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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Email: jmbelth@gmail.com

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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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No. 82: Life Partners—Bankruptcy Court Developments

In six recent items beginning with No. 75, I discussed developments after U.S. Senior District Court Judge James R. Nowlin issued a Final Judgment Order (FJO) on December 2 in a lawsuit filed by the Securities and Exchange Commission (SEC) against Life Partners Holdings, Inc. (LPHI). The FJO was a death sentence for LPHI, which is in the secondary market for life insurance, because the penalties imposed were twice LPHI's total assets. Large penalties were also imposed on LPHI's two top officers: Brian D. Pardo, chairman and chief executive officer; and R. Scott Peden, general counsel. (SEC v. LPHI, U.S. District Court, Western District of Texas, No. 1:12-cv-33.)

In No. 81, I said LPHI filed for bankruptcy on January 20. Here I discuss important filings in the bankruptcy court since then. (In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, No. 15-40289.)

SEC District Court Motion for Receiver

In No. 79, I said the SEC filed a motion on January 5 asking the district court to appoint a Receiver, and recommending a person who was ready to go to work immediately. A magistrate judge held a hearing on the motion on January 21. SEC representatives attended, but LPHI representatives did not. LPHI had said after its bankruptcy filing that no LPHI representatives would attend the hearing. According to the first of the SEC's two January 23 filings (discussed later),

the magistrate judge directed the SEC staff to seek emergency expedited relief from this Court [the bankruptcy court] in the first instance, with an invitation to renew the motion in the District Court at a later date.

LPHI Bankruptcy Court Motion for Examiner

In No. 81, I said LPHI filed a motion on January 21 asking the bankruptcy court to appoint an "examiner with expanded powers." LPHI recommended appointment of Tracy A. Bolt, an executive consultant. The two escrow agents used by LPHI filed responses in support of LPHI's motion. Also, Bolt filed a declaration in support of LPHI's motion.

Throughout its motion, LPHI refers to Judge Nowlin's FJO as the "SEC Judgment." In No. 79, I said Pardo was caught on tape telling members of his sales staff that Judge Nowlin did not write the FJO, but that the SEC wrote it and somehow arranged for Judge Nowlin to sign it.

SEC Opposition to the LPHI Motion for Examiner

On Friday, January 23, the SEC filed an opposition to LPHI's motion. The SEC characterized LPHI's proposed self-selected "examiner with expanded powers" as an "examiner with diminished power." The SEC also said it was preparing a motion for the bankruptcy court to appoint a Chapter 11 Trustee, and would file the motion either later that day or not later than Monday, January 26.

SEC Motion for Appointment of Chapter 11 Trustee

Later on January 23, the SEC filed its motion asking the bankruptcy court to appoint a Chapter 11 Trustee. Attached were many exhibits in support of the SEC's argument that LPHI's current management cannot be trusted to manage the company in the interests of creditors, including owners of fractional interests in life settlements. In the motion, the SEC expressed concern that the bankruptcy involves only LPHI, and not its two subsidiaries. One is Life Partners, Inc. (LPI), which is LPHI's operating subsidiary. The other is LPI Financial Services, Inc., which was created recently to receive the new ministerial fees.

U.S. Trustee Filings

The U.S. Trustee Program is part of the U.S. Department of Justice and oversees the administration of bankruptcy cases. On January 25, the U.S. Trustee's Dallas office filed an objection to LPHI's motion for appointment of an examiner. On January 26, the U.S. Trustee filed a motion asking the bankruptcy court to appoint a Chapter 11 Trustee.

Both motions filed by the U.S. Trustee refer to Judge Nowlin's FJO as the "SEC Judgment." The language probably came from the previously mentioned filing by LPHI, and may suggest that the U.S. Trustee has not yet learned to be wary about relying on LPHI documents.

LPHI Press Release about NASDAQ

On January 26, LPHI issued a press release disclosing it received a letter from the NASDAQ staff on January 20 informing the company that the bankruptcy filing placed LPHI in violation of NASDAQ listing rules, and that LPHI shares therefore will be delisted. LPHI said that it plans to appeal the ruling, and that, if the appeal is not successful, LPHI shares may be eligible to be quoted on the Pink Sheets if a market maker applies to perform that function and is approved.

