Monday, January 5, 2015

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 and ask for the SEC-LPHI December 31 package.