In a continuing investigation, the Securities and Exchange Commission (SEC) announced earlier this month that it has charged three executives, along with their financial services firm, with allegations of fraudulent disclosure in an accounting scheme involving life settlements. The company, Life Partners Holdings, Inc., is based in Texas and is traded on the Nasdaq. The core business of this company is in the brokering of life settlements. In fact, the SEC notes that all the company's revenues derive from life settlements.
Perhaps a lesser-known business model for most of the investing public, life settlements involve the buying and selling of fractional interests in life insurance policies. Key to the offering of this investment is the insured's life expectancy, as well as the terms and conditions of the insurance policy.
In this matter, the SEC complaint alleges that three of the company's executives - the chairman and CEO, the president and general counsel and the chief financial officer -- " 'misled shareholders by failing to disclose a significant risk to Life Partners' business: the company was systematically and materially underestimating the life expectancy estimates it used to price transactions.' " These estimates are significant because if they are consistently inaccurate, the company's revenues and profits are likely to be adversely impacted.
The SEC also alleges that the company and its executives engaged in disclosure violations. They are also alleged to have engaged in improper accounting practices, which resulted in an overvaluing of the company's assets while also making it seem to the public that the company had healthy earnings from brokering these life settlement transactions. The company's misrepresentations and disclosure failures in its SEC public filings are alleged by the agency to have constituted a material risk to the company's revenues, which was detrimental to its shareholders and the investing public.
A major factor in this was the use of an allegedly unqualified individual to perform the actuarial work needed to estimate life expectancies, which were consistently shorter than they should have been. According to the complaint filed by the SEC, the shortened life expectancy valuations resulted in the use of material non-public information that generated revenues to the public's detriment. The person performing this function was not an experienced life expectancy underwriter and was told simply to use methodologies that had been established by a former underwriter that had worked for the company. The use of unqualified experts in a core valuation that is critical to a company's health, presents a risk to the investing public.
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