LPHI 8-K Filing

On January 26, LPHI filed an 8-K (material event) report with the SEC. Attached are two press releases—the January 20 release about the bankruptcy filing and the January 26 release about receipt of the January 20 letter from the NASDAQ staff. This is the first 8-K filing by LPHI since the September 2014 good news announcement of a five-cent quarterly dividend for shareholders.

Incident in the Willingham Lawsuit

In No. 78, I mentioned the Willingham lawsuit against LPI by 158 owners of fractional interests in life settlements. The case was set for trial beginning early in February 2015.

Royce West is a Dallas attorney whose "primary focus areas," according to his website, include "public finance, business transactions, school law and white-collar criminal investigations." He has been a Texas state senator since 1993. On December 2, 2014, he filed a notice of appearance to represent LPI as its attorney. On January 7, 2015, LPI filed a motion for a "legislative continuance," which is a postponement of the proceedings so that an attorney can tend to legislative business. LPI said the legislative session was to begin January 13 and continue until about June 1. LPI, citing a Texas rule, asked for a postponement until 30 days after the end of the legislative session. Although the attorney for the plaintiffs opposed the motion, the judge granted the motion. Thus LPI won a five-month postponement of the trial, from early February to early July. It will be interesting to see whether West remains LPI's attorney after the postponement. (Willingham et al. v. LPI et al., 191st Judicial District Court, Dallas County, Texas, DC-11-10639 and MDL 13-0357.)

I am not an attorney, and I do not know whether it is ethical for an attorney who is also a legislator to allow himself to be used by a litigant to win the postponement of a trial. As a layman, however, I think it is a clever trick that reflects badly on the legal profession.

The Plight of One Owner of Fractional Interests

Several owners of fractional interests in life settlements have contacted me about their problems, and one provided some details. The person had four fractional interests purchased in 1994. One insured had a life expectancy of 18 months and died after 12 years. Another insured had a life expectancy of 24 months and died after 17 years. The other two insureds had life expectancies of 24 months and 36 months, and they are still alive after more than 20 years.

General Observations

At this writing, on the evening of January 27, it remains to be seen whether LPHI will be run during the bankruptcy proceedings by its current management with supervision by an appointed examiner, or whether it will be run by an appointed trustee. I think Judge Russell F. Nelms of the bankruptcy court will make the decision soon.

Meanwhile, I offer a complimentary 54-page PDF consisting of five documents: (1) LPHI's 15-page January 21 motion for appointment of an examiner, with exhibit; (2) SEC's 8-page January 23 opposition to LPHI's motion, without exhibits; (3) SEC's 18-page January 23 motion for appointment of a Chapter 11 Trustee, without exhibits; (4) U.S. Trustee's 11-page January 26 motion for appointment of a Chapter 11 Trustee; and (5) LPHI's 2-page January 26 press release about the delisting by NASDAQ. Send an e-mail to jmbelth@gmail.com and ask for the SEC-LPHI January 27 package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 81: Life Partners Files for Bankruptcy in an Effort to Prevent Court Appointment of a Receiver

In five recent posts, I discussed developments after U.S. Senior District Court Judge James R. Nowlin issued a Final Judgment Order (FJO) on December 2 in a lawsuit filed by the Securities and Exchange Commission (SEC) against Life Partners Holdings, Inc. (NASDAQ:LPHI). The FJO is a death sentence for LPHI, which is a company in the secondary market for life insurance. The FJO imposed huge penalties on the company—twice its total assets—and large penalties on its two top officers: Brian D. Pardo, chairman and chief executive officer; and R. Scott Peden, general counsel. Here I discuss further developments, including LPHI's recent filing for bankruptcy in an effort to prevent the district court from appointing a receiver. (SEC v. LPHI, U.S. District Court, Western District of Texas, No. 1:12-cv-33; In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, No. 15-40289.)

The SEC Motion for Appointment of a Receiver

Previously I said the SEC filed a motion on January 5 asking Judge Nowlin to appoint a receiver for LPHI, and recommended an individual who is ready to go to work immediately. LPHI filed two briefs in opposition to the SEC's motion, and the SEC filed two briefs in response to LPHI's opposition. A hearing on the SEC's motion was set for January 14 and later postponed until 2:00 p.m. on January 21.

