Friday, February 27, 2015

No. 85: U.S. Justice Department Terrorism Charges against Three Brooklyn Men

On February 25, 2015, U.S. Attorney Loretta E. Lynch of the Eastern District of New York announced terrorism charges against three Brooklyn, New York men who allegedly attempted and conspired to provide material support to the Islamic State of Iraq and the Levant (ISIL). On February 26, The New York Times and The Wall Street Journal carried front page articles about the charges.

The sealed complaint and affidavit in support of arrest warrants was filed on February 24 and unsealed the next day. U.S. Attorney Lynch's press release and the two newspaper articles do not include a link to the case. (See U.S.A. v. Juraboev et al., U.S. District Court, Eastern District of New York, No. 1:15-mj-172.)

I am offering readers a complimentary 25-page PDF consisting of U.S. Attorney Lynch's 2-page press release and the 23-page complaint. Send an e-mail to jmbelth@gmail.com and ask for the Juraboev package.
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Thursday, February 26, 2015

No. 84: Life Partners—Significant Recent Developments

Life Partners, Inc. (LPI), based in Waco, Texas, is an intermediary in the secondary market for life insurance policies. LPI's parent company is Life Partners Holdings, Inc. (LPHI). A recently formed subsidiary of LPHI is LPI Financial Services, Inc. (LPIFS).

The SEC Lawsuit
In January 2012, the Securities and Exchange Commission (SEC) filed a civil lawsuit against LPHI and its top officers alleging violations of federal securities laws. The case was assigned to U.S. Senior District Court Judge James R. Nowlin. (See SEC v. LPHI, U.S. District Court, Western District of Texas, No. 1:12-cv-33.)

In January 2014, the case went to trial. The jury found in favor of the defendants on some allegations and against the defendants on some allegations. Judge Nowlin later threw out some of the jury findings against the defendants.

The Death Sentence
On December 2, 2014, Judge Nowlin handed down a Final Judgment Order. It was a death sentence for LPHI because the civil penalties imposed on the company were more than twice the company's total assets. Also, Brian D. Pardo, chairman and chief executive officer of LPHI, and R. Scott Peden, general counsel of LPHI, were ordered to pay civil penalties of $6.2 million and $2 million, respectively.

On December 30, LPHI began the process of appealing the Final Judgment Order. The appeal is in its early stages. (See SEC v. LPHI, U.S. Court of Appeals, Fifth Circuit, No. 14-51353.)

On January 16, 2015, Judge Nowlin handed down a Final Judgment confirming the terms of the December 2 Final Judgment Order. The defendants were not able to obtain surety bonds for the full amounts of the penalties to obtain a stay of the Final Judgment pending appeal. The defendants also were not able to post assets for the full amounts of the penalties to obtain a stay. The district court denied the defendants' requests for permission to post small amounts of assets to obtain a stay.

The Bankruptcy Filing
On January 20, LPHI filed for protection under Chapter 11 of the federal bankruptcy law. The case was assigned to U.S. Bankruptcy Court Judge Russell F. Nelms. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, No. 15-40289.)

The Five Days of Hearings
On February 9, 10, 12, 17, and 19, Judge Nelms held a hearing on requests by the SEC, the U.S. Trustee, and the Official Committee of Unsecured Creditors to appoint a trustee, and on the request by LPHI to appoint a chief restructuring officer. He is considering the requests.

The LPHI Board Actions
On February 18, the LPHI board of directors held a two-hour meeting "to discuss with counsel what actions should be taken with regard to changes in corporate management." In attendance were Pardo, Peden, Colette Pieper (LPHI chief financial officer), the three other directors (Tad Ballantyne, Fred Dewald, and Harold Rafuse (Ballantyne and Dewald attended by telephone), and four LPHI attorneys. After "substantial discussion," the board by unanimous vote took these actions effective that day:
  • Accepted Pardo's resignation as president, chief executive officer, and chairman of the board of LPHI and as an officer of all LPHI subsidiaries.
  • Accepted Peden's resignation as secretary of LPHI and as an officer of all LPHI subsidiaries.
  • Appointed Pieper acting president, chief executive officer, treasurer and secretary of LPHI and acting chief executive officer of all LPHI subsidiaries in addition to her continuing role as chief financial officer of LPHI.
  • Appointed Mark Embry acting president and secretary of LPI and LPIFS in addition to his continuing role as chief operations officer.
  • Engaged Pardo as independent consultant for marketing and strategic direction on terms to be negotiated.
  • Authorized Peden to remain general counsel of LPI.
  • For future life settlements, LPI will no longer utilize the life expectancy opinions of Dr. Donald Cassidy.
  • LPHI subsidiaries will not make transfers out of the ordinary course of its business without further order of the bankruptcy court.
  • LPHI subsidiaries will not pay indebtedness incurred prior to the January 20 bankruptcy filing without further order of the bankruptcy court.
  • Reduced the size of the board of directors to three (Ballantyne, Dewald, Rafuse) with a chairman to be elected from the remaining members at a future board meeting.
The actions were reported in an 8-K (material event) report dated February 20 and filed with the SEC on February 23. The management changes were reflected on the LPHI website on February 23.

