Friday, January 16, 2015

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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