The North American Securities Administrators Association wants the Texas Supreme Court to rule that Life Partners Holdings Inc. has to face a class action securities lawsuit for selling unregistered securities. The state’s high court is set to determine whether to reverse a lower appeal court’s ruling to reinstate a case that accuses the company of selling the securities.
According to the group of securities regulators, violations of the Texas Securities Act were committed when Life Partners sold fractional interests in life insurance polices to investors and that this grounds for a case. The company wants the previous ruling, which found that life settlement contracts are not insurance contracts but are, in fact, investment contracts that are regulated under securities laws, overturned. Life Partners maintains that state securities law does not govern its product.
The putative class action securities case contends that three years ago, Life Partners was involved in a scam that involved offering and selling securities that were unregistered. A trial judge rejected the plaintiffs’ claims, accusing them of submitting a frivolous pleading.
Now, Life Partners wants the high court to rule that its products are different from the traditional securities that fall under Texas securities law. The company contends that profits from life settlements are connected only to the discounted buy price negotiated when Life Partners acquires the underlying policies that investors buy into.
Investors purchase the right to death benefits, with the original owner of a policy getting paid a specific amount upfront. Meantime, investors keep paying premiums, hoping to ultimately get back more than they invested. The shorter a policyholder’s life expectancy, the more likely an investor is to make a profit.
In 2012, Texas regulators accused Life Partners of committing fraud when it gave investors “significantly shorter” life expectancies for the insured parties than what they should have given in order inflate revenue. In their complaint, the state said that as of 12/31/10,and of the 3,879 policies it held, Life Partners, 81% of the policies exceeded the life-expectancy estimates given to investors. The SEC filed its own civil case over this matter.
Shepherd Smith Edwards and Kantas, LTD LLP is a Texas securities fraud law firm.
Regulators Say Texas Treats Life Settlements As Securities, Law360, December 16, 2014
Waco based company ordered to pay $46.8 million in SEC fraud suit, KXXV, December 3, 2014
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