WACO, Texas (CN) – The SEC claims that top bosses of Life Partners Holdings made $11.8 million by selling their own stock at prices inflated by the company’s systematic underestimation of life expectancy “to generate revenues.”
The SEC sued Life Partners Holdings and its officers Brian D. Pardo, R. Scott Peden and David M. Martin, in Federal Court. The company trades on the NASDAQ under the ticker symbol LPHI. It brokers life settlements.
It claims Pardo sold $11.5 million of his stock at inflated priced, and Peden sold $300,000 of it.
Pardo, 69, is president and CEO of the company; Peden, 47, its general counsel; and Martin, 53, a CPA, its CFO.
According to the 57-page complaint: “Since 2006, defendants Life Partners Holdings, Inc. (referred to jointly with its wholly owned subsidiary, Life Partners, Inc. as ‘Life Partners’ or the ‘Company’) – through senior officers Brian D. Pardo (‘Pardo’), R. Scott Peden (‘Peden’), and, since 2008, David Martin (‘Martin’) – engaged in a disclosure and accounting fraud that misled the company’s shareholders about the sustainability of Life Partners’ revenues and profit margins, consumer demand for the life settlement investments that the company brokers, and, since at least fiscal year 2007, the company’s net income. Pardo and Peden profited from the fraud by trading on inside information that Life Partners systematically uses life expectancy estimates that the company knows to be materially short in brokering life settlements. Life Partners engaged in this practice to artificially inflate the company’s revenues and profit margins. Pardo and Peden knew the company engaged in this practice, which defendants concealed from shareholders, and took advantage of the non-public information to sell shares of Life Partners common stock at artificially inflated prices.”
The complaint adds: “In a life settlement transaction, a life insurance policy owner sells the policy to a purchaser, and the purchaser becomes an ‘investor’ in the sense that the purchaser receives the death benefit when the policy matures (i.e., the insured dies). The purchaser makes a lump-sum payment in exchange for the policy, and assumes responsibility for paying premiums on the policy until maturity.
“Life Partners derives revenue from the life settlement transactions it brokers by keeping the difference between what investors pay to acquire a policy and what the policy owner receives from the sale. In a typical life settlement transaction, Life Partners identifies a number of investors who purchase fractional interests in a given policy. Included in the purchase price that investors pay are funds sufficient to cover future premium payments necessary to maintain the policy during the insured’s estimated life expectancy, which funds Life Partners places in escrow. Life Partners captures as revenue the difference between the purchase and sale prices, minus the escrowed funds and certain transaction costs. If the insured under the policy outlives he life expectancy estimate that Life Partners assigns to the policy, investors have a continuing obligation to pay premiums after the escrowed funds are depleted. Otherwise, the policy would lapse, and investors would lose their entire investment.”
The SEC seeks penalties and injunctions and repayment of the profits from stock sales and bonuses.