More On Legal & Compliancefrom The Advisor's Professional Library
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
The Securities and Exchange Commission on Tuesday charged Texas-based financial services firm Life Partners Holdings Inc. and three of its senior executives for their involvement in a fraudulent disclosure and accounting scheme involving life settlements.
The SEC alleges that Life Partners chairman and CEO Brian Pardo, president and general counsel Scott Peden, and chief financial officer David Martin, "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."
Life expectancy estimates, the SEC states, "are a critical factor impacting the company’s revenues and profit margins as well as the company’s ability to generate profits for its shareholders."
As the SEC explains, life settlements involve the purchase and sale of fractional interests of life insurance policies in the secondary market. In life settlement transactions, life insurance policy owners sell their policies to investors in exchange for a lump-sum payment. The dollar amount offered by the investor takes into account the insured’s life expectancy and the terms and conditions of the insurance policy.
The SEC alleges that Life Partners and the three executives were involved in disclosure violations and improper accounting that Life Partners used to overvalue assets held on the company’s books and create the appearance of a steady stream of earnings from brokering life settlement transactions. The SEC further charged Pardo and Peden with insider trading in their shares of Life Partners stock while in possession of material, non-public information indicating that the company had systematically and materially underestimated life expectancy estimates.
“Life Partners duped its shareholders by employing an unqualified medical doctor to assign baseless life expectancy estimates to the underlying insurance policies,” said Robert Khuzami, director of the SEC’s Division of Enforcement, in a statement. “This deception misled shareholders into thinking that the company’s revenue model was sustainable when in fact it was illusory.”
David Woodcock, director of the SEC’s Fort Worth Regional Office, added in the same statement that, “The senior-most executives at Life Partners concealed significant risks to the business, manipulated financial statements with improper accounting, and knowingly profited from their misconduct by executing insider trades based on information that was not available to the public.”