A federal judge who earlier dismissed part of a jury’s verdict against Waco-based Life Partners has ordered the insurance death benefits broker and its two top officers to pay $46.9 million in illegal profits and civil penalties for making false and misleading filings to the Securities and Exchange Commission.
Founding CEO Brian Pardo had boasted to a Fort Worth audience of potential investors three years ago that the SEC would never succeed in winning against him in court.
But in a ruling issued Tuesday in Austin, U.S. District Judge James R. Nowlin called the 70-year-old Pardo a “repeat offender who shows no signs that he has learned his lesson,” citing violations dating back to 1991.
Nowlin ordered the tough-talking Vietnam War helicopter gunner to pay a $6.1 million penalty, which includes $300,000 that he said Pardo “extracted” from the company to cover country club dues, a hangar for his private plane, a home computer, personal cell phones and college tuition for relatives.
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In February, an Austin jury rejected a major fraud allegation, and the judge later dismissed one that jurors had upheld. Although the SEC claimed a partial victory in the mixed verdict at the time, Pardo contended that he had been “exonerated.”
But what Pardo’s side considered “minor” charges — filing false public reports — Nowlin said in his ruling “are not minor at all.”
The SEC alleged that investors were misled about the life expectancy of elderly people whose death benefits were bought and sold by Life Partners on the secondary insurance market.
Investors were told of life expectancy predictions by a Nevada oncologist, who had no actuarial training. His estimates differed greatly from those of professional consultants that Life Partners used to select policies, keeping the more conservative reports secret from the stock-buying public. By making the sellers look sicker than they were, the Waco firm’s business outlook was artificially burnished.
R. Scott Peden, general counsel of Life Partners, was ordered to pay $2 million in civil penalties for 68 violations, for which the SEC had sought $4.7 million. The company must pay $15 million in disgorgement, or return of illegal profits, and $23.7 million in civil penalties. Overall, the SEC secured about a tenth of what it had sought.
Life Partners stock (ticker: LPHI) fell 23 percent Wednesday, or 33 cents, to close at $1.10 on the Nasdaq exchange.
The case was handled by the SEC’s Fort Worth office, which hasn’t decided if the $15 million, or whatever is ultimately collected, would be returned to investors, said David Peavler, associate director of enforcement.
“The court recognized the egregious nature of their misconduct, noting that the defendants engaged in ‘serious violations’ of the securities laws that ‘deprived the investing public of the information it needed to make a fully informed decision about whether to invest in Life Partners,’ ” Andrew Ceresny, SEC director of enforcement, said in a statement.
Defense attorneys had argued unsuccessfully in court that the charges upheld by the jury were “minor.”
Absent a fraud conviction, Peden’s attorney, Case Weiland, told the Wall Street Journal on Wednesday that the “judgment seems rather harsh.”
Pardo’s lawyer, Jay Ethington of Dallas, also expressed surprise by the heavy penalties.
“It appears like the court tried to split the baby but as a result smashed it to pieces,” he told the Star-Telegram.
“We’re disappointed, extremely disappointed and confused, and believe that some of the findings are not supported by the evidence,” Ethington said. “And we’re obviously considering an appeal and other alternatives, including negotiations. We see this as a starting point, not an ending.”
Life Partners must also contend with legal action from the Texas State Securities Board and a number of civil suits lodged by investors.
Nowlin minced no words about Ethington’s client, however.
“As CEO and controlling shareholder, Pardo had the power to make things happen” in 2007 after Life Partners was ousted from Colorado, the judge wrote. “The evidence, however, shows that oversight and compliance at Life Partners were non-existent.”
And Nowlin singled out a board member, Tad Ballantyne, who headed the company’s risk and compliance committee, as asleep at the wheel.
In testimony, Ballantyne said he had never read articles that exposed questionable practices at the company, and was unaware that the national accounting firm, Ernst & Young, required the CEO to retract false public statements about reviewing the accuracy of the Nevada doctor.
Noting that Pardo could have appointed the best talent when Life Partners was a “hot” stock selling for $20, the judge said the CEO instead chose Ballantyne who was either “profoundly dishonest or amazingly uninformed” about a company he had a legal responsibility to protect.
After all of its legal skirmishes, Life Partners “remains a company controlled by a man [Pardo] with a history of violating securities laws and overseen by an apparently blind board of directors.”