Life Partners Holdings, Inc. and its two top officers have received a Wells notice from the Securities and Exchange Commission informing them that the SEC staff intends to recommend a civil enforcement action against them for allegedly misrepresenting the life expectancies of insureds whose life insurance policies it sold to retail investors, according to a Wall Street Journal article by Mark Maremont and Leslie Scism entitled “Life Partners Could Face SEC Action.” According to the article, Life Partners has sold billions of dollars of these policies.
The life expectancy misrepresentations are alleged to be material ? i.e., the information would be important to a reasonable investor in deciding whether or not to invest. The shorter the estimated life expectancy of the insured person is, the shorter an investor’s holding period is, the lower an investor’s carrying costs (premiums), and more investors can expect to make on the investment.
Life Partners, of Waco, Texas, is a major seller of so-called life settlements. People who no longer need or want their life insurance policies sell them, through brokers (like Life Partners), to investors, who buy fractional shares in these strangers’ policies.
Life Partners was recently featured in a page one article in The Wall Street Journal that challenged the accuracy of the company’s life-expectancy estimates, reported that many of the insured people were living well beyond those estimates, and posited that investors were not likely to realize the 10% to 15% annual returns the company promoted.
The life-expectancies were reportedly computed by a doctor in Reno, Nev., who had been paid more than $1.3 million for part-time work since 2002. For example, 95% of the people insured were still living after the life expectancy period estimated by the Reno doctor. The Journal also found that policies brokered in 2003 and 2004 showed similar patterns.
According to the article, Life Partners made large profits buying policies cheaply based on market expectations that the insureds would live a long time, then selling the policies to retail investors at a big mark up based on a much shorter life expectancy.
The officers cited in the SEC’s Wells notice are Brian D. Pardo, CEO, and R. Scott Peden, general counsel.
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