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

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that affects our assumptions about remaining life expectancy, credit worthiness of the policyissuer, funds needed to maintain the asset until maturity, capitalization rates and potentialreturn.” Life Partners disclosed that it would recognize an impairment of individual policies “ifthe expected undiscounted cash flows are less than the carrying amount of the investment, plusanticipated undiscounted future premiums and capitalizable direct external costs, if any.” For thefiscal years ended February 28, 2010 and 2009, Life Partners reported impairments ofinvestments in policies of $281,882 and $151,810, respectively. For the nine months endedNovember 30, 2010, Life Partners reported impairments of investments in polices of $111,333.124. From fiscal year 2009 through the period ended November 30, 2010, contrary tothese disclosures, Defendants failed to appropriately evaluate and reduce the carrying value ofthe Company’s investments in policies to fair value. In its filings with the Commission, LifePartners disclosed that impairment is “generally caused by the insured significantly exceedingthe estimate of the original life expectancy, which causes the original policy costs and projectedfuture premiums to exceed the estimated maturity value.” Yet, when Defendants evaluated LifePartners’ investments in policies for potential impairment, Defendants relied on the LEs Cassidyprovided when the Company originally brokered interests in the policies, which Defendantsknew to be materially short. As the number and percentage of insureds outliving Cassidy’s LEsincreased over time, this event or change of circumstances, known to Defendants, necessitated anevaluation and assessment of the reliability of Cassidy’s LEs – a critical assumption in theCompany’s impairment analysis. Instead, the Company used the same LEs Cassidy provided atthe time Life Partners originated the interests, which Defendants knew to be underestimated. Asa result, the Company misled investors by materially understating impairment for its investmentsin life settlement policies.SEC v. Life Partners Holding, Inc., et al. Page 40Complaint
125. Despite their improper reliance on Cassidy’s flawed LEs, Pardo, Peden, andMartin informed the Company’s auditor at fiscal year-end 2009 of their belief that “[w]e havereviewed long-lived assets and investments in life insurance policies and tested for impairmentwhenever events or changes in circumstances have indicated that the carrying amount of assetsmight not be recoverable and have appropriately recorded the adjustment, if any.”126. This representation was false. Pardo, Peden, and Martin understood that theCompany’s impairment calculations depended on the validity of Cassidy’s LEs. They alsoknew, before year-end 2009, that the LEs were unreliable, and, in fact, systematically andmaterially underestimated127. In July or August 2010, E&Y requested data from Life Partners to support theLEs underlying the Company’s investments in policies, and the Company’s related impairmentanalysis. In response, Peden and Martin submitted a chart with information on the most recent300 maturities of viatical and life settlement policies sold by Life Partners. According to thechart, which covered a ten-year period, the ratio of policies that matured before, versus after, thedate projected by Cassidy’s LEs was roughly 50%/50%. But Peden and Martin failed to alertE&Y that, of the more than 4,000 total outstanding policies brokered by the Company that hadyet to reach maturity, insureds underlying approximately 1,200 of those policies had outlivedCassidy’s LE, and those policies thus failed to mature by the dates Cassidy projected.128. In a letter to the Company’s audit committee dated May 2010, E&Y reported thatit had noted control deficiencies and other matters. E&Y considered the Company’s internalcontrol in order to design audit procedures in connection with its engagement to express anopinion on the Company’s fiscal year 2010 financial statements. E&Y reported that theCompany did not have a formal process in place to assess actual-to-expected LEs. E&YSEC v. Life Partners Holding, Inc., et al. Page 41Complaint
Page 1: UNITED STATES DISTRICT COURT FOR TH
Page 6 and 7: spreadsheet of the 300 “most rece
Page 9 and 10: 24. R. Scott Peden, age 47, has ser
Page 11: 32. Pardo hired Cassidy without con
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 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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