of earnings from brokering the life settlement transactions. As a result, the SEC says, Life Partners materially misstated net income from fiscal year 2007 through the third quarter of fiscal year 2011.
“Life Partners duped its shareholders by employing an unqualified medical doctor to assign baseless life-expectancy estimates to the underlying insurance policies,” said Robert Khuzami, head of the SEC’s enforcement division. “This deception misled shareholders into thinking that the company’s revenue model was sustainable when in fact it was illusory.”
Additionally, the SEC charged Pardo and Peden with insider trading, for allegedly selling shares of the company while having knowledge and in possession of material, non-public information showing that Life Partners, Inc. underestimated life expectancy estimates. During this period of time, Pardo and Peden sold about $11.5 million and $300,000, respectively, of Life Partners stock at inflated prices, while knowing the revenue estimates were not accurate.