Thursday, February 26, 2015

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 and ask for the SEC-LPHI February 25 package.