Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 1 of 32

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 1 of 32UNITED STATES DISTRICT COURTFOR THE WESTERN DISTRICT OF TEXASAUSTIN DIVISIONSECURITIES AND EXCHANGE COMMISSION, :Plaintiff,Civil Action No.: 1-12-cv-00033v.LIFE PARTNERS HOLDINGS, INC., BRIANPARDO,R.SCOTTPEDEN,ANDDAVID M. MARTINDefendants.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'SMOTION TO DISMISS AND BRIEF IN SUPPORTJ Pete LaneyState Bar No. 24036942E-Mail: jpete@jpetelaney.comLAW OFFICES OF J PETE LANEY1122 Colorado StreetSuite 111Austin, TX 78701-2159Tel: (512) 473-0404Fax: (512) 672-6123Elizabeth L. YinglingState Bar No. 16935975E-Mail: elizabeth.yingling@bakermckenzie.comLaura J. 0 'RourkeState Bar No. 24037219E-Mail: laura.orourke@bakermckenzie.comWill R. DaughertyState Bar No. 24053170E-Mail: wil1.daugherty@bakermckenzie.comBAKER & McKENZIE LLP2300 Trammell Crow Center2001 Ross AvenueDallas, TX 75201Tel.: (214) 978-3000Fax: (214) 978-3099ATTORNEYS FOR DEFENDANTS, LIFEPARTNERS HOLDINGS, INC. AND R.SCOTT PEDEN

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 2 of 32TABLE OF CONTENTSI. PRELIMINARY STATEMENT ......................................................................................... 1II. BACKGROUND ................................................................................................................. 2III. STANDARDS ON A MOTION TO DISMISS .................................................................. .4IV. ARGUMENTS AND AUTHORITIES ................................................................................ 5A. Plaintiff Failed to Adequately Plead a Section 10(b) Claim based uponAlleged Short Life Expectancies ............................................................................... 51. Plaintiff Failed to Adequately Plead Motive ................................................. 62. Plaintiff Failed to Adequately Plead Conscious Behavior and Failed toAdequately Plead Material Misstatements or Omissions .............................. 8a. Neither Dr. Cassidy's Methodology nor Peden's Alleged IncorrectDescriptions thereof Impose Liability on Defendants ............................. 8b. Defendants did not Know that Dr. Cassidy's LEs were MateriallyShort ......................................................................................................... 9c. Plaintiffs Allegation that LPHI Artificially Inflated its RevenuesDefies Common Sense ........................................................................... 13d. The Contingency Discussed in the Risk Disclosures had notOccurred ................................................................................................. 14e. Plaintiff Failed to Adequately Allege Misrepresentations by Pardo ..... 17B. Plaintiff Failed to Adequately Plead a Section 10(b) Claim forAccounting Fraud ..................................................................................................... 181. Plaintiff Failed to Plead Scienter with Respect to RevenueRecognition .................................................................................................. 182. Plaintiff Failed to Plead Scienter with Respect to Impairment .................... 20C. Plaintiff Failed to Adequately Plead an Insider Trading Claim against Peden ........ 22D. Plaintiff Failed to Adequately Plead a Section 17(a) Claim ................................... .23E. Plaintiff Failed to Adequately Plead Section 13 Claims and Claims for Violationsof Various Exchange Act Rules ............................................................................... 24IV. CONCLUSION ........................................................................................................ 26-1-

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 3 of 32TABLE OF AUTHORITIESCASESPage(s)Aaron v. SEC,446 U.S. 680 (1980) ................................................................................................................. 23ABC Arbitrage v. Tchuruk,291 F.3d 336 (5th Cir. 2002) ..................................................................................................... 5Abrams v. Baker Hughes, Inc.,292 F.3d 424 (5th Cir. 2002) ........................................................................................... 7, 8,20Ashcroft v. Iqbal,556 U.S. 662, 129 S. Ct. 1937 (2009) ............................................................................ 4, 10, 17Bell At!. Corp. v. Twombly,550 U.S. 544 (2007) ................................................................................................................... 5Belodoffv. Netlist, Inc.,No. SACV 07-00677 DOC (MLGx), 2009 U.S. Dist. LEXIS 78309(C.D. Cal. September 1, 2009) ........................................................................................... 16, 17Dirks v. SEC,463 U.S. 646 (1983) ................................................................................................................. 22Dorsey v. Portfolio Equities Inc.,540 F.3d 333 (5th Cir. 2008) ............................................................................................... 3, 11Ellington Mgmt. Group, LLC v. Ameriquest Mortgage Co.,No. 09 Civ. 0416 (JSR), 2009 U.S. Dist. LEXIS 91204 (S.D.N.Y. Sept. 29, 2009) ............... 14Gonzalez v. Bank of Am. Ins. Servs.,No. 11-20174,2011 U.S. App. LEXIS 25237 (5th Cir. Dec. 12,2011) ................................ 5, 9In re Enron Corp. Sec. Litig.,258 F.Supp. 2d 576 (S.D. Tex. 2003) ...................................................................................... 17In re Novatel Wireless Sec. Litig.,No. 08cv1689 AJB RBB, 2011 U.S. Dist. LEXIS 135602 (S.D. Cal. Nov. 23,2011) ........... 18In re Sterling Foster & Co. Sec. Litig.,222 F. Supp. 2d 289 (E.D.N.Y. 2002) ..................................................................................... 14In re Sun Microsystems, Inc. Sec. Litig.,No. C 89 20351 RPA, 1990 U.S. Dist. LEXIS 18740 (N.D. Cal. Aug. 20,1990) .................. 12-1-

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 4 of 32In re Verifone Sec. Litig.,11 F.3d 865 (9th Cir. 1993) ..................................................................................................... 18Janus Capital Group, Inc. v. First Derivative Traders,131 S. Ct. 2296 (2011) ............................................................................................................. 24Jarrett v. Chase Home Fin. LLC,No. 3:10-CV-1907-M, 2011 U.S. Dist. LEXIS 47317 (N.D. Tex. May 3,2011) ..................... 5Kurtzman v. Compaq Computer Corp.,No. H-99-779, 2002 U.S. Dist. LEXIS 26569 (S.D. Tex. Mar. 30, 2002) ........................ 12, 20Lovelace v. Software Spectrum, Inc.,78 F.3d 1015 (5th Cir. 1996) ................................................................................................. 3, 6Nathenson v. Zonagen, Inc.,267 F.3d 400 (5th Cir. 2001) ..................................................................................................... 8Gran v. Stafford,226 F.3d 275 (3rd Cir. 2000) ................................................................................................... 17Plotkin v. IP Axess Inc.,407 F.3d 690 (5th Cir. 2005) ................................................................................................... 17SEC v. Adler,137 F.3d 1325 (11th Cir. 1998) ............................................................................................... 23SEC v. Cohen,No. 4:05-CV-371-DJS, 2007 U.S. Dist. LEXIS 28934 (B.D. Mo. Apri119, 2007) .... 19, 20, 25SECv. Gann,No. 3:05-CV-0063-L, 2006 U.S. Dist. LEXIS 9955 (N.D. Tex. Mar. 13,2006) ................... .23SEC v. Guenther,395 F. Supp. 2d 835 (D. Neb. 2005) ................................................................................. .18, 19SECv. Horn,No. 10-CV-955, 2010 U.S. Dist. LEXIS 135000 (N.D. Ill. Dec. 16,2010) ........................... .23SEC v. Kelly,No. 08-Civ-04612 (CM), 2011 U.S. Dist. LEXIS 108805 (S.D.N.Y. Sept. 22,2011) ........ 5, 24SEC v. Life Partners, Inc.,87 F.3d 536 (D.C. Cir. 1996) ........................................................................................... 2, 8, 14SEC v. Morgan Keegan & Co.,No. 1:09-cv-1965-WSD, 2011 U.S. Dist. LEXIS 71481, (N.D. Ga. June 28,2011) ................ 9-11-

