A bankrupt seller of stakes in life insurance policies didn’t just mislead investors with early death estimates — it also deceived them about how much they would get when the policyholder died, a trustee found.
Waco-based Life Partners Holdings employed a “wide-ranging scheme” to cheat investors in so-called life settlements, trustee H. Thomas Moran said in papers filed Wednesday in U.S. Bankruptcy Court in Fort Worth. The report includes new allegations about the company, already the target of a Securities and Exchange Commission lawsuit.
Life settlements, also known as viaticals or death bonds, are investments in which terminally ill or elderly people sell their life insurance policies for cash, and an intermediary — in this case, Life Partners — sells a stake in the policy to investors. When the insured person dies, the investor gets the death benefit as a return on the investment.
Artificially shortened life-expectancy figures supplied by the company’s consultant convinced investors that their returns would be greater, Moran said. He announced his findings and requested court approval to control the payout of death benefits, manage premiums and take other measures to unwind the fraud in Chapter 11 bankruptcy.
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Life Partners lied about when policies lapsed, charged massive undisclosed fees and deceived investors about its practices to dodge securities regulations — all of which came on top of “egregious and continuous self-dealing by insiders,” Moran said.
Life Partners filed for bankruptcy in January, seeking to avoid a $46 million SEC fraud judgment against it and key officers, including former CEO Brian Pardo. The SEC found that a consultant hired by Life Partners to estimate life expectancies had used unreasonable methods, resulting in underestimates.
Moran’s investigation uncovered other techniques used to extend the fraud, including forcing investors to abandon their stake in policies and reselling them for personal gain. The company commingled investors’ money and used it in unauthorized ways the report didn’t specify.
Life Partners generated huge profits by concealing the actual amount it paid to acquire policies, Moran said, describing an instance when it charged investors almost $3 million for contracts that cost the company only $700,000.
“While those investors had to wait to find out whether they would receive any return on their investments, LPI generated a ‘profit’ of over 200 percent,” Moran said. U.S. Bankruptcy Judge Russell Nelms ordered that a trustee be put in charge of the company after a series of hearings this year.