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Life Partners Holdings Says SEC Plans Lawsuit

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Life Partners Holdings Inc. announced last week the U.S. Securities and Exchange Commission intends to file civil claims against the company. The company plunged 11 percent in New York trading after the lawsuit notice was made public. The civil action will encompass the company’s marketing practices, specifically the firm’s methodology for estimating life expectancies for life settlements sold to investors. Life settlements, also referred to as viatical settlements, are the sale of an existing life insurance policy to an investor. Companies similar to Life Partners will arrange to purchase life insurance policies from individuals and sell interest to investors. The investor pays a required premium on the policy and collects proceeds upon the insured’s death. The firm’s methodology is under questions because the life expectancy estimate is integral in determining the value of a life settlement. The shorter an insured’s life span is, the more the firm can charge investors. However, if the insured lives longer than expected, the investor’s payout is delayed and they must continue to pay a premium until the insured dies. As morbid as it sounds, the sale of life settlements is legal. According to the North American Securities Administration, which represents state securities regulators, life settlements are complex and dense making them prone to fraud. In 2009, the selling of life settlements made it to the Association’s list of top 10 investor traps. The Wall Street Journal reported that since Life Partners was founded in 1991, the company

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has sold 6,400 policies at a face value of $2.8 billion to over 27,000 clients. The company promoted yearly returns of 10 to 15 percent; however, a large number of the insured outlived the life expectancy estimates. The Wall Street Journal investigation also revealed that in 2002 the company brokered investments in 297 life policies, and in 95 percent of the policies the insured was alive at the end of the life expectancy estimate. “Actuaries say if life-expectancy calculations on a group of people are well done, half should die by their projected dates. Policies brokered in 2003 and 2004 show similar patterns.” The Journal reported that Brian Pardo, Life Partners’ founder and chief executive, admitted many of the company’s life expectancy estimates “are probably wrong.” The company receives estimates “from a doctor in Reno, Nev., who has testified in court that he never checks the accuracy of his prior predictions.” To provide investors a cushion, the company claims that it prices their life settlements “at a steep-enough discount to their face value” in the case the life expectancy estimate is incorrect. Life Partners also claims to warn investors that the insured may live pass the estimate. Pardo commented, “Even if an elderly insured lived 12 years” pass the life expectancy estimate, an investor would “still make as much as they would in a bank deposit. The Journal provided an example of Life Partners flawed methodology. In September 2008, the company sold a $10.8 million policy for a 78-year-old insured male. The company gave investors a three to five year life expectancy estimate; however, two independent firms separately projected the man to live 11 years. Pardo denied any error in the estimate. The SEC also recommended civil action against Pardo and general counsel and President, R. Scott Peden. Aside from the potential SEC lawsuit, Life Partners is being sued by several investors; some are seeking class action status.

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