Wednesday, February 12, 2014

No. 30: Another Court Setback for Life Partners

Life Partners, Inc. (Waco, TX) is an intermediary in the secondary market for life insurance policies and the operating subsidiary of Life Partners Holdings, Inc. (NASDAQ:LPHI). On February 3, 2014, as discussed in my blog post No. 29, a federal jury found LPHI and its two top officers guilty of some and not guilty of other civil securities violations. On February 6, in a separate case, a Texas appellate court reversed a state district court judgment and ruled that the life settlements offered by Life Partners are securities subject to regulation under the Texas Securities Act. The latest ruling, another setback for Life Partners, follows similar recent rulings by another Texas appellate court and a federal district court.

The State Lawsuit
On August 16, 2012, the Texas attorney general, on behalf of the state and at the request of the Texas securities commissioner, filed a lawsuit in a state district court against the Life Partners companies, their two top officers, and five "relief" (nominal) defendants. The state alleged, among other things, that the defendants orchestrated a fraudulent enterprise and manufactured the value of life settlements through artificially short life expectancies. The state requested, among other things, a temporary injunction and the appointment of a receiver.

On October 3, 2012, Judge Stephen Yelenosky ruled that the state had "failed to establish that the transactions at issue are securities under Texas law." He denied the state's requests. (State of Texas v. LPHI, District Court of Travis County, Texas, No. D-1-GV-12-001128.)

The State Appeal
The state appealed the denial. The appeal was heard by a panel consisting of Justices David Puryear, Jeff L. Rose, and Melissa Goodwin.

On February 6, 2014, the panel issued an opinion written by Justice Puryear unanimously reversing the district court judgment and ruling that "the life settlements offered by Life Partners are investment contracts and, therefore, qualify as securities subject to regulation under the [Texas] Securities Act." The panel sent the case back to the district court "for further proceedings consistent with this opinion." (State of Texas v. LPHI, Texas Court of Appeals, Third District at Austin, No. 03-13-00195-CV.)

Two Other Recent Court Rulings
On August 28, 2013, as discussed in the December 2013 issue of The Insurance Forum, a three-justice Texas appellate court panel unanimously reversed a district court decision. The panel ruled that "the viatical settlements sold by Life Partners are investment contracts, as a matter of law, under the Texas Securit[ies] Act and meet the definition of 'security.'" (Arnold v. Life Partners, Texas Court of Appeals, Fifth District at Dallas, No. 05-12-92-CV.)

On November 19, 2013, as discussed in my blog post No. 22, Senior U.S. District Judge James R. Nowlin issued an order denying LPHI's motion for partial summary judgment in the civil lawsuit the Securities and Exchange Commission (SEC) had filed against LPHI. Judge Nowlin ruled, among other points, that LPHI's life settlements are securities. (SEC v. LPHI, U.S. District Court, Western District of Texas, No. 1:12-cv-33.)

The Alexander Statement
Douglas W. Alexander is one of the attorneys who represented LPHI in the Texas appellate court case decided last week. According to the website of the Texas firm of Alexander DuBose Jefferson & Townsend LLP, Mr. Alexander "is widely regarded as one of the premier advocates specializing in practice before the Supreme Court of Texas."

An article by Mark Maremont in the February 6 online edition of The Wall Street Journal referred to a statement by Mr. Alexander. In response to my request, Mr. Alexander sent me this statement:
We are disappointed by the court of appeals' decision and we intend to timely pursue appellate review to the Texas Supreme Court. Two appellate courts have ruled that LPI's life settlements are not securities, and we continue to believe that those are the better reasoned decisions. [LPI is Life Partners, Inc.]
I asked Mr. Alexander what appellate decisions he had in mind. He said one was the 1996 ruling by the federal District of Columbia Circuit in SEC v. Life Partners. I first wrote about that ruling—a 2 to 1 decision where the dissenter wrote a lengthy opinion—in the March 1999 issue of The Insurance Forum. I also wrote about it in my blog post No. 22, where I mentioned Judge Nowlin's recent rejection of it.

The other decision to which Mr. Alexander referred was a 2004 ruling that he said "follows the D.C. Circuit's [1996] decision but also cites some Texas authorities." I checked on the 2004 ruling and found it was a 2 to 1 ruling in which the dissenter said: "I would find that the viatical settlement contracts and notes are securities under the Searsy-Howey four-pronged test and the Reves test." (Griffitts v. Life Partners, Texas Court of Appeals, Tenth District at Waco, No. 10-01-00271-CV).

I appreciate Mr. Alexander's prompt responses to my requests. Over the years, LPHI's officers and attorneys have ignored or brushed off my requests for information.

General Observations
The appellate ruling last week is the third recent ruling that LPHI's life settlements are securities. LPHI has said in public filings with the SEC that, if such a view should ever be finalized, "it would result in a material adverse effect on our operations and require substantial changes in our business model."

By the close of business on Monday, February 10, LPHI had not filed an 8-K (material event) report with the SEC about the February 6 ruling. On February 10, LPHI's shares closed at $2.45, down from Friday's $2.61 close on higher than average volume.

Because of the importance of the latest ruling, I am making it available as a four-page complimentary PDF. Send an e-mail to and ask for the February 6 opinion relating to Life Partners.