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 5 of 32SEC v. Shanahan,646 F.3d 536 (8th Cir. 2011) ............................................................................................... 6, 20SEC v. Shanahan,No. 4:07CV270JCH, 2010 U.S. Dist. LEXIS 2101 (E.D. Mo. Jan. 12,2010) ........................ 25SEC v. Shapiro,No. 4:05-CV-364, 2008 U.S. Dist. LEXIS 17039 (E.D. Tex. March 5, 2008) .......................... 5SEC v. Steffes,No. 10-CV-6266, 2011 U.S. Dist. LEXIS 85496 (N.D. Ill. Aug. 3,2011) ............................. 23SEC v. Truong,98 F. Supp. 2d 1086 (N.D. Cal. 2000) ..................................................................................... 22Southland Sec. Corp. v. Inspire Ins. Solutions Inc.,365 F.3d 353 (5th Cir. 2004) ..................................................................................................... 6Tuchman v. DSC Comm 'ns Corp.,14 F.3d 1061 (5th Cir. 1994) ............................................................................................. 5, 6,8United States v. Lloyds TSB Bank PLC,639 F. Supp. 2d 326 (S.D.N.Y. 2009) ...................................................................................... 10Vachon v. Baybanks, Inc.,780 F. Supp. 79 (D. Mass. 1991) ............................................................................................. 14STATUTES15 U.S.C. §78j(b) ................................................................................................................... passimOTHER AUTHORITIESFed. R. Civ. P. 8(a) ............................................................................................................. 1,24,25Fed. R. Civ. P. 9(b) ................................................................................................................ passimFed. R. Civ. P. 12(b)(6) ........................................................................................................ 1,24,2521 5t Services, Life Settlement Services, Issues and Answers on 21 5t Services' MortalityStudy, http://www.21stservices.com/science/cdrg.aspx ........................................................... .4A. Hasan Qureshi and Michael V. Fasano, "Measuring Actual to Expected Accuracy forLife Settlement Underwriting," Reinsurance News, July 2010, Issue 68 .................................. 4Ed Mohoric, FSA, MAAA, and Robert O. Kinney, M.D., FLMI, "Life SettlementMortality Considerations and Their Effect on Portfolio Valuation," March 1, 2008 ............... .4-111-

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 6 of 32Joseph T. King Jr., MD, MSCE, et al., Long-Term HIVIAIDS Survival Estimation in theHighly Active Antiretroviral Therapy Era, Medical Decision Making, Jan.-Feb. 2003 ............ 3Michael L. Closen, Symposium on Health Care Policy: What Lessons Have We Learnedfrom the AIDS Pandemic: Article: The Decade of Supreme Court Avoidance of AIDS:Denial of Certiorari in HIV-AIDS Cases and its Adverse Effects on Human Rights, 61Alb. L. Rev. 897 (1998) ............................................................................................................. 3Paul Siegert, Evolution of Life Expectancies in the Life Insurance Secondary Market... Current Trends and New Developments, Life Insurance Settlement Series EditionNo. VI (Aug. 4, 2010) ................................................................................................................ 8-IV-

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 7 of 32UNITED STATES DISTRICT COURTFOR THE WESTERN DISTRICT OF TEXASAUSTIN DIVISIONSECURITIES AND EXCHANGE COMMISSION, :Plaintiff,Civil Action No.: 1-12-cv-00033v.LIFE PARTNERS HOLDINGS, INC., BRIANPARDO, R. SCOTT PEDEN, ANDDAVID M. MARTINDefendants.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'SMOTION TO DISMISS AND BRIEF IN SUPPORTDefendants, Life Partners Holdings, Inc. ("LPHI") and R. Scott Peden ("Peden")(collectively "Defendants"), file this Motion to Dismiss, pursuant to Rules 8(a), 9(b), and12(b)(6) of the Federal Rules of Civil Procedure, and respectfully show the Court as follows:I. PRELIMINARY STATEMENTPlaintiff seeks to hold Defendants liable for alleged misrepresentations and omissions inviolation of the federal securities laws. However, in fact, the Complaint contains only partialdisclosures and blatant misrepresentations of fact.By way of example, Plaintiff claims thatreports Life Partners, Inc. ("LPI") filed with the Texas Department of Insurance established thatinsureds underlying 80% of matured policies facilitated by LPI using Dr. Donald Cassidy's lifeexpectancy estimates had outlived those estimates. In truth, more than 44% of those insuredsdied at or prior to the estimates provided by Dr. Cassidy, making Plaintiff s 80% figure animpossibility.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 1

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 8 of 32In addition, although the bulk of the Complaint is devoted to LPI's business practices infacilitating viatical and life settlements, and although Plaintiff misleadingly defines "Defendant[]Life Partners Holdings, Inc." to specifically include LPI, LPI is not a party to this action, norcould it be. More than a decade ago, Plaintiff sued LPI, claiming that the viatical settlements itfacilitated were securities under the federal securities laws - Plaintiff lost that case. See SEC v.Life Partners, Inc., 87 F.3d 536, 549 (D.C. Cir. 1996).Now, well aware of its lack ofjurisdiction, Plaintiff attempts to bootstrap a case regarding LPI's business practices into one ofsecurities fraud by way of risk disclosures contained in LPHI's Forms 10-K.However,Plaintiffs attempt to do so falls woefully short of the pleading requirements set forth in theFederal Rules of Civil Procedure.In short, and despite more than a year of investigation and Plaintiffs receipt of millionsof pages of documents, the Complaint, riddled with conclusory and misleading assertions, isdevoid of facts sufficient to plead the claims on which Plaintiff seeks relief.II. BACKGROUNDLPHI is a publicly-traded company and the parent company of LPI since 2000. LPI, aprivate company incorporated in 1991, is engaged in the secondary market for life insuranceknown generally as "life settlements." Defendant Brian D. Pardo ("Pardo") is the CEO andChairman of the Board for LPHI and has held those positions since 2000. Peden is the GeneralCounsel, Secretary and Board member for LPHI, and has held those positions since 2000. He isalso the President of LPI. Defendant David M. Martin ("Martin") is the CFO of LPHI and LPI.Martin became the CFO in February 2008.When LPI commenced business in 1991, it facilitated the sale of viatical settlements,DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 2

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 9 of 32which are life insurance policies sold by a tenninally-ill person to another party.! More thanninety percent (90%) of the viatical settlements that LPI facilitated were for viators living withAIDS.2 Although only first identified in the early 1980s, as of mid-1997, more than 500,000people in the U.S. had been diagnosed with AIDS, and approximately half of those had died. 3 Inorder to address this catastrophic illness, a multitude of experimental drugs were introduced,with mixed results. As of 2003, studies emerged indicating that antiretroviral therapy appearedto prolong survival in HIV/AIDS patients by 4 to 6 years, although "no long-tenn survival data[was yet] available.,,4 Such antiretroviral therapy had been introduced in response to a prior drugtherapy thought to be significantly life-sustaining, but which was later shown to provide only aone-time, six-month benefit. s The foregoing exemplifies the era of uncertainty in which AIDSpatients lived during the first three decades of the known existence of the disease.While,ultimately, medical discoveries resulted in the extension of the lives of AIDS patients, suchlongevity extensions could not have been predicted, but rather, were only detennined inhindsight, after lengthy in-depth studies.In light of the unprecedented medical breakthroughs in the treatment of AIDS patients,beginning in fiscal year 2004, LPI began facilitating retail life settlements. 6A life settlementinvolves the sale of a life insurance policy by an insured who is not tenninally-ill but, rather, is a1 LPHI 2006 Form 10-KSB, p. 3, found at www.sec.gov. On a motion to dismiss, the Court may rely on '''mattersof which a court may take judicial notice.'" Dorsey v. Portfolio Equities Inc., 540 F.3d 333, 338 (5th Cir.2008)(quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)). This includes documentsrequired to be filed with the SEC. See Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1018 (5th Cir. 1996).2 LPHI 2005 Form 10-KSB, p. 6, found at www.sec.gov.3 Michael L. Closen, Symposium on Health Care Policy: What Lessons Have We Learnedfrom the AIDS Pandemic:Article: The Decade of Supreme Court Avoidance of AIDS: Denial of Certiorari in HIV-AIDS Cases and itsAdverse Effects on Human Rights, 61 Alb. L. Rev. 897, at 906 (1998).4 Joseph T. King Jr., MD, MSCE, et al., Long-Term HIVIAIDS Survival Estimation in the Highly ActiveAntiretroviral Therapy Era, Medical Decision Making, Jan.-Feb. 2003, at pp. 9-10, 14.5Id. at p. 15.6 LPHI 2004 Form 10-KSB, p. 3, found at www.sec.gov.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 3

