Jury Finds Against SEC On Most Claims In Financial Fraud Case

by Dorsey & Whitney LLP
Contact

The jury in SEC v. Life Partners Holdings, Inc., Civil Action No. 1-12-cv-00033 (W.D. Tx. Verdict Feb. 3, 2014) rejected most of the Commission’s claims which centered around an alleged financial fraud. This is one of a series of recent set-backs the SEC has suffered in the courtroom.

The action was brought against Nasdaq traded Life Partners Holdings, Inc. and its chairman and CEO, Brian Pardo, along with president and general counsel, Scott Peden, among others. The complaint alleged that the defendants misled shareholders by failing to disclose that the company was systematically and materially underestimating the life expectancy estimates it used to price transactions.

Most of the revenue of the company is derived from brokering life settlements which involve the sale of fractional interests of life insurance policies whose value is keyed to the insured’s life expectancy. For this purpose the company used life expectancy estimates provided by a doctor with no actuarial training or prior experience in this area, according to the complaint. No meaningful due diligence was conducted to determine if the doctor’s methodology and qualifications were appropriate.

The complaint claimed the two officers were aware that the estimates were systematically and materially short. Nevertheless, between February 2007 and January 2009 Messrs. Pardo and Peden sold, respectively, about $11.5 million and $300,000 of Life Partners common stock based on inside information “that the firm’s stock price was dependent on its practice of systematically using materially short . . .” life expectancy estimates, according to the complaint. The Commission also claimed that from fiscal year 2007 through the third quarter of fiscal 2011 the company prematurely recognized revenue and understated impairment expense related to its investment in life settlements. Violations of Exchange Act Section 10(b), 13(a), 13(b)(2)(a) and 13(b)(5) and Securities Act Section 17(a) were alleged. The complaint also demanded the repayment of certain stock sales profits and bonuses under SOX.

Prior to jury deliberations the parties disagreed on the precise scope of the claims being advanced by the SEC. Defendants sought the entry of a judgment in their favor based in part on a contention that the Commission “failed to introduce any evidence at trial to support any of its revenue recognition claims . . .” The Court rejected that motion and presented the then existing claims for consideration by the jury. Those claims were summarized by the Court in the instructions. There jurors were told to consider nine specific claims (grouping the aiding and abetting charges together with the primary claim for purposed of brevity):

1) Securities fraud under Exchange Act Section 10(b) against the three defendants for making material misstatements regarding “a material risk to the Company’s business . . . or a material trend impacting the Company’s reserves . . .” The jury rejected this claim.

2) Insider trading against the two individual defendants. The jury rejected this claim.

3) Securities fraud under Securities Act Section 17(a) against the three defendants for making misrepresentations or omissions “regarding the company’s revenue recognition policy.” The jury found in favor of the SEC as to each defendant.

4) Section 13(a) and Rules 12b-20, 13a-1 and 13a-13 against the company (and aiding and abetting violations by the individuals) for filing “Forms 10-Q, 10QSB, 10-K and 10-KSB with the SEC that contained false statements . . .” The jury found in favor of the Commission on these claims.

5) Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B) as to the company (and aiding and abetting as to each individual defendant) for failing “to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that . . .” transactions were recorded as necessary and such that the firm could maintain accountability of its assets. The jury found against the SEC on these claims.

6) Exchange Act Section 13(b)(5) as to the two individual defendants for either falsifying the books and records of the company, circumventing its internal controls or failing to implement a system of internal accounting controls. The jury rejected the SEC’s claims.

7) Exchange Act Rule 13b2-1 as to the two individual defendants for falsifying “any book, record or account . . .” of the firm. The jury rejected these claims.

8) Exchange Act Rule 13b-2 against each individual defendant for making a false or misleading statement “to an accountant in connection with (i) any audit . . . . or (ii) the preparation or filing of any document or report required to be filed with the Commission.” The jury found against the SEC on these claims.

9) Exchange Act Rule 13a-14 against Mr. Pardo for certifying a report of the firm filed with the Commission that contained a misrepresentation or omission. The jury found in favor of the Commission on this claim.

According, the jury found against the SEC on six of nine claims and in its favor on three. The jury rejected the primary fraud claim against the defendants which was based on alleged misstatements or omissions regarding essentially the business model of the company and the related insider trading charges while concluding that the defendants made a filing with the Commission which misrepresented the revenue recognition policy of the business. Life Partners is the fifth case in which the Commission has lost either all or the key claims at trial since late December 2013 – less than sixty days.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!