Life Partners Holdings Inc. violated Texas law by fraudulently selling unregistered securities to investors, Attorney General Greg Abbott alleged in a state court complaint.
Life Partners Holdings buys rights to death benefits from policyholders in exchange for lump-sum payments, generating revenue on the split between what they pay for policies they acquire and what they charge investors for their interests.
Abbott, in a complaint filed yesterday in an Austin, Texas, court, accused the company and its Life Partners Inc. unit of manufacturing the value of life-settlement investments by using artificially short life expectancies, an action he claimed is akin to a used car salesman rolling back a vehicle’s odometer to increase its value.
“Revenues have declined rapidly, escrow accounts are depleting, policies are at risk, and the companies will be out of cash in as early as two months,” according to Abbott’s complaint.
The Waco, Texas-based company has more than 29,000 investors across the U.S., according to the attorney general. As of Dec. 31, 2010, the companies held 3,879 policies, of which 3,152 were beyond the contrived life expectancy estimates given investors, according to the complaint.
Abbott is seeking an immediate court order barring Life Partners, Chief Executive Officer Brian D. Pardo and President R. Scott Peden from continuing to sell the allegedly fraudulent securities, appointing a receiver and other relief.
Abbott said that despite Life Partners’ “dire financial situation,” the company will pay a $1.8 million quarterly dividend next month.
“Pardo, either directly or through his Pardo Family Trust, will benefit from this dividend by approximately $900,000,” Abbott said in the complaint.
“We deny the allegations in the strongest possible terms,” Pardo said in a statement issued by Life Partners Holdings late today. “We did not misrepresent our life settlements. The life expectancy estimates we provided to purchasers were made by a third party in good faith.”
Pardo called Abbott’s claim that the company was nearing insolvency “spurious” and said the business had more than $10 million in cash on hand and $45 million assets.
He also said Texas courts and a federal appeals court had reviewed the companies’ life settlements and ruled they are not securities.
Travis County, Texas, District Court Judge Orlinda Naranjo today granted a temporary order barring Life Partners and the two executives from dissipating company assets and from destroying or removing books and records.
A hearing originally set for today at which the judge would consider the receivership appointment and a temporary restraining order has been postponed until tomorrow, according to Naranjo’s order.
The case is State of Texas v. Life Partners Holdings Inc., D-1-GV-12-001128, District Court of Travis County, Texas, 201st Judicial District (Austin).