Life Partners Customers Face Tough Investment DecisionsTrust is strained as firm’s customers try to navigate bankruptcy process and complex alternatives being offered
By
KATY STECH
Updated Aug. 22, 2016 8:24 a.m. ET
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Chuck Smith has an investment payout that depends on five 92-year-old women he has never met and how much longer they live.
Mr. Smith is one of more than 22,000 clients of Life Partners Inc.who have bet on strangers’ life expectancies and now must decide whether to cancel or keep their investments as the Waco, Texas, firm goes through bankruptcy proceedings.
Mr. Smith says it isn’t an easy decision. “There’s no way I’m going to be able to make any smart guess.”
Life Partners customers who invested in roughly 3,400 life-insurance policies must decide by Tuesday between two competing plans from life-settlement firms Vida Capital Inc. and BroadRiver Asset Management, which are fighting to manage the lucrative Life Partners $2.3 billion portfolio.
The plans offer an array of payout scenarios and fees explained in more than a thousand pages of dense legal language. A bankruptcy judge approved the wording earlier this year.
Federal bankruptcy rules require that plans sent to creditors be written in simple language. But a Wall Street trader who specializes in distressed trading said he can’t tell what recovery rates would be under the different scenarios.
Through Life Partners, a life-insurance policyholder sold his or her policy at a discount to an investor for immediate cash. Life Partners brokered the transactions for a fee. Buyers of the policies continued paying the premiums hoping to get a profit when the insured person dies and the policy pays out.
Many Life Partners customers said in interviews that lacking clarity before Tuesday’s voting deadline, they don’t know whom to trust.
In written statements and at meetings each group held in Florida, California and other states, Vida Capital and BroadRiver accused each other of trying to disguise unreasonable customer fees. The firms jointly published a 30-page comparison chart in which each presented cost data using metrics that were different from the other’s.
Dan Young, vice president of asset management for Vida Capital, conceded the proposed plans are complicated and was concerned some clients lacked the financial sophistication to fully understand the voting options. At one meeting, Mr. Young said, an investor asked him to explain the definition of a note, another term for a loan.
Mr. Young said many Life Partners clients invested on advice of friends, relatives and financial advisers. “This was something that was sold, not bought.”
Life Partners is now in the hands of a court-appointed trustee, H. Thomas Moran II, who is backing Vida Capital’s plan. But the cost of Mr. Moran’s legal team—more than $33 million so far—has rankled some of the investors. A Texas client who invested $230,000 said the administration expenses made her feel “like prey.”
Mr. Moran defended his team’s costs in a emailed statement and said they would only be covered if deemed reasonable by a judge.
Some of Life Partners’ customers say they began losing trust in the firm years ago. The company has been accused of using unrealistic life-expectancy projections, something Mr. Moran called “one of the largest and longest-standing fraud schemes” to unfold in Texas. Previous Life Partners management has denied that characterization.
Investors relied on Life Partners life-expectancy estimates to choose policies in which to invest. The estimates were the focus of a December 2010 article in The Wall Street Journal, which found that 95% of the insured in deals brokered by Life Partners in 2002 were still living beyond the life expectancies estimated by a company physician.
For the 11 policies in which he invested in 2007 for $142,000, only one policy has matured, Mr. Smith said.
In 2012, the U.S. Securities and Exchange Commission accused Life Partners of making misleading statements and won a $46.9 million partial court judgment against the company, its founder Brian Pardo and another executive.
Mr. Pardo, who founded the company in 1991, has denied wrongdoing, and the judgment is under appeal. Life Partners’ parent company filed for bankruptcy on Jan. 20, 2015, and its operating subsidiaries filed later.
Meanwhile Mr. Pardo said in an interview that he doesn’t support either of the bankruptcy plans offered by the two life-settlement companies because of a potential tax issue.
The competing bankruptcy plans offer similar options: Life Partners investors could continue paying premiums on the policies they bought, hoping for an eventual payout, or they could transfer their investment to a pool that would distribute payouts widely as the policies mature.
The costs to customers of these plans are tough to compare. BroadRiver co-Chief Executive Philip Siller said Mr. Moran’s financial projections are off and that BroadRiver’s plan charges lower fees and is safer. Vida officials say BroadRiver’s compensation appears less expensive because the firm forecasts fewer maturities during the period of comparison.
Joseph Sarachek, who handles distressed trading for a division of capital markets investment firm Cantor Fitzgerald LP, said statements circulated by the life-settlement companies and the trustee are the most confusing he has seen in more than 30 years in the bankruptcy industry. “In most bankruptcy cases, the recovery numbers are much, much clearer,” he said. “If you look at [the two plans], there are no percentages that we normally see. That’s troubling.”
Mr. Sarachek’s firm and others that purchase claims in bankruptcy have extended another option to Life Partners clients: they can sell their ownership stakes in the policies at a discount to Cantor and other claims traders. More than 60 customers have taken up Cantor’s offer of paying 10 cents to 20 cents on the dollar, Mr. Sarachek said.
Some Life Partners clients have said they are unhappy with Mr. Moran’s management decisions. Some temporarily lost access to online account details, and Mr. Moran has delayed distributing $128 million in payouts during a policy-ownership dispute.
Mr. Moran said online access was lost because of inaccurate account information and that a court has blocked distribution of those payouts.
Although policy investor Mr. Smith, a Texas resident, made several spreadsheets to predict his potential recoveries from the bankruptcy proceedings, he says he is still confused and isn’t planning to vote. “I’m very skeptical.”
Write to Katy Stech at katherine.stech@wsj.com
Corrections & Amplifications:
Life Partners customers must decide by Tuesday between two competing plans from life-settlement firms. An earlier version of this article incorrectly said the deadline was Monday. (Aug. 22, 2016) |