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 10 of 32senior citizen over the age of sixty-five.? Notably, because insurance companies generally do notsell life insurance policies to senior citizens and, accordingly, do not have sufficient actuarialdata to track the mortality of such persons, there has been a lack of sufficient experience withlong-term mortality rates for the life settlement industry. For example, a March 1, 2008 publicreport noted that "[t]he long-term experience in life settlement mortality is unknown. Short-termexperience is only beginning to emerge."s Indeed, as of July 2010, commentators were stilldebating the methodology to be utilized in measuring the accuracy of life expectancies in the lifesettlement market. 9Despite the very public uncertainty regarding life expectancies experienced by allcompanies in the viatical and life settlement market, and despite LPHI's repeated risk disclosuresregarding the impossibility of predicting any person's life expectancy exactly, Plaintiff, by theComplaint, seeks to hold Defendants liable because - according to Plaintiff - the life expectancyassessments made by a non-party medical doctor were not always "accurate." The fallacy ofPlaintiffs premise is ultimately the reason why the Complaint fails to state a claim for relief.III. STANDARDS ON A MOTION TO DISMISSA motion to dismiss should be granted where a plaintiff is unable to delineate "enoughfacts to state a claim to reliefthat is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "TheCourt will not accept 'threadbare recitals of the elements of a cause of action, supported by mereconclusory statements,' which 'do not permit the court to infer more than the mere possibility of7 Id.8 Ed Mohoric, FSA, MAAA, and Robert O. Kinney, M.D., FLMI, "Life Settlement Mortality Considerations andTheir Effect on Portfolio Valuation," March 1, 2008, at p. 6; see also 21 st Services, Life Settlement Services, Issuesand Answers on 21 st Services' Mortality Study, http://www.21stservices.comlscience/cdrg.aspx ("[T]he [lifesettlement] industry has such a small data pool that mortality results are extremely volatile. The full shape of themortality curve is not yet fully known.").9 A. Hasan Qureshi and Michael V. Fasano, "Measuring Actual to Expected Accuracy for Life SettlementUnderwriting," Reinsurance News, July 2010, Issue 68, at p. 26.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 4

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 11 of 32misconduct.'" Jarrett v. Chase Home Fin. LLC, No. 3:10-CV-1907-M, 2011 U.S. Dist. LEXIS47317, at *7-8 (N.D. Tex. May 3, 2011)(quoting Iqbal, 129 S. Ct. at 1949-50). In short, a districtcourt "'retain[ s] the power to insist upon some specificity in pleading before allowing apotentially massive factual controversy to proceed. '" Twombly, 550 U.S. at 558.Because Plaintiff has asserted claims of securities fraud, the Complaint must satisfy theheightened pleading requirements of Rule 9(b).In order to state a claim under Rule 9(b),plaintiffs generally must plead the who, what, where, and when of the alleged fraud.ABCArbitrage v. Tchuruk, 291 F.3d 336, 349 (5th Cir. 2002); see also Gonzalez v. Bank of Am. Ins.Servs., No. 11-20174, 2011 U.S. App. LEXIS 25237, at *8-9 (5th Cir. Dec. 12, 2011) (acomplaint must state the "time, place and contents of the false representations, as well as theidentity of the person making the misrepresentation and what [that person] obtained thereby").IV. ARGUMENTS AND AUTHORITIESA. Plaintiff Failed to Adequately Plead a Section lOeb) Claim based upon Alleged ShortLife Expectancies.In order to state a claim under Section 1 O(b) and Rule 10b-5 promulgated thereunder,Plaintiff must allege that each of the Defendants: (1) used a fraudulent device, made a materialmisrepresentation or omission, or committed an act that operated as a fraud or deceit; (2) inconnection with the purchase or sale of a security; and (3) acted with scienter. 10 SEC v. Shapiro,No. 4:05-CV-364, 2008 U.S. Dist. LEXIS 17039, at *10 (E.D. Tex. March 5, 2008).Toadequately plead scienter, Plaintiff "must set forth specific facts that support an inference offraud." Tuchman v. DSC Comm 'ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994). Although a10 Other than reciting the elements of Rule 1 Ob-5( a) and 1 Ob-5( c) claims, Plaintiff failed to allege any facts tosupport such claims separate and apart from its misrepresentation claim under Rule lOb-5(b). Compl., ~157(i),(ii).However, "where the primary purpose and effect of a purported scheme is to make a public misrepresentation oromission, courts have routinely rejected the SEC's attempt to bypass the elements necessary to impose'misstatement' liability under subsection (b) by labeling the alleged misconduct a 'scheme' rather than a'misstatement. '" SEC v. Kelly, No. 08-Civ-04612 (CM), 2011 U.S. Dist. LEXIS 108805, at *8 (S.D.N.Y. Sept. 22,2011). Accordingly, Plaintiffs claim for liability claims under Rule 10b-5(a) and (c) claims must be dismissed.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 5

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 12 of 32finding of scienter may be based upon "severe recklessness," "[i]t is insufficient to show that adefendant should have known that a material statement or omission was false or misleading."SEC v. Shanahan, 646 F.3d 536, 544 (8th Cir. 2011). "Alleged facts are sufficient to support aninference of scienter if they either (1) show a defendant's motive to commit securities fraud, or(2) identify circumstances that indicate conscious behavior on the part of the defendant."Lovelace, 78 F.3d at 1018. In the absence of sufficient allegations of motive, "the strength of thecircumstantial allegations [indicating conscious behavior on the part of the defendant] must becorrespondingly greater." Tuchman, 14 F.3d at 1068. Further, when assessing allegations ofscienter relating to a corporate defendant, courts must address the allegations of scienter as toeach individual officer defendant to determine whether the complaint satisfies the heightenedpleading requirements of scienter. Southland Sec. Corp. v. Inspire Ins. Solutions Inc., 365 F.3d353, 366 (5th Cir. 2004).Plaintiff s "disclosure" fraud claims are premised upon the unsupported allegation that"Life Partners systematically used materially underestimated LEs"ll and that Defendantsmisrepresented "that the underestimation ofLEs was a contingent risk." I 2 Yet, Plaintiff failed toadequately plead motive, knowledge, or a material misstatement or omission, and thus, the"disclosure" claims must be dismissed.1. Plaintiff Failed to Adequately Plead Motive.Plaintiff does not plead motive with respect to Defendant Martin.13In fact, theComplaint's only allegations of motive are that Defendants Pardo and Peden sold LPHI stock. 14However, allegations of insider trading by corporate defendants are only probative of scienter if11 "LEs" is a shorthand term for life expectancy estimates.12 Compl., ~~1, 10.13 See generally, Compl.14 Compl., ~~14, 138-43.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 6

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 13 of 32the trading occurs in suspicious amounts or at suspicious times. Abrams v. Baker Hughes, Inc.,292 F.3d 424, 435 (5th Cir. 2002). As to Peden, Plaintiffrelies on a June 18, 2007 sale of LPHIstock, but alleges no facts establishing that the amount of the trade was suspicious. ISIn fact,public filings establish that, after his sale, Peden retained 44,097 (pre-split) shares of LPHI stock(over 81% of his shares).16 Moreover, the timing of the sale was not suspicious, given that thesale occurred more than fifteen (15) months after Peden purportedly became aware that LifePartners systematically underestimated LEs.17Finally, because the price of LPHI stockincreased substantially after his stock sale, Peden clearly did not sell to "maximize personalprofit" or to prevent imminent losses in the value of his shares. 18Similarly, Plaintiff cites Pardo Family Trust stock sales, without any allegations that suchsales were in suspicious amounts or at suspicious times. 19Rather, according to the Complaint,the first sale occurred one (1) year after Pardo purportedly knew of the underestimation of LEs.2oIn addition, the Complaint also alleges that, as of June 2010, Pardo directly or indirectly ownedmore than 50% of LPHl,21 Had Pardo been in possession of material non-public infonnation andintended to "maximize his personal profit," one would think he would have caused the PardoFamily Trust to dispose of significant shares long before news of the SEC investigation hit themarket. Nor are there allegations in the Complaint that the sales were unusual or out of line withhistorical trades for Pardo or the Pardo Family Trust. See Abrams, 292 F.3d at 435 (allegationsof insider trading not probative of scienter because no allegations that the sales were "out of linewith prior trading practices or at times calculated to maximize personal profit"); see also15 CompI., ~~138-43.16 See Form 4 Statement of Changes in Beneficial Ownership of Securities filed on June 25, 2007, a true and correctcopy of which is included in the Appendix as Exhibit A.17 See CompI., ~138.18 See http://finance.yahoo.com/gihp?s=LPHI+Historical+Prices.19 See CompI., ~139.20 See CompI., ~139.21 CompI., ~23.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 7

