Life Partners Inc., a company that buys out life insurance policy interests, deceives its own investors about how soon those policies will pay off, lawyers for Texas Attorney General Greg Abbott said.
Abbott sued the Waco, Texas-based company and parent Life Partners Holdings Inc. last month, claiming their actions are tantamount to a used car dealer who rolls back vehicle odometers to increase their value.
“The companies rely upon one life expectancy at purchase and then provide investors with a significantly shorter and artificial life expectancy in order to generate contrived and inflated revenues,” according to the complaint filed in state court in Austin.
At a hearing today, the attorney general sought a court order ending practices he claims violate the Texas Securities Act. Judge Stephen Yelenosky heard more than three hours of testimony before adjourning until tomorrow.
Life Partners’ lawyers have asked the court to throw out the case, arguing prior rulings prove the state’s securities laws don’t apply to their clients.
The company has more than 29,000 investors in the U.S., according to Abbott. As of Dec. 31, 2010, Life Partners held 3,879 policies, of which 3,152 were beyond the life expectancy estimates given to the investors, according to the complaint.
Courtroom spectators included Life Partners investors and financial advisers, some of whom wore blue short-sleeve shirts bearing the company’s name.
Supporters held signs outside the courthouse stating “AG For Sale,” “LPI Helps Seniors,” and “Abbott: Friend of Lobbyist.”
Chief Executive Officer Brian Pardo and General Counsel Scott Peden are also defendants in the case. They’ve denied the attorney general’s claims. Peden will testify tomorrow, company lawyer Elizabeth Yingling told the court.
“The very issue sought to be adjudicated by plaintiff herein has already been determined as to LPI not once but twice, by two different appellate courts,” according to the Life Partners filing, citing a 2005 Texas appeals court decision and a 1996 ruling by the U.S. Court of Appeals in Washington.
“It is not only logical and lawful, but perfectly fair, for LPI to have relied upon those decisions in the continued operation of its business,” attorneys for the company said in the Sept. 19 filing.
Travis County District Court Judge Orlinda Naranjo in Austin on Aug. 17 issued an order barring Life Partners from dissipating assets or destroying records. She rejected the state’s request to bar Life Partners from engaging in fraud or selling unregistered securities, telling the lawyers those issues went to the heart of the dispute.
She didn’t rule on the attorney general’s request to appoint a receiver for the companies, which Abbott has said are running out of money.
The case was reassigned today to Yelenosky. He heard testimony from former Life Partners Chief Financial Officer David Martin, who left the company in July after four years in that role.
He testified that at the second quarter of fiscal year 2011 Life Partners had $33 million in revenue. By end of last February revenue was $5 million.
Still, under questioning by Yingling, Martin said that when he left, he wasn’t concerned that the business was in imminent danger of failing.
“I felt like they could exist for much longer than 12 months,” he said. Martin also said he wasn’t worried about its finances for fiscal 2014.
The ex-CFO told the court he had no reason to believe any fraudulent activity was taking place.
Kevin Stephens, a forensic accountant with Navigant Consulting Inc. in Washington, also testified for the state, telling the court that Life Partners’ operating income had been decreasing for the past five quarters.
The company is using cash on hand, $12.7 million at the start of its fiscal year, to pay dividends and cover operating losses, Stephens said.
Most of those dividends have gone to Pardo Family Holdings Ltd., domiciled in Gibraltar, Stephens said. SEC filings also reflect payments to Brian Pardo, his daughter and son-in-law for salary, bonuses and other compensation.
The case is Texas v. Life Partners Holdings Inc., D-1-GV-12-001128, District Court of Travis County, Texas, 201st Judicial District (Austin).