Investors can either keep or pool their stakes in $2.4 billion worth of life insurance policies purchased under a bankruptcy reorganization plan filed for Life Partners Holdings.
Life Partners, which sold shares in policies on the elderly and the ill — known as life settlements, viaticals or death bonds — doesn’t fit neatly under bankruptcy law. On Nov. 28, the company submitted terms of a plan to resolve 100,000 positions in life settlements held by 22,000 investors, by giving creditors a choice of how to unwind their stakes.
Life Partners filed for bankruptcy in January after the company received a $46 million court judgment in a case brought by the Securities and Exchange Commission alleging it filed false and misleading financial statements.
A trustee overseeing the bankruptcy, Thomas Moran II, further found that fraud had occurred. He said that the company told investors the policyholders were expected to die sooner than its own records indicated — making the investments appear more profitable than they were — and that sales agents had pocketed investors’ money.
Complicating matters in bankruptcy, the Waco-based company sold “fractional” stakes in life insurance, with several individuals each holding a small percentage of multiple life policies. That means whatever one investor wants to do with a stake could affect other holders. Some investors are underwater because, until the policyholder dies, they must continue paying premiums. Others have profited.
That has left investors divided. Some want to liquidate their positions while others want to keep them. The trustee’s past proposal — to pool all the fractional stakes, using payouts from policies where the person has died to pay premiums on other policies that are in danger of lapsing — met with resistance.
Investors have four options under the latest proposal, which is supported by the trustee and a committee of unsecured creditors. They can keep a 95 percent stake in their investment and contribute the other 5 percent to the estate; pool their investment into a trust; cancel their position and be treated as a general unsecured creditor; or, for investors who held stakes through individual retirement accounts, convert to a stake outside the IRA.
Brian Pardo, the company’s former CEO, has filed opening briefs in an appeal that seeks to reverse the judgment against him. Moran has also sued Pardo, as part of the bankruptcy, to recover funds he said should be shared among all creditors.