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 14 of 32Nathenson v. Zonagen, Inc., 267 F.3d 400,420-21 (5th Cir. 2001).Finally, the absence of allegations that Defendant Martin engaged in improper tradingactivity further establishes that Pardo's and Peden's sales do not support an inference of scienter.See Abrams, 292 F.3d at 435 (unsual sales by one insider "do not give rise to a strong inferenceof scienter" when other defendants did not sell shares).Accordingly, Plaintiff's allegationsconcerning Pardo's and Peden's stock sales are insufficient to support an inference of scienterbased upon motive, and therefore, Plaintiff's allegations of conscious behavior are subject to amore stringent standard for establishing scienter. See Tuchman, 14 F.3d at 1069.2. Plaintiff Failed to Adequately Plead Conscious Behavior and Failed toAdequately Plead Material Misstatements or Omissions.a. Neither Dr. Cassidy's Methodology nor Peden's Alleged IncorrectDescriptions thereof Impose Liability on Defendants.Plaintiff alleges that Dr. Cassidy's practices in projecting LEs for LPI's use in facilitatinglife settlements deviate from the purported "standard practices" in the life settlement industrybecause he is a medical doctor and not an actuary, and because he uses mortality data generatedby the U.S. Govemment. 22 However, because this is not a suit against LPI, its use of Dr. Cassidyand, thus, his methodology, are not at issue, nor could they be since the life settlementtransactions are not securities under the federal securities laws. 23Knowing this, Plaintiff attempts to bootstrap Dr. Cassidy's methodology into a claim forsecurities fraud when it alleges that Peden, in October and November 2008, misrepresented "toan investor" and to a non-investor, respectively, that Dr. Cassidy used a different actuarial table22 See Compl., ~~5, 32, 35. Defendants dispute that a "standard practice" actually exists in the industry and, to theextent it exists, the timing of when such "standard practice" emerged. See, e.g., Paul Siegert, Evolution of LifeExpectancies in the Life Insurance Secondary Market ... Current Trends and New Developments, Life InsuranceSettlement Series Edition No. VI (Aug. 4, 2010)("[U]nderwriting guidelines vary substantially among LEunderwriters, and most of the life settlement underwriters have developed unique mortality curves based on theirown experience of mortality patterns.").23 See SEC v. Life Partners, 87 F.3d at 549; see also 15 U.S.C. §78j(b) (requiring misstatements or omission "inconnection with" the purchase or sale of a security).DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 8

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 15 of 32than what he was actually using. 24 The foregoing allegations fail to set forth the time and placefor the statements, the identities of the persons to whom the statements were made, and whatPeden "obtained thereby." Therefore, the allegations are insufficient under Rule 9(b). Gonzalez,2011 U.S. App. LEXIS 25237, at *8-9.Moreover, for Peden's alleged statements to be actionable, such statements must havebeen made "in connection with" the purchase or sale of a security.25 Thus, Peden's November2008 statement to a non-investor cannot give rise to liability or establish a strong inference ofscienter. Nor does Peden's October 2008 statement to an alleged "investor" give rise to suchliability or establish scienter. More specifically, the Complaint refers to purchasers of viaticaland life settlements as "investors," as distinguished from its references to "shareholders" ofLPHI,26 thereby confirming that Peden's October 2008 statement was not made to a purchaser ofLPHI securities and, thus, was not made "in connection with" the purchase or sale of a security.27In short, both Dr. Cassidy's methodology and Peden's alleged incorrect statementsrelated thereto are red herrings, providing no basis for liability or a finding of scienter againstany Defendant.b. Defendants did not Know that Dr. Cassidy's LEs were Materially Short.Plaintiffs repeated allegations that Defendants knew Dr. Cassidy's LEs were materiallyshort not only defy logic, but also are refuted by the very documents on which Plaintiffpurportedly relies in support of its claim.24 Compl., ~~43-44.25 15 U.S.C. §78j(b).26 Compare Compl., ~~2, 3, 4, 5, 9, 11 with ~~1, 14.27 Moreover, even a purportedly inaccurate statement by Peden to a "shareholder" would not alter the total mix ofinformation available to LPHI's shareholders, thus precluding any liability with respect to that statement. See, e.g.,SEC v. Morgan Keegan & Co., No. 1:09-cv-1965-WSD, 2011 U.S. Dist. LEXIS 71481, at *31-37 (N.D. Ga. June28, 2011)(rejecting SEC's argument that statements made to four investors were sufficient to impose liability,holding that "[t]he SEC must do more than show a few isolated instances of alleged ... misconduct to obtain therelief it seeks.").DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 9

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 16 of 32As conceded in the Complaint, Dr. Cassidy did not begin providing LE estimates to LPIuntil after his predecessor, Dr. Kelly, passed away.28 Thus, Dr. Cassidy's first LE estimates werenot provided until October 1999. 29 According to Plaintiff, the average LE generated by Dr.Cassidy from 2000-2005 was 3.8 years. 30 By way of example, then, the insureds underlyingpolicies facilitated for the first half of calendar year 2000 would not have reached the estimatedLE until, on average, the latter half of calendar year 2003. For policies facilitated in latter half ofcalendar year 2000, the insureds would not have reached the estimated LE until, on average, thefirst half of calendar year 2004, and so on.Despite the foregoing, Plaintiff relies on LPHI Audit Committee minutes discussing thenine months ended November 30, 2002 in alleging that "at least as early as 2003, it was apparent... that the LEs used ... were materially short.,,31 Plaintiff then assumes that the reference inthe minutes related to Dr. Cassidy's LEs when Plaintiff alleges that Pardo and Peden did not"determine why Life Partners was not seeing the expected number of maturities based onCassidy's LEs.,,32 However, neither the minutes nor Plaintiffs conclusory allegation establish"knowledge" regarding the purported inaccuracy of Dr. Cassidy's LEs as of November 2002,especially when considered in light of Dr. Cassidy's 3.8 year average LE. As the U.S. SupremeCourt has noted, "[ d]etermining whether a complaint states a plausible claim for relief will, ...be a context-specific task that requires the reviewing court to draw on its judicial experience andcommon sense." Iqbal, 129 S.Ct. at 1950; see also United States v. Lloyds TSB Bank PLC, 639F. Supp. 2d 326, 342 (S.D.N.Y. 2009)(applying common sense in rejecting the Government's28 CompI., ~5.29 Dr. Kelly passed away on September 20, 1999. See the redacted, certified copy of Dr. Kelly's death certificate,included in the Appendix as Exhibit B.30 CompI., ~40.31 CompI., ~49 (emphasis added).32 CompI., ~50.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 10

