Wednesday, March 16, 2016

No. 150: Life Partners—The Trustee's Report on Allegedly Fraudulent Business Conduct Preceding the Bankruptcy Filing

Life Partners Holdings, Inc. (LPHI), led by controlling shareholder and chief executive officer Brian D. Pardo, participated for many years in the secondary market for life insurance. On January 20, 2015, the Waco, Texas-based company filed for protection under chapter 11 of the federal bankruptcy law. On March 19, 2015, the bankruptcy court judge approved the appointment of H. Thomas Moran II as chapter 11 trustee. On May 20, 2015, Moran reported the preliminary results of his investigation of the allegedly fraudulent business conduct that preceded LPHI's bankruptcy filing. On March 5, 2016, Moran filed a follow-up report on the results of his investigation. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289, Document No. 1584.)

The Recent Moran Report
The text of the recent Moran report consists of 89 pages. The report has ten attachments showing 158 exhibits and covering 2,048 pages. The exhibits include internal emails, deposition transcripts, and other documents that are now in the public domain. Among the transcripts, for example, are excerpts from depositions given by Pardo in April 2011 and May 2015, by longtime LPHI executive R. Scott Peden in April 2011, and by longtime LPHI life expectancy estimator Dr. Donald T. Cassidy in September 2012. The attorneys involved in the preparation of the report were David M. Bennett, Richard Roper, Katharine Battaia Clark, and Jennifer R. Eklund of the Dallas firm of Thompson & Knight LLP. The concluding section of the text of the report reads:
Life Partners, Pardo, and others acting in concert, executed a wide-ranging, long-term scheme to defraud Investors, which (as described in detail above) occurred in a number of ways, including but not limited to the following:
  • Use of unreasonably short LEs [life expectancies] in the sale of its so-called "fractional" investments;
  • Material misrepresentation of the returns Investors could expect;
  • Misrepresentations regarding whether policies had lapsed and resale of lapsed positions;
  • Charging massive, undisclosed fees and commissions, the total amount of which, in many cases, exceeded the purchase price of the policies themselves;
  • Repeated misrepresentation of Life Partners' business practices in order to maneuver around securities regulatory regimes;
  • Egregious and continuous self dealing by insiders and their accomplices;
  • Failure to disclose cash surrender value;
  • Forcing Investors to abandon contract positions, many of which were then resold for personal gain;
  • Systematic financial mismanagement, including improper payment of dividends;
  • Faulty and inconsistent record keeping, including with respect to the escrow companies and purported "trusts";
  • Commingling and unauthorized use of Investor monies;
  • The offer and sale of unregistered securities; and
  • Implying the investment structure was a permissible investment for an IRA [individual retirement account], and failing to disclose the risks if it was not.
In 2004, in an attempt to sell Life Partners and its underwriting compared to others in the business, Brian Pardo stated: "What you have to do is explain that there is never a good defense against fraud." Ironically, Pardo and his company committed the same violations of trust he evidently ascribed to others in the business, misleading his Investors at every turn and seeking to profit himself and his family above all else. As a result of Pardo's fraud, thousands of individual Investors lost hundreds of millions of dollars.
And when the scheme as originally conceived and implemented began to collapse, they simply morphed their conduct and found new ways to reap a profit on the backs of their Investors. One fraud was layered upon another.
The financial devastation as of the bankruptcy petition date to the Investors was massive and continuing to grow. It will be decades before all of the policies in the Life Partners portfolio mature, and tens of millions of dollars in additional premiums will have to be expended in that time to preserve those policies. The Life Partners fraud deserves a place in Texas history as one of the largest and longest-standing fraud schemes ever perpetrated in this State. The scheme has already cost thousands of innocent Investors hundreds of millions of dollars, which in many cases represented a material portion of, or their entire, life savings.
General Observations
Earlier documents filed by the Securities and Exchange Commission (SEC), by the federal district court judge who handled the recent SEC lawsuit against Life Partners, and by Moran also contained criticism of the pre-bankruptcy business conduct of Life Partners, Pardo, and others. The recent Moran report, however, is more powerful. The text is carefully written, the language is strong, and the attachments provide a huge amount of material that had not been easily available. I think the report is devastating for Life Partners and Pardo.

Most of the so-called responses by Pardo and others to the criticism leveled at them have been ad hominem attacks on Moran, on the SEC attorneys, and on the federal district court judge. Stated another way, Pardo and others have criticized those individuals personally rather than addressing the concerns expressed. I think the Moran report undercuts such personal attacks.

Available Material
I am making available a complimentary 96-page PDF. It contains the 89-page text of the Moran report and a 7-page list that briefly identifies the 158 exhibits included in the attachments to the report. Email and ask for the March 2016 Moran report package.