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Life Settlements Are Securities, Court Says

AUSTIN (CN) - A Texas appeals court revived the state's securities fraud lawsuit against Life Partners, saying life settlements are investment contracts subject to securities law.

The state sued the Waco-based financial services company in Travis County Court in 2012. Life Holdings trades life insurance policies at a discount on the secondary markets. Texas also sued various companies that allegedly hold Life Partner assets, including Advance Trust & Life Escrow Services LTA, Purchase Escrow Services LLC, Pardo Family Holdings Ltd., Dr. Donald Cassidy and American Stock Transfer & Trust Co.

The trial court denied the state's bid for an injunction, ruling that Texas failed to establish that the transactions involve securities regulated by the Texas Securities Act (TSA).

Last Thursday, a three-judge panel of the state's 3rd District Court of Appeals in Austin reversed the ruling.

Writing for the panel, Justice David Puryear agreed with a Dallas appeals court's recent ruling that life settlements are securities and not merely life insurance contracts.

"After summarizing relevant case law, the [Dallas] court determined that the products offered by Life Partners are 'investment contracts' and, therefore, 'meet the definition of "security,"'" Puryear wrote.

Life Partners had insisted that the contracts are not regulated by the TSA, because the securities law carves out an exception for insurance policies - or contracts based on policies - issued by an insurer supervised by the Board of Insurance Commissioners.

The court in Austin agreed with the Dallas court that the exemption does not apply, because Life Partners is not subject to the board.

"We agree with the conclusions reached by the Dallas court and fully incorporate its analysis," Puryear wrote.

The ruling comes on the heels of a mixed jury verdict over the Securities and Exchange Commission's federal lawsuit against Life Holdings. In its 2012 lawsuit in Waco, the agency said company officers made $11.8 million by selling their own stock at prices inflated by underestimating life expectancies and not disclosing that to the public.

A federal jury last Tuesday cleared Life Partners and its officers on fraud and insider trading allegations, but found that the company had misstated its books, records and revenue recognition policy.

Brian Pardo, Life Partners' chief executive officer, said he was "extremely pleased" with his company's exoneration.

"As we demonstrated to the jury, life settlements as transacted through Life Partners provide a valuable service to senior Americans who want to sell their unwanted life insurance policies and are a tremendous alternative asset class for accredited investors seeking to avoid the volatility of the stock market," Pardo said in a written statement. "We provide a win-win transaction for everyone involved and, when put to the test, the jury could see the SEC's allegations were not true."

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