Securities Lawyer Blog

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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As experts in the field of securities law and regulation and the representation of broker-dealers, the New York securities lawyers of the Securities Lawyer Blog recently reviewed a filing by the Securities and Exchange Commission (SEC) in Massachusetts. In the action, the SEC filed charges against an investment firm and its principal in Boston. The SEC's complaint was filed in the U.S. District Court in Massachusetts and the court quickly issued a temporary restraining order after the SEC sought an order to freeze assets of the investment firm and its hedge fund.

The allegations of the SEC's complaint include charges that the firm misled investors regarding many aspects of its business, including where the funds raised were actually being placed, in this case, allegedly into the money manager's personal bank account.

The purported hedge fund was the magnet to which potential investors were attracted, but according to the SEC, the solicitation was fraught with misleading information that included false statements. These included that: the principal graduated from Harvard University with both undergraduate and graduate degrees; that he worked for a major global investment company in which he grew and managed billions of dollars; that a major auditing firm served as the purported fund's auditor; and that the firm was a British Virgin Islands company.

The SEC's allegations include that by creating the "indicia of legitimacy" using misrepresentations, the principal had ten investors that may have put up at as much as $1.7 million. Some of this was placed into the principal's personal accounts.
The SEC says both the Swiss Financial Market Supervisory Authority and the British Virgin Islands Financial Services Commission has assisted in the matter, which remains under investigation. Both these entities are involved in regulatory compliance, supervision and inspection of financial services businesses operating within their jurisdictions.

The alleged violations in this matter include those under Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8.

The New York law firm of Gusrae Kaplan Nusbaum PLLC represents broker-dealers and firms in matters involving a broad spectrum of issues before all regulatory entities. Please contact our law firm to consult with one of our attorneys in any matter related to securities regulation and compliance, broker-dealer services and representation before all entities involved with the regulation and compliance of the securities industry.

Earlier this week, the SEC confirmed that $230 million in holdings of a hedge fund's offshore account are back in the United States. Overall, enforcement actions are said by the SEC to have returned over $2 billion to investors last year. The underlying case charges an individual, his investment advisory firm and a hedge fund management entity that managed three hedge funds with involvement in a Ponzi scheme.

The SEC advised the US District Court for the District of Connecticut that the funds are in a bank account in this country and in accord with the court's prior rulings, will remain frozen as the case proceeds. Judge Janet Bond Arterton had entered an order earlier this month that froze the hedge funds' assets and ordered them returned to the United States. She had already frozen the assets of other defendants.

Notably, Ethiopis Tafara, the Director of the SEC's Office of International Affairs was quoted in the SEC's press release saying, " 'In this case, the ability to freeze and repatriate the alleged financial crime proceeds was critical to the SEC's effective enforcement of the U.S. securities laws.' "

The SEC's action alleges that the individual defendant and his unregistered investment advisory firm "misappropriated at least $53 million in investor funds and used the money for self-dealing transactions." Specifically, it is alleged that he improperly transferred investors' monies over which he had personal control and then invested the monies for his personal benefit and that of entities over which he had control "running a multi-year, multi-million dollar Ponzi scheme."

An additional investment advising entity, hedge funds they managed and affiliated entities were recently named in the litigation in a second amended complaint "as relief defendants for allegedly holding funds tainted by the Ponzi scheme."

The charges against various defendants include alleged violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The New York firm of Gusrae Kaplan Nusbaum PLLC represents broker-dealers in regulatory and enforcement matters. Our lawyers advise clients and defend industry members in matters involving a broad spectrum of issues before all regulatory entities. Contact our law firm to consult with one of our attorneys.