More on the Recent 10-Q Report

Previously I said LPHI, on the January 14 due date, filed its 10-Q report for the fiscal quarter ended November 30, 2014. I offered readers an excerpt from the report: the section on "Legal Proceedings," in which LPHI finally disclosed the FJO. However, I did not mention these two sentences that are buried in the 10-Q report, and that take on new significance in the light of LPHI's bankruptcy filing:

In a Board of Directors meeting held on January 12, 2015, the Board discussed the motion by the Securities and Exchange Commission for the appointment of a receiver for us and our affiliates as part of its effort to enforce the judgment it secured against us and the various consequences that could arise from such an appointment by the Federal Court. The Board was of the unanimous belief that if we cannot get this resolved in a manner favorable to us, we may have to seek protection under Chapter 11 of the Bankruptcy Code.

Chapter 11 of the federal bankruptcy law provides a company with protection from creditors while the current management continues to operate the company under the jurisdiction of the bankruptcy court. In this case, however, the SEC believes that the current management cannot be trusted to operate the company to protect the interests of the creditors, including investors in fractional interests in life settlements.

Judge Nowlin's January 16 Orders

Previously I said LPHI and the SEC filed motions to alter or amend the FJO. The SEC motion was to require Pardo to pay a $13.3 million reimbursement to LPHI in accordance with section 304 of the Sarbanes-Oxley Act of 2002. On January 16, Judge Nowlin issued an order in which he found no basis to alter or amend the FJO, and he therefore denied both motions. He also acknowledged he had failed to enter a "separate form of judgment" at the time of the FJO. On the same day, therefore, he issued a final judgment reiterating the terms of the FJO. He ordered LPHI to pay the penalties within 14 days of the final judgment, and he ordered Pardo and Peden to pay the penalties within 30 days of the final judgment.

LPHI's January 20 Bankruptcy Filing

On January 20, LPHI filed for protection under Chapter 11 of the federal bankruptcy law. The filing included a list of 67 creditors with amounts not shown, and a list of the 20 largest creditors with amounts shown. Here, as contrasted with the $20.3 million of total assets shown in the latest 10-Q report, are the six largest creditors (amounts in parentheses) totaling just under $40 million: SEC ($38,700,000), Baker & McKenzie LLP ($1,058,954), Alexander Dubose Jefferson & Townsend LLP ($85,830), Whitley Penn LLP ($51,000), Michael J. Legamaro PC ($45,225), and Nasdaq Stock Market ($40,000).

January 20 Filings in the District Court

On January 20, there were four filings in the district court. First, LPHI, Pardo, and Peden filed an amended notice of their plan to appeal the final judgment to the U.S. Court of Appeals for the Fifth Circuit.

Second, LPHI filed a "Suggestion of Bankruptcy." This was a notification to the district court that LPHI had filed a voluntary petition for bankruptcy under Chapter 11 of the federal bankruptcy law.

Third, the SEC filed a response to LPHI's "Suggestion of Bankruptcy." The SEC attorney said contact had been made with LPHI's attorney, who said no representative of LPHI intends to participate in the January 21 hearing on the SEC motion for appointment of a receiver and on the LPHI motions for alternative security. LPHI's attorney also told the SEC that appointment of a receiver would violate the bankruptcy stay. In its response, the SEC said "there is ample support in this Circuit for the appointment of a Receiver even after a judgment debtor files bankruptcy." The SEC said it continues to urge its motion for appointment of a receiver and intends to present argument and evidence at the January 21 hearing.

Fourth, LPHI filed an "Amended Suggestion of Bankruptcy." LPHI took the position that Chapter 11's automatic stay prohibits any hearing on the SEC's motion for appointment of a receiver unless the bankruptcy court modifies the automatic stay. LPHI informed the SEC by letter of its position, and attached the letter as an exhibit. In the letter, LPHI said that, "if the SEC does in fact proceed with the hearing set tomorrow on the Motion, LPHI will view this as an intentional violation of the automatic stay," and would then seek relief from the bankruptcy court.

January 21 Developments

The district court hearing on January 21 was held before U.S. Magistrate Judge Andrew W. Austin. He took "under advisement" the motions concerning the appointment of a receiver and the motions concerning the type of security to be posted by LPHI in lieu of a bond.

