Life Partners Holdings, Inc. has won the right to a full evidentiary hearing before a Texas state agency next month as it continues to battle allegations by state and federal regulators that could ultimately result in its takeover.
Life Partners, Waco, Texas, is one the world’s oldest companies engaged in the life settlement business and one of the most active.
In general, the legal actions by state and federal regulators allege that the company and its officials made various misrepresentations in the sale of the life settlements, including misrepresentations about the life expectancies of the insureds.
Under the latest agreement, the Texas attorney general on behalf of the state Securities Board had agreed to defer a state court hearing on the Attorney General’s request for a temporary injunction and appointment of receivership until Sept. 24.
The state was denied a motion in state Court on Aug. 17 seeking a temporary restraining order preventing Life Partners from doing business and the appointment of receiver based generally on allegations that life settlements are securities under state law. The suit was filed a day earlier.
The state alleged Aug. 16 in state court that Life Partners' sale of life settlements was fraudulent and constituted unlawful sales of unregistered securities. The state suit also alleges misrepresentations about the life expectancies of the insureds.
The deferral permits a full-day evidentiary hearing on the Attorney General’s request for a temporary injunction and appointment of a receiver and Life Partners’ counter-contention that its life settlement transactions are not securities.
The immediate issue involved in the various legal proceedings is whether Life Partners can pay a previously-declared quarterly dividend of 10 cents a share.
The dividend was supposed to be paid Sept. 15, but payment won’t be made until after a temporary restraining order issued by a Texas state court is dissolved.
Life Partners’ officials said the court hearing will likely determine whether and when the dividend can be paid. If Life Partners is unable to pay the dividend before Oct. 23, 2012, it must fix a new record date to pay a dividend, the company said.
The state action followed the filing of a civil action against Life Partners Jan. 3 by the Securities and Exchange Commission.
The SEC suit was filed in federal court in Waco, Texas, but the case has since been moved to federal court in Austin, Tex.
The filing alleges that Life Partners’ CEO Brian Pardo, general counsel Scott Paden and CFO David Martin misled shareholders by “systematically and materially underestimating the life expectancy estimates that it used to price transactions.”
The three executives are alleged to have then overvalued the assets held on the company’s books in the interest of creating the appearance of a consistent flow of income from the life settlement transactions.
The allegations state that since 1999, Life Partners Inc. has utilized the services of a Dr. Donald T. Cassidy, Reno, Nev., a hematologist/oncologist, with no actuarial training.
Dr. Cassidy apparently utilized a life expectancy methodology that was formulated by a former underwriter and current partner in the company that underestimated life expectancies therefore making the policies that were being sold appear more attractive to investors, the SEC alleges.
The federal case continues, and is based on a presumption that life settlements are securities.
But in a decision Aug. 20, the court sanctioned the SEC and fined it $5,000 by violating the Federal Rules of Civil Procedure by taking the deposition of a non-party witness without proper notice to defendants, without conference with opposing counsel “and without asking leave from the court.”
And, on Monday, Life Partners announced that Martin had stepped down and had been replaced by Scott Dubs, 58, as CFO. Dubs worked as an auditor with Price Waterhouse Coopers for 12 years, and has 24 years of experience as CFO/VP of Finance of both public and private companies, Life Partners said.
In a statement Aug. 20, Pardo said, “The objective facts refute the outlandish and irresponsible financial claims made in the [state] suit. What we regret is the damage done to our shareholders by the state's misrepresentations."
Pardo continued, "We are on solid ground financially. We currently have more than $12 million in cash on hand, $45 million in assets, and virtually no debt.”
Pardon added that the company’s financial ratios are “solid,” including a better than 5:1 current ratio at the last quarter. He said that in the last quarter, we increased our overall net cash by $1.4 million and realized net income of over $1 million.
“Given our asset base and cash position, our financial loss last fiscal year does not threaten our ability to continue as a going concern,” Pardo concluded.
He said that since its incorporation in 1991, Life Partners has completed over 143,000 transactions for its worldwide client base of over 29,000 high net worth individuals and institutions in connection with the purchase of over 6,500 policies totaling approximately $3 billion in face value.