Texas State Securities Board Sues Life Partners over Subpoenas

<"http://www.yourlawyer.com/topics/overview/Life-Partners-Life-Settlement-Lawsuit-Lawyer">Life Partners Holdings, Inc. of Waco, Texas, is taking heat from Texas regulators today for failing to comply with subpoenas issued as part of an investigation into the way it determines valuations for life settlement investments. The Texas State Securities Board took Life Partners to court last Thursday to force it to comply with its subpoenas, marking the first public disclosure of the regulator’s investigation of the firm.

Life settlements, also sometime called viatical settlements, involve the sale of an existing life insurance policy to an investor. The investor pays required premiums on the policy, then collects its proceeds once the insured dies. The shorter the life expectancy of the insured is estimated to be, the more a firm like Life Partners generally can charge investors for that policy.

Earlier this year, a Wall Street Journal investigation reported a significant portion of insured individuals were outliving Life Partners’ life expectancy estimates, a factor that would cut investors’ returns. Life Partners’ generally touted expected returns of 10 to 15 percent on Life Settlements. The Journal reported that many the insured people were living well beyond the estimates put out by Life Partners, making such returns for investors unlikely.

In May, Life Partners disclosed that the U.S. Securities and Exchange Commission (SEC) issued a ‘Wells Notice” to the company regarding “knowledge of and disclosures about the accuracy of the estimates of the life expectancies of settlors.” Such notices are a formal warning that regulators intend to file civil charges. According to the notice, SEC staff planned to recommend the agency file civil action alleging securities fraud violations against the company and two of its executive officers and directors, CEO Brian D. Pardo and general counsel and President R. Scott Peden. In June, Life Partners received an amended Wells notice which said the SEC had expanded its focus to include accounting issues, and also to include another executive, according to The Wall Street Journal.

Texas Securities Commissioner Benette Zivley announced that state’s filing against Life Partners last Friday. According to the Associated Press, the lawsuit was filed Thursday in state district court in Austin, and the announcement of the filing marked the first public disclosure by the Texas State Securities Board that it was pursuing an investigation of Life Partners. The investigation began mid-2010.

Texas is investigating possible wrongdoing in the underlying investments in life policies that Life Partners sold to thousands of retail investors, a Wall Street Journal report said. The SEC investigation, on the other hand, is limited to the company’s publicly traded shares.

Texas is seeking a court order to compel Life Partners and its officers to comply with subpoenas it issued as part of its investigation. According to the Journal, the regulator issued fresh subpoenas to Life Partners in June 2011 seeking a “broad array” of documents.” In a letter from outside counsel, the company declined to respond to the subpoenas stating the securities board had no jurisdiction over its activities, citing a prior Texas court ruling that its insurance products weren’t securities.

In addition to a possible SEC civil action and the Texas probe, Life Partners is also facing a number of lawsuits filed by disgruntled investors. Some of those are seeking class action status.

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