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February 15, 2012updated 13 Apr 2017 8:46am

SEC lays fraud charges against Life Partners

Dropping a bombshell on the US life settlements industry, the Securities and Exchange Commission (SEC) has charged Life Partners Holdings and three of its senior executives with involvement in a fraudulent disclosure and accounting scheme involving life settlements. Since its founding in 1991 it has completed more than 137,000 transactions for a client base of more than 28,000 individuals and institutions involving the purchase of 6,400 policies with a total face value of $3bn

By LII editorial

Dropping a bombshell on the US life settlements industry, the Securities and Exchange Commission (SEC) has charged Life Partners Holdings and three of its senior executives with involvement in a fraudulent disclosure and accounting scheme involving life settlements.

According to Texas-based Life Partners, it is one of the oldest and largest life settlements specialists in the US. Since its founding in 1991 it has completed more than 137,000 transactions for a client base of more than 28,000 individuals and institutions involving the purchase of 6,400 policies with a total face value of $3bn. The company is listed on the Nasdaq stock exchange.

In its complaint before a US District Court in Texas, 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 SEC added: “The company was systematically and materially underestimating the life expectancy estimates it used to price transactions.”

Underestimating life expectancies resulted in the assets held on Life Partners’ books being inflated, alleged the SEC. This, noted the regulator, created the appearance of a steady stream of earnings from brokering life settlement transactions.

“Life Partners duped its shareholders by employing an unqualified medical doctor to assign baseless life expectancy estimates to the underlying insurance policies,” commented Robert Khuzami, director of the SEC’s Division of Enforcement in a statement. “This deception misled shareholders into thinking that the company’s revenue model was sustainable when in fact it was illusory.”

The SEC alleged that Life Partners “materially misstated” its net income from its 2007 financial year through to the third quarter of its 2011 financial year. The SEC has also laid an additional charge against Pardo and Peden under which it alleged that they engaged in insider trading in Life Partners shares.

Commenting on this aspect of the complaint, David Woodcock, director of the SEC’s Fort Worth regional office, said: “The senior-most executives at Life Partners concealed significant risks to the business, manipulated financial statements with improper accounting, and knowingly profited from their misconduct by executing insider trades based on information that was not available to the public.”

Responding to the SEC’s allegations, Pardo said in a statement: “It is very disappointing that the SEC has chosen to pursue litigation over issues that we believe have no merit and financial presentation issues that we do not believe are material. We have always done our best to deliver value to our shareholders and to run an honest and transparent company. We intend to vigorously defend ourselves against these meritless claims.”

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