Aug. 17--Accusing Waco-based Life Partners of fraud, state officials asked a state district judge in Austin on Thursday for authority to seize the life insurance settlement broker because it may run out of cash in two months.
A lawsuit filed by Texas Attorney General Greg Abbott and the State Securities Board claims that Life Partners sold unregistered securities and manufactured the value of the life insurance, or viatical, settlements by artificially shortening the life expectancies of those covered by the policies.
The company bought up insurance policies from elderly people, then resold fractions of the policies to investors, often promising big returns -- saying they are safer than buying gold or stocks. But some investors discovered that they had to pay premiums to keep the policies from collapsing, as people lived far longer than Life Partners predicted.
State District Judge Orlinda Naranjo scheduled a hearing for this morning and issued an order prohibiting the movement of any assets by Life Partners or destruction of records or equipment.
Andrea Atwell, the company's director of investor relations, was not at the company's headquarters Thursday and did not immediately respond to a request for comment.
Shares in Life Partners Holdings declined in after-hours trading after the state's action, announced near the close of regular trading. Its stock (ticker: LPHI) dropped 1.3 percent to finish at $2.38 at the close, then declined 5 percent more in late trading, or 12 cents. The stock is down steeply from its 52-week high of $9.20.
In January, the Securities and Exchange Commission'sFort Worth office filed suit, accusing Life Partners of duping investors. It claimed that the company paid Dr. Ron Cassidy, a Reno, Nev., oncologist without formal actuarial training, to predict the life expectancy of people covered by the viatical settlements.
In some cases, these were found to be widely divergent from analyses provided by established actuarial firms, which had been supplied to Life Partners by the sellers. Until last year, the Waco company did not make those life expectancies available to investors.
The Texas suit compared this to used car salesmen who "rolled back" the odometer on vehicles, then overcharged the buyer and pocketed the difference.
After the SEC sued, Life Partners CEO Brian Pardo told a Fort Worth audience that he has beaten charges of trading in unregistered securities before. In 2007, Pardo successfully argued that Life Partners dealt in life insurance policies, not securities. In its new case, the federal regulatory agency brought insider trading allegations, claiming that officers knew that Cassidy's methodology created generally short estimates. This, in turn, artificially inflated Life Partners revenue and stock price, it said.The latest suit by Texas officials makes clear that the state considers the reselling of life settlements to be trading in securities, and promoted in a fraudulent manner.
Life Partners earlier denied any wrongdoing, and in its investment materials has used a praise-heavy endorsement from heirs of Tonight Show announcer Ed McMahon.
But the scheme is unraveling and revenues have declined, the state's suit alleges, and "the company will be out of cash as early as two months."
Life Partners' board announced that a dividend worth about $1.8 million was to be paid to shareholders Wednesday despite a net loss of $5 million and a 78.8 percent decline in revenues during fiscal 2012, the suit states. Pardo and his family trust own roughly half the stock, meaning they would receive about $900,000, it said.
Some 29,000 investors nationwide, believing the company's life expectancy predictions and knowing that death is inevitable, entrusted more than $1.5 billion to Life Partners. But since the life expectancies were inaccurate, investor escrow accounts are underfunded by $300 million, which could lead to lapse of policies in which many people invested, the suit said.
When an e-mail noted that insured people were not dying by the firm's provided life expectancy, the suit quoted Pardo as telling company officers that the information was "highly confidential" and "you should not disseminate the information to anyone."
Barry Shlachter, 817-390-7718
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