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 17 of 32claim of securities fraud). Common sense dictates that Plaintiffs conclusory leap of faith mustbe rejected as a basis for imposing knowledge, and thus, securities fraud liability on Defendants.What is most shocking about the Complaint's allegations is the inexcusablemisrepresentation of LPI's annual filings with the Texas Department of Insurance ("TDI").More specifically, Plaintiff represented that "[t]he reports filed by Life Partners for 2003 through2009 reveal that insureds underlying approximately 80% of matured policies that the Companybrokered had outlived Cassidy's LEs.,,33 To the contrary, however, the TDI reports establish that45.6% of the matured policies from 2003-2009 that were arguably based on Dr. Cassidy's LEsactually matured before, or in the month of, the estimated LE. 34Moreover, the reportsestablish that an additional 14.64% of the policies matured within 1 year of the LE projection,and another 12.97% matured within 2 years of the LE projection. 35 Therefore, more than 73%of the maturities from 2003-2009 were on, before, or within 2 years of Dr. Cassidy's estimateshardlyan indication that Dr. Cassidy's LEs were 8 to 9 years off. 36In addition to the foregoing, Plaintiff provides its own table in the Complaint, fromunknown origin, claiming that it purports to depict the policies exceeding Dr. Cassidy's LEs "forthe universe of policies from which his success rate is measurable.,,37 However, the chart andsurrounding allegations fail to satisfy the Rule 9(b) requirements, as the chart fails to specificallyallege the source of the information, and fails to specify whether each of the Defendants receivedsuch information, in what form, when, and whether the conclusions Plaintiff now draws weredrawn by Defendants during the relevant time periods. Absent that information, the chart and33 Compl., ~51.34 Included in the Appendix as Exhibits C-l through C-7 are true and correct copies of the portions of LPI's reportsfiled with the TDI from 2003-2009 showing the maturities during each of those respective years. It is appropriatefor Defendants to include same with the Motion to Dismiss because they are referred to in the Complaint. Dorsey,540 F.3d at 338. Exhibit D in the Appendix is a chart summarizing the Cassidy-related data set forth in Exhibit C.35 See Exhibits C and D in the Appendix.36 See Compl., ~40.37 Compl, ~~41, 54.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT Page 11

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 18 of 32associated allegations must be rejected. See Kurtzman v. Compaq Computer Corp., No. H-99-779, 2002 U.S. Dist. LEXIS 26569, at *10-18, 38-50 (S.D. Tex. Mar. 30, 2002)(rejectingscienter claims based on general references to reports where there were no allegations about theactual contents of the reports, whether defendants read the reports, or whether the information inthe reports had been reported to defendants).One of the Complaint's more puzzling allegations is the contention that LPHI "disclosedin its periodic filings with the Commission that it advanced money to pay premium payments ...when the amounts escrowed for premiums was depleted.,,38 Plaintiff then uses this publicdisclosure to support its allegation that Defendants knew the LEs were short. 39 If, in fact,Plaintiff is correct, and the disclosure of the "steady" increase in premium payments imputedknowledge to Defendants of the LE underestimation, then, because that increase was publiclydisclosed, the public, in tum, was provided with the knowledge of the LE underestimation, andPlaintiffs fraud claim vanishes. See, e.g., In re Sun Microsystems" Inc. Sec. Litig., No. C 8920351 RP A, 1990 U.S. Dist. LEXIS 18740, at * 7 (N.D. Cal. Aug. 20, 1990)("If the materialcontaining the alleged omission actually discloses the facts that plaintiffs claim are absent thereis obviously no omission.").Plaintiff next alleges that a "consultant" retained by a "firm" in 2006 recommended in a"report" that LPI "track, analyze and validate" Dr. Cassidy's LEs.40This allegation fails tosatisfy Rule 9(b) because it fails to specifically identify the "firm," the "report," to whom thereport was provided, and when the report was provided. Further, and more importantly, theallegation fails to support any basis for the imputation of knowledge of the allegedunderestimation of LEs - indeed Plaintiff makes no claim that the report so found. Thus, this38 Compl., ~52.39 Compl., ~52.40 Compl., ~53.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 12

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 19 of 32allegation must also be disregarded.Finally, Plaintiff relies on a complaint filed by, and a subsequent settlement LPI madewith, the Colorado Securities Division as apparent support for Defendants' knowledge of theunderestimation of LEs.41Importantly, Plaintiff does not allege that the Colorado action wasbased, in whole or in part, on Dr. Cassidy's LEs. Indeed, the only allegation regarding LEscontained in the Colorado Securities Commission's 17-page complaint is the one quoted byPlaintiff. 42It is impossible to discern from this one statement whether the allegation related inany way to Dr. Cassidy's LEs. Notably, the publicly-available settlement of the Colorado casecontained no findings or admissions regarding the accuracy or inaccuracy of Dr. Cassidy's LEs,as the settlement only related to the claim by Colorado that the life settlements were securitiesunder Colorado law. 43Thus, Plaintiffs reliance on the Colorado case is yet another red herring,having no bearing on this case or on Defendants' alleged knowledge of the assertedunderestimation of LEs.c. Plaintiff's Allegation that LPHI Artificially Inflated its Revenues DefiesCommon Sense.Perhaps the most obvious example of Plaintiff s attempt to bootstrap a business practicescase against a private company not engaged in the sale of securities into a federal securities fraudcase against the public parent company is the following allegation:Using Cassidy's materially short LEs enabled Life Partners to artificially inflateits revenues, as the Company extracted significantly more money frominvestors than it would have had it priced life settlements based on appropriately41 CompI., ~55.42 See CompI., ~55 (quoting from the Colorado complaint the following allegation: "the high frequency rate inwhich viators outlived life expectancies predicted by Life Partners."). See First Amended Complaint for Injunctiveand Other Relief filed in Joseph v. Life Partners, Inc., Case No. 2007 CV 5218, ("Colorado Action"), a true andcorrect copy of which is included in the Appendix as Exhibit E.43 See Stipulation for Permanent Injunction and Other Relief, filed in the Colorado Action, and attached order ofPermanent Injunction and Other Relief, a true and correct copy of which is included in the Appendix as Exhibit F.Conveniently omitted from the Complaint is a reference to the Stipulation that resolved the action, wherein theColorado Securities Commission represented that "no investor has alleged or asserted any impropriety againstDefendants with respect to their investment . . . ."DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 13

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 20 of 32developed LEs. During fiscal years 2006 through 2011, Life Partners extractedmore than $400 million of revenue from the life settlement transactions itbrokered. 44On its face, this allegation is nonsensical, as how could LPI (or LPHI) have artificially inflatedrevenues if, as the Plaintiff concedes, LPI actually received $400 million in revenues? In reality,Plaintiff is not complaining that LPI (or LPHI) claimed it made $400 million in revenues when,in fact, it did not. Rather, Plaintiff asserts that, in its opinion, LPI received too much moneyfrom the facilitation of life settlement transactions, i.e., from non-securities transactions: "Thus,by overvaluing its policies using materially short LEs, Defendants were able to extract frominvestors ... approximately $555 million more than they could have reasonably expected to earnusing appropriately developed LEs.,,45 However, Plaintiff lacks jurisdiction to complain of thosetransactions in light of SEC v. Life Partners, Inc. 46d. The Contingency Discussed in the Risk Disclosures had not Occurred.Plaintiff seeks to reverse-engineer a business practices case into a securities fraud case bythreading its claims through a risk disclosure contained in LPHI's Forms 10-K, only portions ofwhich Plaintiff quoted in the Complaint.However, because the risk disclosures were accurate,and the "contingency" addressed by the disclosures had not occurred, Plaintiff s claims based onsuch disclosures must be dismissed. 4744 Compl., '1145 (emphasis added).45 Compl., '1148.46 Further, Plaintiffs hypothetica1s regarding how LPI might have priced a particular policy with a six-year LE, asopposed to a four-year LE, (Compl., '1147), and what the returns on investment might be with "appropriatelydeveloped LEs" (Compl., '1148) fails to satisfy the heightened pleading requirements of Rule 9(b). See, e.g.,Ellington Mgmt. Group, LLC v. Ameriquest Mortgage Co., No. 09 Civ. 0416 (JSR), 2009 U.S. Dist. LEXIS 91204,at *10 (S.D.N.Y. Sept. 29, 2009)(rejecting, under Rule 9(b), plaintiffs' attempt to substitute "indirect, hypotheticalallegations for more directly applicable factual allegations"); In re Sterling Foster & Co. Sec. Litig., 222 F. Supp. 2d289,307 (E.D.N.Y. 2002); Vachon v. Baybanks, Inc., 780 F. Supp. 79, 82 (D. Mass. 1991).47 Plaintiffs quotation from the risk disclosure contained in LPHI's 2006 Form lO-K is inappropriate, as Plaintiffhas not asserted claims against Defendants based on the 2006 Form lO-K. It is also unclear whether or not Plaintiffis asserting a claim related to LPHI's 2011 Form lO-K, as discussed infra. See Compl., '11'11147,152,162, 168, 175,178,181,182.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 14

