Dropping a bombshell on the
US life settlements industry, the Securities and Exchange
Commission (SEC) has charged Life Partners Holdings and three of
its senior executives with involvement in a fraudulent disclosure
and accounting scheme involving life settlements.

According to Texas-based Life
Partners, it is one of the oldest and largest life settlements
specialists in the US. Since its founding in 1991 it has completed
more than 137,000 transactions for a client base of more than
28,000 individuals and institutions involving the purchase of 6,400
policies with a total face value of $3bn. The company is listed on
the Nasdaq stock exchange.

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In its complaint before a US
District Court in Texas, the SEC alleges that Life Partners
chairman and CEO Brian Pardo, president and general counsel Scott
Peden, and chief financial officer David Martin “misled
shareholders by failing to disclose a significant risk to Life
Partners’ business”.

The SEC added: “The company
was systematically and materially underestimating the life
expectancy estimates it used to price transactions.”

Underestimating life
expectancies resulted in the assets held on Life Partners’ books
being inflated, alleged the SEC. This, noted the regulator, created
the appearance of a steady stream of earnings from brokering life
settlement transactions.

“Life Partners duped its
shareholders by employing an unqualified medical doctor to assign
baseless life expectancy estimates to the underlying insurance
policies,” commented Robert Khuzami, director of the SEC’s Division
of Enforcement in a statement. “This deception misled shareholders
into thinking that the company’s revenue model was sustainable when
in fact it was illusory.”

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The SEC alleged that Life
Partners “materially misstated” its net income from its 2007
financial year through to the third quarter of its 2011 financial
year. The SEC has also laid an additional charge against Pardo and
Peden under which it alleged that they engaged in insider trading
in Life Partners shares.

Commenting on this aspect of
the complaint, David Woodcock, director of the SEC’s Fort Worth
regional office, said: “The senior-most executives at Life Partners
concealed significant risks to the business, manipulated financial
statements with improper accounting, and knowingly profited from
their misconduct by executing insider trades based on information
that was not available to the public.”

Responding to the SEC’s allegations, Pardo said in a
statement: “It is very disappointing that the SEC has chosen to
pursue litigation over issues that we believe have no merit and
financial presentation issues that we do not believe are material.
We have always done our best to deliver value to our shareholders
and to run an honest and transparent company. We intend to
vigorously defend ourselves against these meritless
claims.”