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

flawed. Through its use of the same flawed and materially short LEs to assess the value policyinterests on its books, the Company materially understated impairment of its assets.68. On November 22, 2011, the Company announced in its Form 10-K for fiscal year2011 that it was restating financial results for fiscal years 2007 through 2010 and the first threequarters of 2011 to correct these and other accounting errors (the “Restatement”). TheRestatement addresses, among other things, errors related to revenue recognition, impairment ofinvestments in Company-owned policies, accrued liabilities, and the related tax impact, all ofwhich Life Partners admitted had been previously “incorrectly accounted for under [GAAP].”A. The Company’s Life Settlement Transaction Cycle and Timely Revenue RecognitionUnder That Cycle69. In a typical life settlement transaction brokered by the Company, Life Partnersfirst identifies policy owners interested in selling their policies, and negotiates a potentialpurchase of the policies through “Seller Agreements” between the policy owners and theCompany. Upon reaching an agreement for a potential sale by the policy owners, Life Partnersforwards them assignment documents covering the policies, to be returned to the Company alongwith executed copies of the Seller Agreement. Peden was one of three executives who reviewedand signed Seller Agreements on behalf of the Company.70. Prior to the “Closing Date,” Seller Agreements are non-binding andunenforceable against the policy owner. The Seller Agreements define “Closing Date” as “thedate upon which the consideration for the transaction described herein is transferred from theEscrow Agent to the Seller.” Prior to the Closing Date, neither the policy owner nor LifePartners are contractually obligated to proceed with the sale, as each may rescind the agreementat any time and for any reason without incurring a penalty. In fact, for a 15-day period followingthe Closing Date (the “Rescission Period”), the policy owner has the option to rescind his or herSEC v. Life Partners Holding, Inc., et al. Page 23Complaint