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 21 of 32The following language is an excerpt from the risk disclosure contained in LPHI's 2008Form 10-KJA. While some of the wording changed slightly, this excerpt is substantially thesame as that contained in each of LPHI's Forms 10-K for fiscal years 2007-2011:Life expectancies are generally estimated from standard medical and actuarialdata based on the historical experiences of similarly situated persons. The data isnecessarily based on averages involving mortality and morbidity statistics. Theoutcome of a single settlement may vary significantly from the statisticalaverage. It is impossible to predict anyone insured's life expectancy exactly.To mitigate the risk that an insured will outlive his or her predicted lifeexpectancy, we price life settlements to yield competitive returns even if this lifeexpectancy prediction is exceeded. . ..If we underestimate the average life expectancies and price our transactions toohigh, our purchasers will not realize the returns they seek, demand may fall,and purchasers may invest their funds elsewhere . ...We cannot assure you that, despite our experience in settlement pricing, we willnot err by underestimating or overestimating average life expectancies ormiscalculating reserve amounts for future premiums. If we do so, we could losepurchasers or policy sellers, and those losses could have a material adverseeffect on our business,jinancial condition, and results of operations. 48Accordingly, the fact that LEs could be underestimated and the potential negative impactunderestimation could have on future business operations was clearly disclosed as a risk. Thereis nothing even arguably misleading about the foregoing that needed to be corrected.Plaintiff asserts, however, that LPHI had a duty to disclose that the "contingency" hadalready occurred. 49 Plaintiffs assertion is misplaced. The "contingency" disclosed in the abovequotedrisk disclosure is a contingency that, to the extent life expectancies are underestimatedand LPI prices the transactions too high, then LPI could lose purchasers or could lose policysellers, and those losses could then have a material adverse effect on the "business, financial48 LPHI 2008 Form lO-KI A, p. 11 (emphasis added). True and correct copies of excerpts from LPHI's Forms lO-Kfor 2007-2011, setting forth the applicable risk disclosures, are contained in the Appendix at Exhibits G - K.49 Compl., ~56.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 15

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 22 of 32condition, and results of operation.,,5o Such a contingency did not occur, and Plaintiff has notcontended otherwise. 51On this issue, Belodoffv. Netlist, Inc., is instructive. 52 In that case, plaintiff alleged thatthe defendant failed to disclose that customer demand for its products was in significantdecline. 53 The court originally dismissed the complaint based, in part on this allegation, but gaveplaintiff leave to amend, holding that if the defendant "already knew that its customers weresignificantly reducing their orders at the time of the lPO and had been for some time, Defendants[sic] representation of such an event as a contingency in the risk disclosure statement would bedeceitful.,,54 In dismissing the same claim from plaintiffs second amended complaint, the courtnoted that the sales figures set forth in defendant's public filings demonstrated "an increase andflat-lining of sales up and through the lPO," thereby defeating plaintiffs claim that defendantsknew of the "significant decline in customer demand. 55 Likewise, in this case, LPHI's business,financial condition, and operations for fiscal years 2007-2010, consistently exhibited dramaticimprovement, with revenues increasing from $30.3 million in fiscal year 2007 to $108.8 millionin fiscal year 2010, and net income increasing from $3.8 million in fiscal year 2007 to $26.1million in fiscal year 2010. 56 Such figures refute Plaintiffs claim that LPHI failed to disclose aknown risk. This is especially true in light of the inadequacy of Plaintiffs allegations regardingDefendants' knowledge of the purported underestimation of LEs, as discussed, supra. For the50 See id.51 See generally, Compl.52 No. SACV 07-00677 DOC (MLGx), 2009 U.S. Dist. LEXIS 78309 (C.D. Cal. Sept. 1,2009).53 2009 U.S. Dist. LEXIS 78309, at *19.54 [d. at *8.55 [d. at *22-26.56 See excerpt from LPHI's 2011 Form 10-K, in the Appendix as Exhibit K. While LPHI's revenue and net incomedecreased in fiscal year 2011 from fiscal year 2010, the 2011 numbers were still dramatically higher than thoseposted in fiscal years 2007 and 2008. Importantly, to the extent Plaintiff contends that the 2011 risk disclosure wasmaterially misleading, Plaintiff ignores the disclosure in the same Form 10-K describing Plaintiffs allegationsregarding the inaccuracy of the LEs. See Exhibit K. Thus, any claim regarding the 2011 Form 10-K must bedismissed as failing to allege a material misstatement or omission.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 16

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 23 of 32same reasons, Plaintiff s claim that Defendants' risk disclosure was misleading because it failedto disclose "a material trend impacting [LPHI's] revenues" in contravention of Item 303 ofRegulation S-K must also be rejected. See Belodoff, 2009 U.S. Dist. LEXIS 78309 at *27-28. 57e. Plaintiff Failed to Adequately Allege Misrepresentations by Pardo.Plaintiff alleges that Defendant Pardo misrepresented the rates of return for LPIcustomers in October 2007 and October 2008 conference calls. 58However, Plaintiff fails tospecify any documents establishing that the ROls were inaccurate, and whether and how Pardoknew they were inaccurate at the time of his statements. 59 Thus, the allegation violates Rule 9(b)and must be rejected. See Plotkin v. IP Axess Inc., 407 F.3d 690,696 (5th Cir. 2005).In addition, Plaintiffs allegation that LPI, when conveying "historic ROI," did not takeinto account "policies that remained active beyond their LE,,,60 must be rejected as defyingcommon sense. It goes without saying that a life insurance policy that is still "active" is a policyfor which the insured is still living. Because purchasers of viaticals or life settlements do notreceive death benefits until the insured has died, it would be impossible to provide an accurateROI for "active" policies, for such cannot be appropriately calculated until there are "returns" tocalculate. 61Thus, common sense requires a rejection of this allegation. See Iqbal, 129 S.Ct. at1950. Further, to the extent, by this claim, Plaintiff is alleging that Defendants had a duty topredict or speculate what the ROls would be for policies that will mature in the future, such an57 Notably, "a violation ofItem 303 's reporting requirements does not automatically give rise to a material omissionunder Rule 10b-5." Gran v. Stafford, 226 F.3d 275, (3rd Cir. 2000); see also In re Enron Corp. Sec. Litig., 258F.Supp. 2d 576, 633 n.63 (S.D. Tex. 2003).58 Compl., ~~6l-62.59 Compl., ~62.60 See Compl., ~63.61 See, e.g., Return on investment, http://financial-dictionary.thefi·eedictionary.com/return+on+investment, at p. 1(citing Farlex Financial Dictionary) (ROI defined as "[t]he money that a person or company earns as a percentage ofthe total value invested."); Return on Investment (RO!): Meaning and Use, http://www.solutionmatrix.com/returnon-investment.htmlat p. 2 ("Return on investment is frequently derived as the 'return' (incremental gain) from anaction divided by the cost of that action.").DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 17

