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http://www.washingtonpost.com/business/economy/fraud-alleged-in-betting-on-life-expectancies/2012/01/03/gIQAyTIRaP_story.html

Fraud alleged in betting on life expectancies

The government Tuesday accused a Texas firm of defrauding investors in the unusual business of essentially betting when people will die.

The firm, Life Partners Holding, brokers the sale of life insurance policies from the policyholders — for example, the people whose lives are insured — to investors. The investors collect when the insured dies and the company that issued the insurance policy pays the death benefit.

The return on the investment is largely a function of when the insured dies; the earlier the payout, the greater the return on investment.

The company and three executives committed fraud by systematically lowballing life expectancies, the Securities and Exchange Commission alleged in a civil suit.

“Life Partners duped its shareholders by employing an unqualified medical doctor to assign baseless life expectancy estimates to the underlying insurance policies,” Robert Khuzami, the SEC’s director of enforcement, said in a news release. “This deception misled shareholders into thinking that the company’s revenue model was sustainable when in fact it was illusory,” he said.

Named in the SEC suit were Life Partners chairman and chief executive Brian Pardo, president and general counsel Scott Peden and chief financial officer David Martin.

“Mr. Pardo vehemently denies any wrongdoing and intends to vigorously defend himself,” Jason S. Lewis, a lawyer for Pardo, said by e-mail.

Pardo sold about $11.5 million in Life Partners stock at inflated prices while he knew of the company’s dependency on short life expectancy estimates, the SEC alleged.

Messages left at the company and with lawyers for the other defendants after business hours Tuesday were not returned.

The company misstated its profit from fiscal year 2007 through the third quarter of fiscal year 2011 by prematurely booking revenue and understating the extent to which its investments in so-called life settlements were impaired in value.

The life settlements industry has packaged potential death benefits into investments in much the way that Wall Street has securitized streams of income as diverse as mortgages, car loans and credit card receivables. Investors can buy fractional shares in insurance policies.

The life settlements industry has been a source of consternation to the life insurance industry, partly because insurers had made assumptions about how many policies would lapse before they could trigger a death-benefit payout. Investors can reduce the lapse rates and force more payouts by paying the premiums to keep policies active.

The life settlements industry has argued that it gives policyholders a way to profit from policies they no longer want or can no longer afford.


Eric D. Schwerin
Rosemont Seneca Partners, LLC
1010 Wisconsin Ave., NW
Suite 705
Washington, DC 20007
(202) 333-1880
eschwerin@rosemontseneca.com
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