Trustee Wants to Use Assets for Victims

     FORT WORTH (CN) – A bankruptcy trustee claims in court that Life Partners Holdings ripped off investors for years by selling fractional interests in life insurance policies.
     A federal bankruptcy judge appointed H. Thomas Moran II trustee in March, two months after Waco-based Life Partners Holdings filed for Chapter 11 protection. The bankruptcy filing came after a $46 million judgment in favor of the Securities and Exchange Commission.
     The SEC sued the company in 2012 in Austin, claiming certain officers made $11.8 million by selling stock at prices inflated by the company’s systematic underestimation of life expectancy “ to generate revenues.”
     The judgment stuck against the company and two of its officers despite a federal judge’s ruling that the SEC failed to prove certain fraud allegations at trial.
     “As a result of my investigation to date, I have concluded that Life Partners devised and executed a wide-ranging scheme to defraud its Investors,” Moran said in a 39-page declaration filed May 20. “That fraud, which took place over the course of a number of years, occurred in a number of ways.”
     Moran said the company did so by “artificially shorten[ing] life expectancies” in sales of fractional interests and misrepresenting whether certain policies had lapsed.
     Subsidiary Life Partners Inc. “failed to disclose the lapse, even though the investment itself became worthless at time of the lapse,” the declaration states. “It appears that some lapses may have been caused by LPI’s own negligence in monitoring and maintaining the policies, which was also not disclosed to investors.”
     Moran said the company charged “massive, undisclosed fees and commissions” that sometimes exceeded the policies’ purchase price and used “so-called escrow companies, including one with the word ‘trust'” to cover the scheme.
     He said the company also demanded payment of unnecessary policy premiums that forced investors to abandon contract positions, resulting in their resale for the company’s benefit.
     “In the 12 months ended March 31, 2015, LPI billed Investors over $72 million to cover premiums on policies, and investors have paid over $67 million of that amount,” the declaration states. “The result of the misleadingly short [life expectancies], and the correspondingly high likelihood that premium calls would be required, was that the ultimate cost of the investment was much greater than the Investors could have ever anticipated (and continues to grow). And those investors unable to afford the premium calls were sometimes forced to either abandon their investments or sell out of their investments in distressed circumstances.”
     To stop the company for continuing to bill investors, Moran filed an emergency motion on May 20, seeking approval of a new payment plan. He wants to use the company’s cash on hand immediately and the cash surrender value of LPI-owned policies to continue funding the investments.
     Moran said he has looked into a several alternatives, including third-party financing.
     “At present, however, the trustee has concluded that the best, cheapest, and most practical alternative to ensure continued payment of policy premiums is to utilize the cash surrender value and premium reserves on hand in order to pay such premiums,” the 27-page motion states. “Accordingly, Life Partners should be permitted to use the Subject Property outside the ordinary course of business.”
     The Texas Supreme Court in April bolstered separate lawsuits filed by Life Partners investors and Texas by ruling that fractional interests in life settlements are investment contracts subject to state securities laws. The court 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.
     Life Partners claimed its agreements are not securities because the failure or success of the investment does not rely on the company’s efforts. The court disagreed, saying 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.”
     Life Partners Holdings did not respond to a request for comment on Friday.

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