Life Partners Holdings Inc. and its Life Partners Inc. unit, an investor-financed buyer of insurance policy death benefits, were barred by a judge in Texas from dissipating assets or destroying records.
Texas Attorney General Greg Abbott sued the company on Aug. 15, claiming the policy interests it sold were unregistered securities and that Life Partners misled investors about the life expectancies of the insured to generate revenue. He asked the court to bar the allegedly unlawful conduct.
Judge Orlinda Naranjo today signed a two-week restraining order after more than two hours of argument in state court in Austin. She struck proposed language barring Life Partners from engaging in fraud or selling unregistered securities, telling the lawyers those issues went to the heart of the dispute.
Naranjo scheduled an injunction hearing for Aug. 30. The judge didn’t rule on the attorney general’s request to appoint a receiver for the firm. Life Partners fell 18 percent to $1.96 in Nasdaq Stock market trading today.
“We’re pleased that we’re able to continue our operations in our ordinary course of business,” Life Partners President Scott Peden said as he left the courthouse. Peden and Chief Executive Officer Brian Pardo are defendants in the lawsuit. Waco, Texas-based Life Partners and Pardo yesterday denied the attorney general’s allegations.
Abbott sued on behalf of the Texas State Securities Board. Robert Elder, a spokesman for board, declined to comment on Naranjo’s order.
“In order to protect investors, the state moved swiftly to secure much-needed protections from the court,” Abbott said in a statement. “Given the firm’s precarious financial state, it was extremely important that safeguards be imposed to protect investors.”
The restraining order, which also apples to Pardo and Peden, bars the company from paying dividends or executive salary increases or bonuses, the attorney general said.
Life Partners has more than 29,000 investors across the U.S., according to the attorney general. As of Dec. 31, 2010, units of the company held 3,879 policies, of which 3,152 were beyond the life expectancy estimates investors were told, according to the complaint.
Shorter life-expectancies meant the policies would pay out more quickly, according to Abbott’s complaint. He compared it to rolling back the odometer on a used car to boost its apparent value.
“The value of these products is driven by the life expectancy,” Jennifer Jackson, an attorney for the state, told Naranjo today. “A shorter life expectancy means a higher price.”
A doctor used by Life Partners to compute insureds’ life expectancies from 1999 until March 2011 was returning estimates that were “significantly too short,” the state’s lawyer said.
Defense lawyer Elizabeth Yingling disputed Jackson’s life-estimate assertions.
“Nobody can predict when somebody is going to die,” she told Naranjo today. The Life Partners lawyer also said the company was fiscally sound and said Abbott was asking the court to shut down a public company, causing “irreparable harm.”
“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. Despite the “dire financial situation,” the company was set to pay a $1.8 million quarterly dividend next month, Abbott said.
“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 company statement yesterday. “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 and $45 million in assets.
He also said Texas courts and a federal appeals court had reviewed the companies’ life settlements and ruled they aren’t securities.
The case is Texas v. Life Partners Holdings Inc., D-1-GV-12-001128, District Court of Travis County, Texas, 201st Judicial District (Austin).