Life Partners Ch. 11 Trustee Alleges 'Wide-Ranging' Fraud By Ben Conarck
Law360, New York (May 21, 2015, 2:59 PM ET) -- The trustee monitoring the bankruptcy of Life Partners Holdings Inc. on Wednesday said the company engaged in a multiyear “wide-ranging” fraud in his emergency motion in Texas bankruptcy court to control the distribution of death benefits payable on the policies held by its customers.
Lawyers for H. Thomas Moran III, who was appointed as trustee in March at the urging of the U.S. Securities Exchange Commission, said in the filing that the life insurance purchaser’s alleged fraud was carried out in a multitude of ways, including artificially shortened life expectancies in the sale of “fractional investments,” or life settlement policies.The alleged fraud also included material misrepresentation of the return to investors as well as whether the policies had lapsed or not, according to the trustee’s filing.
“As a result of his investigation to date, the trustee concluded that Life Partners devised and executed a wide-ranging scheme to defraud its investors,” the filing said.
Life Partners, which hit Chapter 11 in January in an effort to buy time while it appeals a $47 million judgment by the SEC, recently announced that its two subsidiaries have also filed for Chapter 11 protection and will operate as debtors-in-possession. The company was dealt a blow earlier this month by the Texas Supreme Court, which ruled that its life settlements are securities under state law.
The trustee blasted Life Partners’ use of “so-called ‘escrow companies’,” which he said were used as both instruments of and cover for the fraud, which included charging “massive, undisclosed fees and commissions, the total amount of which, in many cases, exceeded the purchase price of the policies themselves.”
Life Partners also kept “faulty and inconsistent” records regarding those two entities, Purchase Escrow Services and Advance Trust and Life Escrow Services. The trustee says they hold a combined $58 million in premium reserves, funds that he is seeking to control.
The trustee has described the companies as “middlemen” and is seeking to “eliminate the unnecessary costs and expenses associated with funding the operations of those companies so that they can provide their ‘services’ — services that amount to little more than ‘window dressing’ which historically (when LIP was selling investment contracts) helped to provide cover for the fraudulent scheme.”
Life Partners owns about 3,600 life insurance policies with a combined face value of more than $2.4 billion, according to the filing.
The company, accused of selling unregistered securities and falsely promising large payouts, has faced a flood of litigation over its sales of the life settlements, including suits from the state securities regulator and a group of investors, both of which were dismissed in trial court. But appeals courts in Austin and Dallas revived the claims after finding the settlements were investment contracts, not insurance contracts, making them securities under state law.
In addition to seeking to control the proceeds of the policies, the trustee has filed a separate emergency motion detailing his premium payout plan, which he said would provide immediate relief from premium calls to all investors. Without approval, the trustee said, investors could receive premium calls of up to $100,000,000 in the next year.
The trustee said that nearly $23 million is projected to be due in premiums on the policies over the next 90 days, and if the funds needed to pay the premiums in accordance with the plan are not available to him, an estimated 849 policies with death benefits of more than $140 million could lapse in the next 90 days. An estimated 1,800 policies with death benefits totaling more than $800 million could lapse within the next year, he said.
“Because of, among other things, the extensive capital Life Partners consumed in maintaining its fraudulent scheme; the fact that, as a result, the Life Partners enterprise has been enmeshed in extensive and costly litigation for many years; and the (ultimately inappropriate) material dividends paid to shareholders in the months leading up to the LPHI petition date, Life Partners does not possess working capital reserves which are sufficient to meet any future premium shortfalls,” the trustee said.
The trustee’s proposed counsel is Katharine Battaia Clark, David M. Bennett and Richard B. Roper of Thompson & Knight LLP.
The case is In re: Life Partners Holding, case number 4:15-bk-40289, in the U.S. Bankruptcy Court for the Northern District of Texas.
--Editing by John Quinn.
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