Embattled Insurer Dealt Blow by Texas High Court

     AUSTIN (CN) – The Texas Supreme Court bolstered lawsuits by the state and a group of investors against Life Partners by ruling life settlements are securities subject to the Texas Securities Act and not mere life insurance contracts.
     The unanimous ruling May 8 two appeals court rulings that fractional interests in life insurance policies are investment contracts.
     A panel with the 3rd District Court of Appeals in Austin in 2014 affirmed an earlier ruling by the 5th District Court of Appeals in Dallas that the life settlements do not qualify for an exception for insurance policies.
     A putative class of investors sued the company in Dallas County Court in 2011 for securities fraud, while Texas filed a separate lawsuit in Travis County Court.
     Writing for the Texas Supreme Court, Justice Jeffrey S. Boyd adopted the U.S.
     Supreme Court’s definition of an investment contract, which requires a person to expect profits “solely from the efforts” of a promoter or third party.
     “We hold that the agreements at issue are investment contracts because they constitute transactions through which a person pays money to participate in a common enterprise with the expectation of receiving profits, under circumstances in which the failure or success of the enterprise and the person’s realization of the expected profits is at least predominately due to the entrepreneurial or managerial efforts of others,” the 40-page opinion stated.
     Life Partners argued their agreements are not securities because the failure or success of the investment does not rely on the company’s efforts. The high court disagreed, stating an investor’s realization of expected profits “is at least predominately due to the entrepreneurial or managerial, rather than merely ministerial or clerical, efforts of others.”
     The opinion noted Life Partners identifies insureds to buy policies from by predicting their remaining lifespan; the life settlement purchaser only fails to profit if the insured dies beyond Life Partners’ prediction.
     Boyd was not persuaded by Life Partners’ argument that the TSA’s protections are unnecessary when the “entrepreneurial or managerial efforts” happen before the transaction and their value is included in the purchase price.
     “We reject the argument that only post-purchase conduct should determine whether these pre-purchase protections apply,” the opinion stated. “We agree that the Act’s disclosure requirements provide protection if the purchaser relies predominately on the entrepreneurial or managerial efforts of others to receive the anticipated profit, rather than on market forces or on the purchaser’s own efforts, even if those efforts occur before the sale.”
     Based in Waco, Life Partners said it engaged in 162,000 transactions in connection with the purchase of 6,500 policies worth $3.2 billion in face value. It did not immediately respond to a request for comment Tuesday.
     Its parent company, Life Partners Holdings, filed for bankruptcy protection in January after the SEC was awarded $46 million from the company. The agency sued in Austin Federal Court in January 2012, claiming certain officers made
     $11.8 million by selling their stock at prices inflated by the company’s systematic underestimation of life expectancy “to generate revenues.”
     A federal jury cleared the company and its officers on fraud and insider trading allegations in February 2014, but concluded it had misstated its books, records and revenue recognition policy.
     Texas State Securities Board spokesman Robert Elder said Friday the board was “pleased” with the court’s ruling that “clarifies and affirms the scope” of the TSA.

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