In the federal bankruptcy court, there were numerous filings. One was LPHI's motion seeking appointment of an "examiner with expanded powers." LPHI recommended appointment of Tracy A. Bolt, an executive consultant. The motion suggests the examiner would provide advice on such matters as compliance with securities laws, but the exact duties will have to be worked out with the bankruptcy court. LPHI also is seeking an expedited hearing on its motion for the appointment of an examiner.

LPHI Share Prices

LPHI's closing share price declined after the FJO—from $1.43 on the day of the FJO, to $1.10 the next day, to 67 cents on December 31, and to 54 cents on January 16. The next trading day was January 20, the day of LPHI's bankruptcy filing. Trading was halted temporarily that day, but then resumed trading and closed at 18 cents on very heavy trading of almost 500,000 shares. The shares closed at 25 cents on January 21 in very heavy trading of more than 400,000 shares.

General Observations

At this writing, on the evening of January 21, I do not know how the duties of the proposed examiner compare with the duties of the receiver proposed by the SEC. Clearly LPHI wants current management to operate the company with advice from the examiner, rather than to have a receiver operate the company. How this will work out remains to be seen.

Meanwhile, I offer a complimentary 19-page PDF consisting of five documents: (1) Judge Nowlin's 2-page January 16 Order, (2) Judge Nowlin's 3-page January 16 Final Judgment, (3) LPHI's 5-page Suggestion of Bankruptcy, (4) SEC's 3-page Response to LPHI's Suggestion of Bankruptcy, and (5) LPHI's 6-page Amended Suggestion of Bankruptcy, including the exhibit. Send an e-mail to jmbelth@gmail.com and ask for the SEC-LPHI January 21 package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 80: Life Partners Files Its First Financial Report after the Court-Ordered Death Sentence

In Nos. 75, 77, 78, and 79, I described developments after a federal judge handed down a Final Judgment Order (FJO) on December 2 in a lawsuit filed by the Securities and Exchange Commission (SEC) against Life Partners Holdings, Inc. (NASDAQ:LPHI). The FJO is essentially a death sentence for LPHI, a company in the secondary market for life insurance. The FJO imposes huge penalties on the company and its two top officers: Brian D. Pardo, chairman and chief executive officer; and R. Scott Peden, general counsel. Here I briefly discuss important recent developments, including the filing of the company's first financial report after the FJO. (SEC v. LPHI, U.S. District Court, Western District of Texas, Case No. 1:12-cv-33.)

LPHI's Lack of Disclosure

As I reported previously, LPHI did not file an 8-K report with the SEC. An 8-K is supposed to be filed within four business days after a "material" event. It is hard to envision an event more "material" to the company's shareholders and the public than the imposition of penalties amounting to more than twice the company's total assets.

In a recent filing in the case, LPHI claimed an 8-K was not necessary because the FJO "was widely reported by various business news organizations such as The Wall Street Journal, Reuters, and the Fort Worth Star-Telegram." Further, LPHI said its share price dropped sharply after the FJO in heavy trading, showing that the word had gotten out. Still further, LPHI said that its 10-Q financial report for the fiscal quarter ended November 30, 2014 was due to be filed on January 14, 2015, and that the 10-Q would disclose information about the FJO.

LPHI's 10-Q Filing

On January 14, LPHI filed the 10-Q report with the SEC and posted the report on the LPHI website. The report shows positive net income of about $1.1 million for the quarter. Most recent quarters show net losses. The primary reason for the positive figure was the company's sudden and unexpected imposition of substantial ministerial fees on investors who own fractional interests in life settlements. The fees collected were about $4.4 million. LPHI said that, without the revenue from the new fees, the company would have realized a net loss, before taxes, of about $2.7 million for the quarter. The 10-Q also revealed a continuation of virtually no new business; two life settlements were transacted in the quarter, with a total face value of $600,000.

LPHI disclosed details of the FJO and subsequent developments in three places in the 10-Q: under "Contingencies," "Legal Proceedings," and "Risk Factors." I am reproducing for interested readers the entire "Legal Proceedings" section, which discusses not only the SEC lawsuit and the FJO but also other lawsuits, including the Willingham case mentioned in No. 78.

Hearing on Motion for Receiver

As mentioned in No. 79, the SEC filed a motion on January 5 asking the court to appoint a receiver, and recommended an individual who is ready to go to work immediately. On January 7, Senior U.S. District Court Judge James R. Nowlin, who handed down the FJO, turned over many aspects of the case to U.S. Magistrate Judge Andrew W. Austin. On the same day, Magistrate Judge Austin set a hearing for January 14 on the SEC's motion for appointment of a receiver, and ordered LPHI to file its answer to the SEC's motion by January 12.

