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

E. Defendants Knew that Cassidy’s LEs Were Materially Short49. Beginning at least as early as 2003, it was apparent to Life Partners’ AuditCommittee and Board of Directors that the LEs used by the Company to broker life settlementtransactions were materially short. In February 2003, Life Partners’ auditor and AuditCommittee expressed concern that that the number of maturities on the policies that theCompany brokered was less than expected based on the LEs that Life Partners assigned to thosepolicies. In pertinent part, the Audit Committee’s February 2003 quarterly report to LifePartners’ Board of Directors stated:[D]iscussion was held regarding the small number of policies paying off during the nine months ended November 30, 2002. Based on these discussions, the Committee recommended discussions with management about obtaining an independent review of this issue to determine whether adjustments are necessary to the Company’s underwriting criteria. Both Pardo and Peden were members of Life Partners’ Board of Directors in February 2003.50. Despite the Audit Committee’s concerns, Pardo and Peden did not attempt toreview or adjust the Company’s underwriting criteria or determine why Life Partners was notseeing the expected number of maturities based on Cassidy’s LEs. Indeed, neither Pardo norPeden followed the audit committee’s recommendation to conduct an independent review of LifePartners’ underwriting criteria even though, according to them, they had not spoken to LifePartners’ sole underwriter—Cassidy—for almost four years.51. In 2003, Life Partners began including data in its annual filings with the TexasDepartment of Insurance (“TDI”) reflecting, for matured policies, the difference betweenCassidy’s LEs and when insureds actually died. The reports filed by Life Partners for 2003through 2009 reveal that insureds underlying approximately 80% of matured policies that theSEC v. Life Partners Holding, Inc., et al. Page 16Complaint