No. 87: Life Insurance Replacement—Let's See the Numbers

In No. 69 posted September 30, 2014, I discussed the debate over the nature of sales illustrations that should be allowed in the promotion of indexed universal life (IUL) policies. I offered readers a 23-page "IUL package" of documents relating to the debate.

Recently a reader sent me a request for the IUL package. He made some comments that led to an exchange of e-mails. He said he is

genuinely helping owners of older, permanent policies change or restructure them away from the too often "dead money" of old policies into something current much more powerful. My default carrier is Penn Mutual and my nemesis is NML [Northwestern Mutual Life] because of their too successful tactics of being your best friend while picking your pocket.

When I sent him the IUL package, I said I was puzzled by his remarks. I asked what he meant by "something current much more powerful," his "default carrier is Penn Mutual," and NML "picking your pocket."

He responded: "Penn Mutual came highly recommended and my experience has been consistent with those recommendations." He also said:

I have found numerous people/clients with 15-20+ year old permanent policies who can get much greater death benefits and ultimately cash value (after recovering the initial reduction) by 1035ing the cash into a new policy. The old policies are consistently projected to perform much more poorly than a new one but the existing carrier virtually never offers to restructure it unless at risk of losing the policy. There's no reason an old policyholder should accept below market returns for life but typically don't know how to proceed. Mortgages are refinanced frequently but the lack of transparency and self interest make refinancings in insurance much less common.

Most old policies can be improved including NML. They can be greatly improved on but the tenacity (and mendacity) of the agents (through badmouthing other carriers, misrepresenting returns, etc.) frustrates me because they too often succeed in their interests but at the expense of the policyholders in whose interests they claim to work.

I responded that I am not from Missouri but still need to be shown. I asked him to consider a man who bought a $100,000 traditional whole life policy from NML ten years ago at age 35. I asked him to give me figures that show how the man could improve his financial position today by replacing the NML policy through a 1035 exchange with a new Penn Mutual policy. In response he said:

Can't take the time to do that right now, but the approach would be to compare an illustration of a new policy using cash value transferred, paying the same premium, same age etc. vs. in-force illustration of existing policy. It may not be perfect but the improvement is usually dramatic. Often when the policyholder requests the in-force illustration, the agent of the carrier offers to improve the policy.

I said I still need to see the numbers. He said he understood but can't take the time to do it now. He said he will try to do it sometime soon.

General Observations

I have often said some replacements are justified from a price standpoint, some are not justified, and some situations are a toss-up. I said serious consideration should be given to replacement only when it is clearly justified.

The unwarranted replacement situation that I discussed in No. 76 (posted December 15, 2014) admittedly was an extreme case. However, I have never seen a situation where the replacement of a seasoned cash-value life insurance policy issued by NML was justified from a price standpoint. That is what prompted me to ask my reader to show me the numbers. I hope that some day soon he will perform the analysis I requested.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 86: Life Partners—The NASDAQ Delisting Situation

In No. 84 posted February 25, I reviewed several significant recent developments since Life Partners Holdings, Inc. (LPHI) filed for bankruptcy protection under Chapter 11 of the U.S. bankruptcy law. Subsequent to the filing, LPHI received three notifications concerning the possible delisting of its shares, which are traded on NASDAQ.

The First Notice
On January 20, the day of the bankruptcy filing, NASDAQ notified LPHI that the bankruptcy filing placed the company in violation of NASDAQ listing rules, and that the company's shares therefore will be delisted. LPHI said it was planning to appeal the ruling and that, if the appeal is not successful, the shares may be eligible to be quoted on the Pink Sheets if a market maker applies to perform that function and is approved.

The Second Notice
On February 2, NASDAQ notified LPHI that the company did not meet the minimum bid price requirement in NASDAQ listing rules because the minimum bid price per share was below $1.00 for 30 consecutive days. The price lately has been fluctuating in a fairly narrow range around 20 cents per share. The company has until August 3, 2015, to regain compliance with the minimum bid price requirement, and may be eligible for additional time.

The Third Notice
On February 23, NASDAQ notified LPHI of three public interest concerns that constitute an additional basis for delisting the company's shares. The concerns, which relate to the Securities and Exchange Commission (SEC) lawsuit against LPHI and its top officers, are:

• The jury findings that LPHI's executive officers participated in filing false and misleading financial statements with the SEC.
• The history of egregious misconduct by LPHI's executive officers.
• LPHI's failure to make prompt disclosure of material information, particularly the approximately $46 million in sanctions imposed on LPHI and certain of its executive officers by the December 2 Final Judgment Order, until the January 14 filing of the 10-Q report for the fiscal quarter ended November 30, 2014.

LPHI has requested a hearing about the delisting proceedings, and the hearing is scheduled for March 19, 2015. There can be no assurance the company will be successful in the appeal.

General Observations
This is my first detailed experience with the NASDAQ delisting procedure. It strikes me as a lengthy process. Also, it is unclear what arguments LPHI can make at the March 19 hearing that would persuade NASDAQ to refrain from delisting the company's shares.

I am offering a complimentary six-page PDF consisting of the three LPHI announcements about the delisting proceedings. On the first of the three, I have indicated the date of the announcement and shown the correct date on which LPHI received the NASDAQ letter. Send an e-mail to jmbelth@gmail.com and ask for the LPHI delisting package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

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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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

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

Blog: www.josephmbelth.com

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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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

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