On January 12, LPHI filed a motion to postpone the hearing until January 28. Magistrate Judge Austin reset the hearing for January 21.

Also on January 12, as ordered, LPHI filed its answer to the SEC's motion for appointment of a receiver. That is the filing in which LPHI explains why it thinks an 8-K filing was not necessary. In the filing LPHI also explains why it thinks the appointment of a receiver would be inappropriate, and characterizes the SEC's motion for the appointment of a receiver as an "end run" around the appellate process. LPHI has filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit, but little has happened there other than the appellate court's denial of an LPHI motion for an injunction against enforcement of the FJO.

General Observations

The SEC's lawsuit against LPHI is now essentially on hold until the court acts on the SEC's motion for the appointment of a receiver. With regard to LPHI's explanation for its failure to file an 8-K report after the FJO, I think the company's reasoning is preposterous. However, it is consistent with LPHI's practice of "selective disclosure," which I discussed in No. 35 posted March 10, 2014.

I am offering a complimentary 6-page PDF showing—in enlarged type—the "Legal Proceedings" section of LPHI's 10-Q report for the fiscal quarter ended November 30, 2014. Send an e-mail to jmbelth@gmail.com and ask for the excerpt from LPHI's 10-Q report filed January 14.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 79: Life Partners—A Brief Interim Report on Developments Relating to the Court-Ordered Death Sentence

Life Partners Holdings, Inc. (NASDAQ:LPHI) is in the secondary market for life insurance. In No. 78 posted January 5, I reviewed developments through December 31 relating to the Final Judgment Order (FJO) handed down on December 2 by Senior U.S. District Court Judge James R. Nowlin in a lawsuit filed by the Securities and Exchange Commission (SEC) against LPHI and its two top officers: Brian D. Pardo, chairman and chief executive officer; and R. Scott Peden, general counsel. The FJO required LPHI to pay the SEC disgorgement of $15 million and a civil penalty of $23.7 million. The sum of those items was more than twice the total assets of LPHI. The order also required Pardo and Peden to pay civil penalties of $6.2 million and $2 million, respectively. Here I briefly discuss six developments through January 7 as LPHI struggles with the court-ordered death sentence. (SEC v. LPHI, U.S. District Court, Western District of Texas, Case No. 1:12-cv-33.)

SEC Motion for Appointment of Receiver
On January 5, the SEC filed an opposed emergency motion for appointment of a Receiver. The motion is "opposed" because, according to the SEC, "the Defendants are opposed to the relief sought by this motion." The motion consists of three requests. In this major motion, the SEC asks Judge Nowlin to appoint a Receiver for LPHI and its affiliates, and gives detailed reasoning for the motion. The SEC says "a highly qualified Receiver candidate is prepared to act immediately," and recommends the appointment of H. Thomas Moran II, chief executive officer of Asset Servicing Group (Oklahoma City, OK), "a market leader in the life settlement industry." As an alternative, the SEC asks the Court to appoint a Monitor to "oversee and approve all LPHI financial transactions" and "report observations and recommendations to the Court." As another alternative, the SEC asks the Court to appoint a Receiver under the "Texas turnover statute," and explains the statute.

Denial of Intervention Motion
On January 6, Judge Nowlin denied the intervention motion I discussed in No. 78. He says he previously refused to allow the petitioners to intervene, and nothing has changed to justify changing course.

SEC Supplement Supporting Appointment of Receiver
On January 6, the SEC filed supplemental evidence to support its motion for appointment of a Receiver. The evidence consists of three recorded teleconferences held in December following the FJO and featuring Pardo discussing with his sales staff recent developments in the case. Pardo harshly attacks Judge Nowlin and the SEC.

Referral to Magistrate Judge
On January 7, Judge Nowlin issued an order referring all nondispositive motions to U.S. Magistrate Judge Andrew W. Austin for resolution. Also, all pending and future dispositive motions were referred to Magistrate Judge Austin for report and recommendation.

LPHI Opposition to SEC Motion Regarding Stay
On January 7, LPHI filed its objection to the SEC motion concerning conditions for a stay. LPHI also responded to the SEC's objection to the alternate security proposed by LPHI.