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 24 of 32allegation must also be rejected. See, e.g., In re Verifone Sec. Litig., 11 F.3d 865, 868-869 (9thCir. 1993)(rejecting securities fraud allegations based on failures to make a forecast of futureevents).B. Plaintiff Failed to Adequately Plead a Section 1 OCb) Claim for AccountingFraud. 62Plaintiff alleges that Defendants are liable under Section 1 O(b) because LPHI issued aRestatement regarding a variety of accounting issues, including revenue recognition. 63 However,Plaintiff has failed to adequately allege scienter, necessitating dismissal of this claim. This isespecially true with respect to Defendants Pardo and Peden who are not alleged to beaccountants or to have any accounting expertise sufficient to challenge the treatment given to anyparticular transaction. See In re Novatel Wireless Sec. Litig., No. 08cv1689 AJB RBB, 2011U.S. Dist. LEXIS 135602, at *41 (S.D. Cal. Nov. 23,2011). Furthermore, even as to DefendantMartin, who was the CFO for only part of the time the SEC alleges Defendants engaged inaccounting fraud, Plaintiff makes no allegations that he was aware of any wrongdoing or directedany improper activity. Accordingly, the "accounting fraud" claims must be dismissed.1. Plaintiff Failed to Plead Scienter with Respect to Revenue Recognition."[T]o give rise to section 1 O(b) liability for fraud, the mere second-guessing ofcalculations will not suffice; the [SEC] must show that defendants' judgment - at the momentexercised - was sufficiently egregious that a reasonable accountant reviewing the facts andfigures should have concluded that the company's financial statements were misstated and thatas a result the public was likely to be misled." SEC v. Guenther, 395 F. Supp. 2d 835, 845 (D.62 Although Plaintiff asserts Section 10(b) claims against Defendants "through November 2011," Plaintiff does notspecify what statements made by Defendants in 2011 are false. While the Form 10-K that contained therestatements at issue was filed in November 2011, Plaintiff does not assert that any of the financial data wasinaccurate. On its face, then, this claim fails to satisfy Rule 9(b).63 See CompI., ~~64-137, 152.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 18

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 25 of 32Neb. 2005). The Complaint fails to adequately allege that any of Defendants Pardo, Peden orMartin (1) knew that revenue was not being properly recorded; (2) knew that the disclosedrevenue recognition policy was not being followed; or (3) knew that any backdating ofdocuments was occurring that could impact revenue recognition. 64Indeed, based upon theComplaint's allegations, it appears that the backdating of documents occurred throughout theyear, and that such backdating did not occur only at quarter or year end in a concerted effort toalter revenue. Further, the fact that restated revenues for fiscal years 2007-2010 and the firstthree quarters of 2011 showed that, for some periods, revenue was understated, as opposed tooverstated, evidences a lack of intent to systematically overstate revenues. Absent allegations ofknowledge, participation or motive, Plaintiffs claims in this regard must be dismissed.Strikingly similar claims made by Plaintiff in another case were rejected due to the samedeficiencies. In SEC v. Cohen, the SEC sued the CFO of a public company that issued anaccounting restatement as a result of improper revenue recognition. 65The SEC alleged that, asthe CFO, defendant knew that the company was prematurely recording revenue and, further, thatthe CFO was motivated to manipulate the revenues in order to inflate the company's revenuesand earnings, facilitate the company's secondary offering, and derive personal gain from annualbonuses and stock sales. 66After a bench trial, the court found that the SEC had failed to provescienter because (1) there was "no evidence that defendant knew the various managers assignedto properly report the revenue were not performing their jobs correctly," and (2) there was "noevidence that the managers were pressured by defendant to accelerate revenue.,,67Further,because the restatement of revenues resulted in both over- and understatements, the court found64 See CompI., ~~69-118, 159.65 No. 4:05CV371-DJS, 2007 U.S. Dist. LEXIS 28934, at *3, 25-27 (E.D. Mo. April 19, 2007).66Id. at *48-53.67Id. at *48-49.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 19

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 26 of 32that it could not "discern a pattern where ... [the] revenue was strategically shifted.,,68 Finally,the court rejected the argument that the CFO's single sale of stock "significantly below the alltimehigh and at months away from the secondary offering" supported scienter. 69Although theCohen case was a bench trial in which the SEC had an opportunity to present evidence ofscienter, the fact that Plaintiff has not even asserted such allegations in this case - or, to theextent it has, has only done so improperly - further highlights the necessity for dismissal ofPlaintiff s claims in this case.Plaintiff improperly attempts to allege "knowledge" of improper revenue recognitionwhen it asserts that Martin reviewed and approved quarter-end accrual journal entries, andasserts that Pardo and Peden "monitored daily, monthly, quarterly, and annual contract activity,including contract funding status .... ,,70However, Plaintiff fails to specifically identify towhich reports Plaintiff refers, and how those reports revealed to each Defendant that revenue wasbeing recognized improperly; therefore, the allegations are violative of Rule 9(b). See Abrams,292 F.3d at 432; Kurtzman, 2002 U.S. Dist. LEXIS 26569 at *10-18, 38-50. 71 Likewise,Plaintiffs claim that "Pardo, Peden and Martin were aware of periodic cancellations andrescission of Seller Agreements, which exposed the impropriety of Life Partners' revenuerecognition practices" is conclusory and fails to sufficiently state a claim for scienter. 72 See SECv. Shanahan, 646 F.3d at 544.2. Plaintiff Failed to Plead Scienter with Respect to Impairment.Plaintiff s allegations regarding the calculation of impairment is premised on the samefaulty analysis of Dr. Cassidy's LEs discussed supra, coupled with improper conclusory claims.68Id. at *51.69!d. at *52-53.70 Compl., ~73.71 Plaintiff's allegations regarding auditor communications from 2004 (Compl., ~~81-83) must be disregarded, asPlaintiff makes no claims against Defendants for time periods prior to January 2007.72 Compl., ~88DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 20

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 27 of 32For example, without any factual support, Plaintiff alleges that, "[d]espite their awareness thatthese policies may have been impaired when acquired, Defendants failed to properly evaluatepotential impairment.,,73 This allegation fails to satisfy the pleading requirements for scienter.Plaintiff further improperly alleges that "Pardo, Peden, and Martin understood that theCompany's impairment calculations depended on the validity of Cassidy's LEs.,,74 However,Plaintiff provides no factual basis to support the claim that (1) the policies at issue were allpurchased using Dr. Cassidy's LEs, (2) Defendants Pardo, Peden and Martin knew, at the timethat the policies were purchased, that the policies were "impaired," or (3) assuming Defendantsknew the policies were impaired, that Defendants knew the extent of the impairment.Next, Plaintiff contends that in the summer of 2010, in a response to a request by Ernst &Young, Defendants Peden and Martin provided a chart "on the most recent 300 maturities ofviatical and life settlement policies sold by Life Partners.,,75 Plaintiff then attempts to attach anefarious motive to the provision of the chart, when it alleges that Peden and Martin "failed toalert E&Y" that insureds underlying 1,200 of the outstanding policies had outlived Dr. Cassidy'sLEs.76 The absurdity of this claim is obvious - if, as readily admitted by Plaintiff, Peden andMartin provided E& Y with the "most recent" maturities, how was E& Y misled? Plaintiff doesnot allege that E& Y requested information regarding all outstanding policies, that Defendantsrefused to provide that information, or that Defendants provided false information in response tosuch hypothetical request. Absent such assertions, this allegation provides no basis to establishscienter related to LPHI's impairment analysis.73 Compl., ~119.74 Compl., ~126.75 Compl., ~127.76 Compl., ~127.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 21

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 28 of 32Plaintiff also alleges that E& Y recommended - in May 2010 - that LPHI conduct aquarterly analysis of the accuracy of initial LEs to determine if adjustments needed to be made tothe underwriting process. 77 Of course, this allegation undermines Plaintiff s claim that any of theDefendants knew that Dr. Cassidy's LEs were significantly underestimated and, further,undermines Plaintiffs claim that Defendants knew LPHI's impairment analysis was incorrect.C. Plaintiff Failed to Adequately Plead an Insider Trading Claim against Peden.In order to state a claim of insider trading under Section 1 O(b), Plaintiff must plead thatPeden sold LPHI stock while in possession of material, non-public information, and withscienter. See Dirks v. SEC, 463 U.S. 646, 653-54 (1983). However, "[c]ourts stress that the SECcan not base insider trading actions on strained inferences and speculation." SEC v. Truong, 98F. Supp. 2d 1086, 1098 (N.D. Cal. 2000).Plaintiffs insider trading claim against Peden is based upon a single sale of a fraction ofPeden's holdings of LPHI shares that took place in June 2007. 78 Plaintiff asserts that Peden hadthe following non-public information in his possession when he made his single trade: "[I]t wasLife Partners' practice to systematically use materially short life expectancy estimates to brokerlife settlements, and that this practice had the effects of artificially inflating the Company'srevenues and profit margins, and creating investor demand for the life settlements that LifePartners brokered and that would not exist but for the Company's practice of doing SO.,,79Asdiscussed in Sections A(2)(b),(c), and (d), the Complaint is devoid of sufficient allegations thatwould establish Peden's possession of the alleged material, non-pUblic information. Indeed, thefact that, according to Plaintiff, "Peden did not follow the recommendation to analyze Cassidy'sLEs" allegedly made by an undisclosed "firm" in 2006, only further supports the inference that77 CompI., ~128.78 CompI., ~139.79 CompI., ~154.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 22