The Abstracts of Judgment
Judge Nowlin's January 16 Final Judgment required Pardo and Peden to pay to the SEC by February 16 the civil penalties imposed on them, but the penalties were not paid. On February 19, the district court clerk entered "Abstracts of Judgment" as of February 16 against Pardo and Peden and in favor of the SEC for the amounts of the penalties including post-judgment interest. Each abstract
creates a lien [for 20 years, subject to renewal] on all real property of the defendant(s) and has priority over all other liens and encumbrances which are perfected later in time.
Disclosure of Risks
On February 23, LPHI filed an 8-K report with the SEC. The text contains a lengthy discussion of risks relating to appointment of a trustee. According to LPHI, a potential trustee testified during the above mentioned five days of hearings. Because of that testimony, LPHI decided to communicate, to shareholders and purchasers of life settlements, the risks they face in the event a trustee is appointed. LPHI also discusses risks they face in the "potential liquidation" of LPHI. Attached to the 8-K are two exhibits dated February 23: a press release from Andrea Atwell in LPHI Shareholder Relations, and a "Ladies and Gentlemen" letter from Pieper containing a "Bankruptcy Case Update" addressed to "Clients of Life Partners, Inc."

The SEC Emergency Motion
On February 24, the SEC filed an emergency motion to supplement the record concerning the appointment of a trustee. The SEC is critical of LPHI's lack of advance notice to interested parties of the actions taken by the LPHI board on February 18 and the items circulated on February 23. The SEC is also critical of the LPHI reliance on the testimony of a witness at the February 17 hearing as justification for the items circulated on February 23. Attached to the SEC motion are the items circulated on February 23 and a brief excerpt from the hearing to illustrate the inappropriate LPHI interpretation of what happened at the hearing.

General Observations
If Judge Nelms appoints a trustee, the trustee would operate LPHI during the bankruptcy proceedings. I think the management changes and other actions taken by the LPHI board of directors on February 18 were an effort to undercut the SEC argument that current management cannot be trusted to operate the company properly during bankruptcy proceedings. I think the effort will not succeed. Further, in the absence of a trustee, I think Pardo would continue operating the company despite his new designation as a consultant.

As for the February 23 letter to investors in life settlements, I think its purpose was to frighten investors into believing that they would lose everything if a trustee is appointed. I have been contacted by several investors who expressed concern, and some apparently even thought the government was going to confiscate their property. I think it is important to recognize that, if a trustee is appointed, the objective of the trustee, under the supervision of the bankruptcy court, would be to do everything possible to minimize investor losses.

I am offering a complimentary 34-page PDF consisting of six items: (1) the 7-page LPHI filing that includes the minutes of the February 18 meeting of the LPHI board; (2) the 1-page abstract of judgment relating to Pardo; (3) the 1-page abstract of judgment relating to Peden; (4) the 10-page LPHI February 23 8-K report that includes the discussion of the claimed risks associated with the appointment of a trustee, the press release, and the letter to LPI clients; (5) the 9-page SEC motion filed February 24; and (6) the 6-page excerpt from the transcript of the February 17 hearing filed as an exhibit to the SEC motion. Send an e-mail to jmbelth@gmail.com and ask for the SEC-LPHI February 25 package.