Scheduling of a Hearing
On January 7, Magistrate Judge Austin issued an order setting a hearing for January 14 on the SEC's motion for appointment of a Receiver. Also, LPHI was ordered to file a response by January 12 to the SEC's motion for appointment of a Receiver.

General Observations
It appears that further significant developments will occur during the next week or two. I plan to continue reporting on this important and complex situation.

Meanwhile, I offer a complimentary 28-page PDF consisting of four documents: (1) 12-page SEC motion for appointment of a Receiver, without exhibits; (2) 1-page Order denying intervention motion; (3) 5-page SEC supplemental evidence about Pardo's comments; and (4) 10-page LPHI opposition to SEC motion regarding stay. Send an e-mail to jmbelth@gmail.com and ask for the SEC-LPHI January 7 package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 78: Life Partners Struggles with the Court-Ordered Death Sentence

Life Partners Holdings, Inc. (NASDAQ:LPHI), through its operating subsidiary, Life Partners, Inc. (LPI), is in the secondary market for life insurance. In No. 75 posted December 10, I discussed the final judgment order handed down on December 2 by Senior U.S. District Court Judge James R. Nowlin in a lawsuit filed by the Securities and Exchange Commission (SEC) against LPHI and its two top officers: Brian D. Pardo, chief executive officer; and R. Scott Peden, general counsel. The order required LPHI to pay the SEC, by December 16, disgorgement of $15 million and a civil penalty of $23.7 million. The sum of those two items was more than twice the total assets of LPHI. The order also required Pardo and Peden to pay civil penalties of $6.2 million and $2 million, respectively. In No. 77 posted December 17, I reviewed developments through December 16. Here I discuss developments through December 31 as LPHI struggles with the court-ordered death sentence. (SEC v. LPHI, U.S. District Court, Western District of Texas, Case No. 1:12-cv-33.)

Orr Motion to Intervene

On December 22, James Craig Orr, Jr., an attorney representing some LPI clients, filed a motion to intervene for the purpose of filing a motion to alter or amend the order. Accompanying exhibits are the motion to alter or amend the order; LPHI's 10-Q report for the fiscal quarter ended August 31, 2014; and the third amended petition filed November 24, 2014 in Willingham et al. v. LPI et al. (191st Judicial District Court, Dallas County, Texas, DC-11-10639 and MDL 13-0357).

In the petition in the Willingham case, the sum of the maximum amounts claimed by 158 LPI clients named in the petition is $95.5 million. According to the Orr motion to alter or amend the order, those clients invested about $35 million.

SEC Opposition to Motion to Intervene

On December 23, the SEC filed a response in opposition to the Orr motion to intervene. The SEC says the attempt to intervene is barred by section 21(g) of the Exchange Act, which, according to the SEC, courts have broadly applied "to preclude interference by private parties in SEC law enforcement proceedings without SEC consent."

LPHI Motion to Extend Stay

On December 29, LPHI filed an opposed motion for a stay to further extend, beyond December 30, the stay of enforcement of the order. The motion is "opposed" because, according to LPHI, "the SEC believes that the judgment is sound and ripe for enforcement and that enforcement is appropriate." LPHI seeks an order further extending the stay until 14 days after the later of (1) the date on which the court rules on the LPHI motion to set security or (2) the date on which the court disposes of all LPHI post-order motions filed by December 30.

LPHI Motion to Set Security

On December 29, LPHI filed an opposed motion to set security and for alternate security to stay enforcement of the order pending appeal. The motion is "opposed" because, according to LPHI, "the SEC believes that the proposed security is insufficient to protect its interest in the judgment against LPHI."

LPHI says Travelers Casualty and Surety Company of America and Hartford Fire Insurance Company, large writers of surety bonds, declined to issue a bond in any amount without the posting of collateral in the form of an irrevocable letter of credit for the full amount of the bond. LPHI says it is unable to obtain such a letter of credit and therefore is unable to post a bond in any amount. LPHI asks the court to approve alternate security in the form of $250,000 cash and a pledge of LPHI unencumbered real estate with a current book value of $2.3 million before depreciation.

