According to bankruptcy trustee H. Thomas Moran II, Life Partners Holdings (LPHIQ) ran a scam to bilk its investors. The Texas company, which sold over $1.3 billion of fractional interests in individual life insurance policies to over 20,000 individuals, is accused of unnecessarily demanding that a lot of investors pay yearly premiums on policies that had enough funds to pay for future premiums. Many of these investors were forced to resell or abandon these investments while company insiders made money.
Now, Moran wants a court to give him permission to pool all of the policies and use accessible cash to pay premiums where necessary. This would relieve investors of having to continue to put more of their funds into the scam to keep their investments.
Life Partners used to be a huge player in the secondary market for life insurance. The company makes arrangements to purchase life insurance policies from people. Life Partners would then divide up the policies into fractional interests. Retail investors would buy the rights to collect on them.
In his filing, Moran alleges that the company bought policies based on life expectancies provided by independent parties. Life Partners then re-marketed the policies to retail investors, providing them with life expectancy projections that were “misleadingly short”-typically about half of the length of what the independent parties had cited.
With life insurance policy investments, the life expectancy of the insured plays a key part. If the policyholder dies sooner rather than later, investors can turn a profit. If the individual lives longer than expected, investors must keep paying the yearly premiums while likely returns start to shrink.
Moran said that the discrepancies created by Life Partners and its sales agents resulted in $392 million in undisclosed fees and commissions over eight years. That figure was greater than what Life Partners paid the original policyholders. Meantime, Life Partners purportedly covered up that most of the insured persons were “materially outliving” the life expectancy estimate provided for them.
Moran believes that in the 12 months ending in March 31, 2015, Life Partners billed investors more than $72 million for premiums on polices and that investors paid more than $67 million of that sum. He noted that because of the misleadingly brief life expectancies and the high chance that premium calls would be likely, the cost of the investment was much bigger than what investors could have estimated.
Because of this, Moran said, investors that could not pay for premiums were sometimes compelled to abandon their investments or sell out of them. He submitted an emergency motion last month to stop Life Partners from continuing to bill investors.
Last year, the U.S. Securities and Exchange Commission won a $47 million judgment in its civil case against Life Partners and the firm’s CEO Brian Pardo and general counsel Scott Peden for their filing of false reports to the regulator. The SEC contends that the company and certain officers made $11.8 million by selling stocks at inflated prices because of inaccurate life expectancy estimates. Of the $47 million judgment, $38.7 million was for disgorgement and a civil penalty. Pardo was ordered to pay $6.3 million and Peden must pay $2 million.
Life Partners maintains that its agreements aren’t securities since the investments’ success or failure is not dependent on the efforts of the company. In April, the Texas Supreme Court disagreed, noting that an investor’s realization of the profits expected is at least due “predominantly” to the “entrepreneurial or managerial.”
Meantime, investors have filed Texas securities cases against Life Partners.
Life Partners Holdings Defrauded Investors, a Trustee’s Filing Says, Wall Street Journal, May 21, 2015
Life Partners, Execs To Pay $47M For False SEC Filings, Law 360, December 2, 2014
Bankruptcy trustee H. Thomas Moran II