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Wednesday, February 4, 2015

No. 83: Life Partners—A Setback for Pardo and Peden

U.S. Senior District Court Judge James R. Nowlin issued a Final Judgment Order on December 2 in a lawsuit filed by the Securities and Exchange Commission (SEC) against Life Partners Holdings, Inc. (LPHI), which is in the secondary market for life insurance. The Final Judgment Order was a death sentence for LPHI, because the penalties imposed on the company were twice its total assets. Also, Brian D. Pardo, chairman and chief executive officer, and R. Scott Peden, general counsel, were ordered to pay penalties of $6.2 million and $2 million, respectively.

On January 16, Judge Nowlin issued a Final Judgment reiterating the terms of the December 2 Final Judgment Order. On January 20, in federal bankruptcy court, LPHI filed for protection under Chapter 11 of the federal bankruptcy law. I wrote about these and related developments in seven items beginning with No. 75 posted December 10. Here I discuss two new developments: a setback for Pardo and Peden in the district court, and the appointment of an unsecured creditors' committee in the bankruptcy court. (See SEC v. LPHI, U.S. District Court, Western District of Texas, No. 1:12-cv-33, and In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, No. 15-40289.)

The Magistrate Judge's Order
Pardo and Peden are preparing an appeal of Judge Nowlin's January 16 Final Judgment to the U.S. Court of Appeals for the Fifth Circuit. Normally they would have to post bonds in the full amount of the penalties to obtain a stay pending appeal. They filed separate motions to allow posting of much less security to obtain a stay. I did not write earlier about the motions because they were not available. Presumably they were sealed (and are still sealed) because they contain personal financial information.

On February 2, U.S. Magistrate Judge Andrew W. Austin of the district court issued an Order. He denied both motions.

According to the Order, Pardo said he could not post a $6 million bond because it exceeds "his alleged net worth of $1,585,885." He proposed alternate security of $50,000 cash and a pledge of 100 percent of his stock in LPHI. He submitted a "conclusory declaration" about his financial condition and no "verified financial or accounting statements." He "did not bother to appear" at the January 21 hearing to provide testimony or be cross-examined. The Order mentions his 2014 salary of more than $600,000, his real estate of more than $1 million, his four airplanes (including two luxury jets), and his automobiles worth $369,000 (including a Mercedes that retails at more than $220,000). He did not mention any interest in the off-shore family trust that received millions in dividends from LPHI in recent years. Thus he "has offered to post as security less than one-quarter of the value of one of his cars."

Peden said his net worth is $377,607. He proposed alternate security of $10,000 cash and a pledge of 100 percent of his LPHI stock. He "does not appear to own as many gaudy luxury items as Pardo, and thus his request is not as audacious as Pardo's." However, he submitted an "unaudited conclusory declaration" about his financial condition and no "verified financial or accounting statements." He was not present at the January 21 hearing to present testimony.

The Creditors' Committee
On January 30, in the bankruptcy court, U.S. Trustee William T. Neary filed a notice about the appointment of a three-person "Official Unsecured Creditors' Committee" of LPHI. The names, addresses, and telephone numbers of the committee members are:
Bert Scalzo
2917 Elmridge Drive
Flower Mound, TX 75022
(469) 693-3300
Glenda Pirie
128 PR 4831
Newark, TX 76071
(817) 489-2334
Adriana Atchley
235 Zachary Walk
Murphy, TX 75094
(972) 423-7146
On January 30, the clerk of the bankruptcy court filed a notice about the case. The notice indicates that a meeting of creditors is set for March 20 at 9:30 a.m. in the Fritz G. Lanham Federal Building, 819 Taylor Street, Room 7A24, Fort Worth, TX 76102. The notice also indicates that the deadline to file a proof of claim is June 18. The bankruptcy court clerk's office address and telephone number are 501 West Tenth Street, Fort Worth, TX 76102, (817) 333-6000.

General Observations
I am not certain what happens now. Judge Nowlin's January 16 Judgment requires Pardo and Peden to pay the penalties within 30 days of the Judgment. I think that means the deadline is Monday, February 16, because February 15 falls on Sunday.

I am offering a complimentary 11-page PDF consisting of three documents: (1) Magistrate Judge Austin's 5-page February 2 Order denying the motions filed by Pardo and Peden; (2) U.S. Trustee Neary's 3-page notice about the appointment of the official unsecured creditors' committee; and (3) the bankruptcy court clerk's 3-page notice about the case. Send an e-mail to jmbelth@gmail.com and ask for the SEC-LPHI February 4 package.

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