© 2014 The Texas Lawbook.
By Natalie Posgate – (Dec. 3) – An Austin federal judge late Tuesday ordered Waco-based Life Partners Holdings, Inc. and two top executives to pay $46.9 million for violating securities laws by filing misleading financial statements.
U.S. District Judge James Nowlin slammed the financial services company for not replacing the corporate executives who “were responsible for the violations.”
The U.S. Securities and Exchange Commission claimed Life Partners intentionally hid the actual value of the life insurance policies it purchased from elderly or ill policyholders at a discount and then resold to investors. The federal agency also accused the company’s CEO and its general counsel of insider trading and filing bogus quarterly and annual financial reports.
In February, a jury rejected most of the larger claims that Life Partners defrauded investors and found that the executives did not violate insider-trading laws. But jurors said there was sufficient evidence to conclude that the insurance investment firm misled investors when CEO Brian Pardo and General Counsel Scott Peden submitted false or misleading company filings to regulators and investors.
Life Partners and its lawyers told Judge Nowlin that the jury dismissed all but minor charges and that the company should not face any fines or sanctions.
Judge Nowlin, in a scathing 22-page final judgment that surprised lawyers on both sides, clearly disagreed.
“These ‘minor’ charges are not minor at all,” the judge wrote. “The jury judged that LPHI, Pardo and Peden deprived the investing public of the information it needed to make a fully informed decision about whether to invest in Life Partners. Given that disclosure is the basis of American securities law, these are serious violations.”
Judge Nowlin ordered Life Partners to pay $15 million in illegal profits and a $23.7 million civil penalty in the next two weeks. In the next 30 days, Life Partners CEO Brian Pardo must pay $6 million and General Counsel Scott Peden must pay $2 million.
“This order shows the importance of truthful corporate disclosures,” said David Woodcock, the SEC’s Fort Worth Regional Office director. “The defense has repeatedly called these minor violations, but the court showed otherwise.”
Elizabeth Yingling of Baker & McKenzie, who led the defense for Life Partners, declined to comment on the final judgment.
Dallas attorney Jay Ethington, who represents Pardo, said he was so surprised by the language in the judge’s order that thought he was “reading a court order from a different case” when he first saw it.
“We’re very disappointed in the language of the order and believe that some significant statements are unsupported by the evidence as we saw it,” Ethington said. “The company intends to continue on, and we’ll deal with this as it goes through the final stages of the litigation.”
In an email, Squire Patton Boggs partner Cass Weiland, who represents Peden, said he thought the penalties seemed “a bit harsh” for “a case where there was no fraud.”
“The SEC seems to be aiming to put the company out of business and destroy the shareholders’ investments,” he said.
Outside legal experts following the case said Judge Nowlin’s final order was unique because he took Life Partners’ post-trial conduct into great account when making his decision on the sanctions. In other words: a company done with the trial is not yet out of the woods until final judgment.
“He goes to pains to describe the lack of institutional changes within Life Partners as the jury came back,” said Bell Nunnally partner Jeff Ansley, a previous U.S. Attorney and enforcement attorney for the SEC.
“Your activity during that period sits within the parameters of what the judge can consider in determining the type of penalties and restitution or disgorgement that can be ordered,” said Ed Tomko, a former federal prosecutor who now practices in Dykema Gossett’s Dallas office.
In his opinion, Nowlin pointed out that despite the company and CEO’s history of securities issues, “Life Partners exhibited – at best – a casual attitude toward ensuring that it followed the law” and “has apparently not made any changes to the core group of leaders who were responsible for the violations that are the subject of this litigation.”
For example, the evidence showed Peden rendered “knowing and substantial assistance in LPHI’s filing of 17 separate, false reports” that added up to 68 individual SEC violations, Nowlins’ order said.
Ansley pointed out that it is also unusual for courts to be so demonstrative in statements regarding individuals in the lawsuit in the final judgment.
Previous securities issues included a 2007 lawsuit settlement Life Partners reached with Colorado securities regulators, who alleged Life Partners’ materially short lifetime expectancies violated Colorado securities laws. Nowlin also pointed out the fact that Pardo threatened to sue Ernst and Young, the company’s auditor, when it said it could not sign off on Life Partners’ financial disclosures because it didn’t believe it met compliant accounting practices.
In his order, Nowlin said the evidence in the case showed “that oversight and compliance at Life Partners were non-existent,” such as compliance officer Ted Ballantyne, who testified during trial that he had never heard of the Wall Street Journal investigative story that raised the national question of whether Life Partners was systematically defrauding its retail investors.
Bracewell & Giuliani partner Shamoil Shipchandler said the ruling was good for the SEC, because despite the initial mixed result of the SEC not prevailing on its main charges at trial, “the court order helped the SEC by saying the case wasn’t brought in vain.”
However, by losing the main charge, Shipchandler, a former prosecutor with the Department of Justice, said “the SEC needs to go back and think about how they’re processing these cases.”
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