The motion describes the impact that enforcement of the order would have on LPHI, its employees, and its clients. Accompanying exhibits are sworn statements by Charles T. Frazier, Jr., an LPHI attorney; Colette Pieper, LPHI chief financial officer; Peden; Dennis Gilliam, president of Advance Trust & Escrow Life Services, an escrow agent used by LPI; and Sabrina Braus, president of Purchase Escrow Services LLC, another escrow agent used by LPI. Personal data, LPHI internal data, and LPHI financial data as of November 30, 2014 are blacked out in the motion and in the exhibits.

Baker & McKenzie LLP, a law firm that at one time represented LPI in the Willingham case, is the largest creditor of LPHI. The motion says LPHI owes the firm $1.1 million, is paying down the debt in installments, and recently cut the weekly payments in half to help with cash flow problems at LPHI. Also, the two escrow agents mentioned above together are involved with 3,500 policies and 26,000 LPI clients who hold 100,000 positions for which the clients paid $1.5 billion.

Other Motions

On December 29, LPHI, Pardo, and Peden filed hardship motions. The motions are under seal, presumably because they contain private and personal information.

On December 30, LPHI filed a motion to alter or amend the order. On the same day, LPHI filed a notice of its intent to appeal the order to the U.S. Court of Appeals for the Fifth Circuit.

On December 30, the SEC filed a motion to alter or amend the order. The SEC had previously argued that Pardo was required to reimburse LPHI, in accordance with section 304 of the Sarbanes-Oxley Act of 2002, for "certain bonus, incentive-based, and equity-based compensation" he had received, and Judge Nowlin ruled in the order that Pardo was not required to make such reimbursement to LPHI. The SEC argues, in its motion to alter or amend the order, that Judge Nowlin's ruling is incorrect, and that Pardo should be required to reimburse LPHI in the amount of $13.3 million.

On December 30, LPHI filed several motions with the Fifth Circuit. That appellate court promptly denied the motion for an injunction pending appeal, granted the motion for an expedited ruling on the motion for an injunction pending appeal, and granted the motion to file documents under seal. (SEC v. LPHI, U.S. Court of Appeals, Fifth Circuit, No. 14-51353.)

LPHI Share Prices

In No. 75, I said LPHI's closing share price declined after the order—from $1.43 on the day of the order, to $1.10 the next day, and to 78 cents on December 16. The closing price on December 31 was 67 cents.

More on Ministerial Fees

In No. 74 posted November 25, I mentioned the LPI decision to begin charging annual ministerial fees. Many clients complained, citing this sentence in the policy funding agreement between LPI and the client:

LPI's fees for all services provided in the performance of its duties shall be complete and inclusive in the policy purchase deposit and the PURCHASER will not incur costs of any type beyond the amount tendered as the policy purchase deposit.

Pardo responded by saying the fees referred to in that sentence were for "acquisition services" associated with the purchase of the policy. He said that, for 24 years, LPI did not charge fees to cover the cost of "a small army of full time programmers and IT experts," and that "we are simply no longer able to absorb this cost." The displeasure of clients is understandable, but the issue is dwarfed by the implications of the order.

General Observations

The LPHI 10-Q report for the fiscal quarter ended November 30, 2014, is supposed to be filed on January 15. Under the circumstances, it would be surprising if LPHI files the report on time.

LPHI has yet to disclose the order in an 8-K (material event) report that is supposed to be filed with the SEC within four business days of the event. The most recent LPHI public document, filed November 15, is the 10-Q report for the fiscal quarter ended August 31, 2014.

Nor has LPHI issued a press release about the order. The most recent press release on the LPHI website is the September 2 announcement of a quarterly dividend. That release was attached to an 8-K report filed the same day. LPHI probably will not pay any more dividends.

It will be interesting to see how Judge Nowlin disposes of the post-order motions. It also will be interesting to see how the Fifth Circuit deals with the case. I plan to report developments.

Available Documents

Meanwhile, I offer a complimentary 72-page PDF consisting of seven documents: (1) 5-page Orr motion to intervene; (2) 5-page Orr motion to alter or amend the order; (3) 4-page SEC response in opposition to Orr motion to intervene; (4) 7-page LPHI motion for further stay; (5) 30-page LPHI motion to set security, without exhibits; (6) 10-page LPHI motion to alter or amend the order; and (7) 11-page SEC motion to alter or amend the order. Send an e-mail to jmbelth@gmail.com and ask for the SEC-LPHI December 31 package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com