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Life Partners Sued by SEC Over Disclosures, Accounting; Shares Plunge 20%

Life Partners Holdings Inc. (LPHI) and three top executives are facing U.S. regulatory claims that they defrauded shareholders by systematically understating risk related to the firm’s purchases of insurance policies.

Shares of Waco, Texas-based Life Partners fell $1.10, or 17 percent, to $5.27 in New York, a day after the Securities and Exchange Commission said Chairman and Chief Executive Officer Brian D. Pardo, President and General Counsel R. Scott Peden and Chief Financial Officer David M. Martin engaged in a scheme that misled investors about the firm’s profit potential.

“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,” David Woodcock, director of the SEC’s Fort Worth Regional Office, said in a statement yesterday.

The company, which buys rights to death benefits from policyholders in exchange for lump-sum payments, knowingly underestimated life expectancies used in transactions from 2007 to 2011, the SEC said in its statement. Pardo sold $11.5 million of stock and Peden sold shares valued at $300,000 while privy to inside information, the agency said.

Life Partners opened at $4.07, 36 percent below yesterday’s close. The shares peaked at $28.10 a share three years ago.

‘No Merit’

“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,” Pardo, who owns more than 50 percent of the firm’s shares, said in a statement. “We intend to vigorously defend ourselves against these meritless claims.”

Life Partners generates revenue by buying and selling fractional interests of insurance policies in the secondary market, the SEC said. The firm duped shareholders “by employing an unqualified medical doctor to assign baseless life expectancy estimates to the underlying insurance policies,” SEC Enforcement Director Robert Khuzami said in the agency’s statement.

“This deception misled shareholders into thinking that the company’s revenue model was sustainable when in fact it was illusory,” Khuzami said.

Calls to the company seeking further comment yesterday and today weren’t returned. Peden didn’t respond to a telephone message left at a residential listing under his name in Woodway, Texas. A listing couldn’t be found for Martin.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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