Life Partners Holdings, Inc., Brian D. Pardo, R. Scott Peden, and ...

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premium payments on the policy for the term of the life expectancy estimate provided by LifePartners. The escrowed amount, as well as a 12% commission paid to the investor’s broker andmedical review fees, are funded from the amount paid by the investors for the policies. When aninsured dies, investors in that policy collect their pro rata share of the policy’s death benefit.B. Life Partners’ Profits Depend on Short LEs29. According to the Company’s Forms 10-K and 10-KSB filed with the Commissionfor fiscal years 2008 through 2010, Life Partners prices life settlements “based on the policy faceamount, the anticipated life expectancy of an insured and policy maintenance costs.” The policyface amount and policy maintenance costs are ostensibly fixed. But the LE is variable in that itis set by an LE underwriter that analyzes the age and health of the insured. Accordingly, the LEis a significant factor impacting both the price investors pay for policies and the revenues andprofit margins that Life Partners extracts from the transactions that it brokers.30. Since 1999, the Company has relied exclusively on Cassidy, a Reno, Nevadabasedinternist, to provide LEs for the policies it brokers. Prior to 1999, Life Partners obtainedthe LEs it used to broker life settlements from Kelly, a founder and part owner of Life Partners,Inc. Kelly died unexpectedly in 1999. Before his death, he and Cassidy shared office space inReno, but maintained separate medical practices.31. Pardo met Cassidy at Kelly’s funeral, and hired him to fill Kelly’s role infurnishing LEs to Life Partners. Pardo had never met Cassidy before, and, according to Pardo,never spoke to him again after their conversation at the funeral. At Kelly’s funeral, Pardodirected Cassidy to review Kelly’s life expectancy assessments to determine “how they weredoing it.” Cassidy agreed to do so, and, within days of meeting Pardo at Kelly’s funeral, he wasrendering LEs for Life Partners.SEC v. Life Partners Holding, Inc., et al. Page 10Complaint
32. Pardo hired Cassidy without conducting any meaningful due diligence onCassidy’s qualifications to serve as a life expectancy underwriter. At the time Pardo hired him,Cassidy had no experience rendering LEs. Cassidy has never had any actuarial training, and, asof February 8, 2011, had never taken any courses or received any professional guidance orinstruction on life expectancy analysis. He had never attended a life settlement conference orresearched the methodology used by other underwriters in the life settlement industry.33. Initially, Life Partners paid Cassidy $500 for each policy Life Partnerssuccessfully brokered using Cassidy’s LE. In or around February 2008, Life Partners beganpaying Cassidy a $15,000 per month retainer on top of the $500 fee he received for every policyLife Partners brokered using his LE. Since Kelly’s funeral in 1999, Life Partners has sent all ofits retail life expectancy work to Cassidy. In the ten-plus years he has worked for Life Partners,Cassidy has never evaluated his track record on LEs or the reliability of his methodology, whichhe has never modified.C. Cassidy’s Methodology Results in Short Life Expectancy Estimates34. Cassidy described his methodology in letters to the Company dated March 2002(“2002 Letter”) and May 2009 (“2009 Letter”) (collectively, the “Letters”). The purpose of theLetters was to provide information to Life Partners’ auditor about Cassidy’s methodology.35. According to the 2009 letter, Cassidy was rendering LEs using a census tablepublished by the U.S. Department of Health and Human Services (“HHS”). The HHS table is acensus table that addresses life expectancies for the entire U.S. population. In contrast, mortalitytables used by actuaries in the life settlement industry address mortality rates for a select portionof the population who have been underwritten for insurance. LE estimates based on dataprovided in the HHS table are typically shorter than LE estimates based on data in tables tailoredSEC v. Life Partners Holding, Inc., et al. Page 11Complaint
Page 1: UNITED STATES DISTRICT COURT FOR TH
Page 6 and 7: spreadsheet of the 300 “most rece
Page 9: 24. R. Scott Peden, age 47, has ser
Page 14 and 15: insurance. In fact, contrary to the
Page 16 and 17: E. Defendants Knew that Cassidy’s
Page 18 and 19: oker life settlement interests were
Page 20 and 21: 57. Contrary to Life Partners’ mi
Page 22 and 23: THE ACCOUNTING FRAUD 64. In fiscal
Page 24 and 25: agreement to sell the policy for an
Page 26 and 27: 76. Under GAAP, revenue can be reco
Page 28 and 29: therefore misleading. Based on the
Page 30 and 31: 88. Pardo, Peden, and Martin were a
Page 32 and 33: E. Life Partners Backdated Certain
Page 34 and 35: though all three of its internal cr
Page 36 and 37: Company made it a practice to keep
Page 38 and 39: 118. In a letter to the Company dat
Page 40 and 41: that affects our assumptions about
Page 42 and 43: ecommended that “[a] formal analy
Page 44 and 45: 136. Life Partners’ 2011 Form 10-
Page 46 and 47: 11/3/2008 $36.67 2,866 $105,096.221
Page 48 and 49: through 145.SECOND CLAIM FOR RELIEF
Page 50 and 51: through 145.THIRD CLAIM FOR RELIEFV
Page 52 and 53: 171. By reason of the foregoing, Pa
Page 54 and 55: through 145.SEVENTH CLAIM FOR RELIE
Page 56 and 57: e) ordering Defendants to disgorge

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