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

136. Life Partners’ 2011 Form 10-K also reports Pardo and Martin’s conclusion thatthe Company did not maintain effective internal control over financial reporting as of the start ofthe end of fiscal year 2011, including effective controls to ensure the existence, completeness,accuracy, valuation, and presentation of activities related to, inter alia, revenue recognition andimpairment of investment in policies. These internal control deficiencies, according to theCompany, resulted in the aforementioned misstatements of revenue and investments in policies.137. The table below is based upon the Restatement and indicates that Life Partners’misstatements of net income range from negative 29% to positive 11% for fiscal years 2007,2008, 2009, and 2010. Similarly, the Company misstated net income for the first, second, andthird quarters of fiscal year 2011 by 7%, 2%, and (78)% respectively. The misstatements of netincome resulting from prematurely recognizing revenue prior to the Closing Date and inadequateimpairment of investments in policies are material to Life Partners consolidated financialstatements for fiscal years 2007, 2008, 2009, 2010 and for the first, second, and third quarters offiscal year 2011.Increase (Decrease) Net Income(Dollars in millions)Nature of Restatement AdjustmentYear Ended2/28/07Year Ended2/29/08Year Ended2/28/09Year Ended2/28/101.Revenue based on closing date $ 0.4 $ (3.8) $ 0.1 $ (2.1)2. Impairment -- (0.2) (2.2) (1.8)3. Deferred policy monitoring costs N/A (1.9) (0.7) (0.4)4. Other 2 (0.2) (0.3) 0.6 (0.1)Subtotal, pretax 0.2 (6.2) (2.2) (4.4)Federal and state taxes 0.2 2.0 0.6 1.1Misstatement, after tax 0.4 (4.2) (1.6) (3.3)Reported net income 3.4 18.8 27.1 29.4Restated net income $ 3.8 $ 14.6 $ 25.5 $ 26.1% Misstatement,under (over) stated 11% (29)% (6)% (13)%1 The Company’s restatement of prior year financial statements includes correction of errors related to thetiming of expensing executive bonuses, impairment of investments in securities, and certain other items.SEC v. Life Partners Holding, Inc., et al. Page 44Complaint