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

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

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