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 29 of 32Peden was not in possession of material, non-pUblic infonnation. 8oFurther, any attempt byPlaintiff to impute knowledge of the "non-public" infonnation concerning LEs to Peden becausethat infonnation was accessible to him due to "the Company's internal policy tracking system,,81is equally unavailing. See, e.g., SEC v. Horn, No. 10-CV-955, 2010 U.S. Dist. LEXIS 135000,at *17 (N.D. Ill. Dec. 16, 2010) ("[P]roof of access to nonpublic infonnation is not proof ofpossession of that infonnation.").Nor has Plaintiff alleged circumstantial evidence againstPeden, such as selling LPHI shares in suspicious amounts or at suspicious times. The absence ofsuch allegations lies in stark contrast to the more typical insider trading claims. See, e.g., SEC v.Steffes, No. 10-CV-6266, 2011 U.S. Dist. LEXIS 85496, at *44-45 (N.D. Ill. Aug. 3, 2011)(unusual trading in amounts and timing supported an inference of scienter); SEC v. Adler, 137F.3d 1325, 1340 (11th Cir. 1998) (same).Accordingly, because the Complaint fails to adequately allege scienter, Plaintiffs Section1 O(b) claims of insider trading against Peden must be dismissed.D. Plaintiff Failed to Adequately Plead a Section 17(a) Claim.Plaintiffs Section 17(a) claim is premised upon January and February 2007 filings byLPHI wherein Plaintiff alleges LPHI, Pardo and Peden made misrepresentations or omissionsregarding revenue recognition. 82To establish a violation of Section 17(a)(1), Plaintiff mustallege the defendants (1) made material misrepresentations or materially misleading omissions,(2) in the offer or sale of securities, (3) with scienter. Aaron v. SEC, 446 U.S. 680,697 (1980).The same elements apply under Sections 17(a)(2) and 17(a)(3), except that no scienter isrequired. Id. Plaintiffs scienter allegations must be pled, as to each defendant, with requisiteparticularity under Rule 9(b). See SEC v. Gann, No. 3:05-CV-0063-L, 2006 U.S. Dist. LEXIS80 CompI., ~53.81 CompI., ~54.82 CompI. ~147.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 23

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 30 of 329955, at *9 (N.D. Tex. Mar. 13,2006).The Section 17(a) claim based on LPHI's February 2007 public filings must be dismissedbecause there were no LPHI filings in that month that referenced LPHI's revenue recognitionpolicies. 83 Further, for each of the reasons set forth in Sections B(l) and C(l) herein, Defendantscannot be liable under Section 17(a)(1) for the January 2007 Form 10-QSB because Plaintiff hasfailed to sufficiently allege scienter. Finally, Defendants cannot be liable under Section 17(a)(2)or (3) because Plaintiff cannot premise scheme liability on a misrepresentation claim. See SECv. Kelly, 2011 U.S. Dist. LEXIS 108805, at *8_15. 84E. Plaintiff Failed to Adequately Plead Section 13 Claims and Claims for Violations ofVarious Exchange Act Rules.The Complaint's Third through Sixth Claims allege various violations of the ExchangeAct for the filing of false statements, the failure to maintain books and records, the failure tomaintain and implement internal accounting controls, and the making of false statements to anaccountant. 85However, many of the same deficiencies previously discussed, similarly, requiredismissal of these claims.For example, Plaintiffs reliance on the allegation that Defendants failed to disclose a"material risk" to LPHI's business or a material trend impacting LPHI's revenues in support ofsuch claims must be dismissed, as Plaintiff has not plead a material misstatement with respectthereto. 86Likewise, Plaintiffs aiding and abetting claims against Defendants Pardo, Peden and83 See Form 4 Statement of Changes in Beneficial Ownership of Securities filed on February 14,2007, and Form 8-K filed on February 20,2007, true and correct copies of which are included in the Appendix as Exhibits Land M.84 Additionally, Peden cannot be liable for the January 2007 Form 10-QSB because he did not sign same and, thus,did not "make" the statement. See Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2302-2305 (2011); SEC v. Kelly, 2011 U.S. Dist. LEXIS 108805, at *8-15.85 CompI., pp. 50-53.86 See Section A(2) herein. Plaintiff expressly relies on these allegations to support the Third Claim for Relief.CompI., ~162. It is unclear whether Plaintiff is relying on these allegations to support their remaining claims forrelief. In that regard, the allegations fail to put Defendants on notice of the claims against them in violation of Rule8(a) and 12(b)(6).DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 24

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 31 of 32Martin under the Third, Fourth and Fifth Claims for Relief must be dismissed because Plaintiffhas failed to allege that any of the Defendants knew of the problems with LPHI's revenuerecognition or impairment calculations. See SEC v. Cohen, 2007 U.S. Dist. LEXIS 28934, at*53-59 (dismissing claims under Sections 13(a), 13 (b)(2), 13(b)(5) and related rules based upondefendant CFO's lack of knowledge of the accounting issues and lack of evidence that defendantdirected someone to falsify company's books and records.). Such is especially true with respectto Defendants Pardo and Peden, neither of whom are alleged to be responsible for the accountingbooks and records or the internal controls related to accounting. See, e.g., SEC v. Shanahan, No.4:07CV270JCH, 2010 U.S. Dist. LEXIS 2101, at * 15-18 (B.D. Mo. Jan. 12, 2010)(rejectingSection 13(b )(2)(A) claim "in absence of evidence that defendant was responsible for thecorporation's books and records or for maintaining adequate controls").Plaintiff s Sixth Claim is based on a conclusory allegation that the individual Defendantsmade false and misleading statements "to an accountant.,,87 However, Plaintiff has failed toadequately plead that any of Pardo, Peden or Martin, when they signed managementrepresentation letters to the auditors,88 knew of the existence of any material errors in LPHI'sfinancial statements. Nor are there sufficient allegations that, at the time they signed thoseletters, the individual Defendants knew that the system of internal controls was inadequate. Suchlack of knowledge (or pleading of same) is fatal to the Sixth Claim for Relief. See SEC v.Cohen, 2007 U.S. Dist. LEXIS 28934, at *59-60.87 Compl., ~178.88 Defendants assume that Plaintiff is relying on the management representation letters to support this claim.However, Plaintiff fails to specify what statements they are relying on in support of their claim, in violation of Rules8(a) and 12(b)(6).DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 25

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 32 of 32IV. CONCLUSIONFor each of the reasons stated herein, Defendants respectfully request that the Motion begranted in its entirety, and that Plaintiffs Complaint against them be, in all things, dismissed.Respectfully submitted,J Pete LaneyState Bar No. 24036942E-Mail: jpete@jpetelaney.comLAW OFFICES OF J PETE LANEY1122 Colorado StreetSuite 111Austin, TX 78701-2159Tel: (512) 473-0404Fax: (512) 672-6123/s/ Elizabeth L. YinglingElizabeth L. YinglingState Bar No. 16935975E-Mail: elizabeth.yingling@bakem1ckenzie.comLaura J. O'RourkeState Bar No. 24037219E-Mail: laura.orourke@bakermckenzie.comWill R. DaughertyState Bar No. 24053170E-Mail: will.daugherty@bakem1ckenzie.comBAKER & McKENZIE LLP2300 Trammell Crow Center2001 Ross AvenueDallas, TX 75201Tel.: (214) 978-3000Fax: (214) 978-3099ATTORNEYS FOR DEFENDANTS, LIFEPARTNERS HOLDINGS, INC. AND R.SCOTT PEDENCERTIFICATE OF SERVICEI hereby certify that on February 29, 2012, I electronically filed the foregoing documentwith the Clerk of the Court using the CMlECF system, which will send notification of such filingto all counsel who have registered with the Court. All others were served a copy via U.S. mail./s/ Elizabeth L. YinglingDALDMS1707410.5DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 26