Life Partners Holdings Inc., which lets customers gamble on other people’s life insurance policies, mostly beat back claims by the Securities and Exchange Commission that the company defrauded investors. But Life Partners and its executives are still reckoning with class action plaintiffs pressing related securities fraud claims, and on Thursday they lost an early bid to derail the case.
U.S. District Judge Alia Moses in Del Rio, Texas, allowed the proposed class action to move forward in a 56-page decision, rejecting a motion to dismiss filed by defense lawyers at Baker & McKenzie. The investors, Moses ruled, adequately alleged that Life Partners duped them about improper practices at the heart of the company’s business.
Waco, Texas-based Life Partners is a pioneer in the secondary market for life insurance, selling stakes in death benefit policies that the company buys from policyholders for a lump sum. Customers continue to pay premiums until death delivers a payout, wagering they’ll earn more in the end than they’ve paid.
The plaintiffs, investors who purchased Life Partners shares between May 2006 and June 2011, accuse the company of concealing that it was systematically underestimating policyholders’ longevity, and thus overvaluing the policies it brokered to customers.
The company’s lawyers at Baker & McKenzie countered in their motion to dismiss that the plaintiffs failed to state a securities fraud claim, and that they were trying to bootstrap allegations about the company’s business practices into a federal securities fraud case. (Lawyers from Locke Lord represented company CEO Brian Pardo on the brief as well, but they’ve since been replaced on the docket by Rory Ryan, a professor at Baylor Law School.)
In Thursday’s decision, Judge Moses sided squarely with the plaintiffs. “It is certainly material to a potential investor in Life Partners’ stock to know that Life Partners employed one doctor who hastily reviewed a large quantity of life insurance policies using nonindustry standards, and who, in the process, routinely underestimated the [life expectancy] estimates he generated.”
The win on motion to dismiss is hardly a guarantee of success for the proposed class. In the SEC case, an Austin federal jury returned a mixed verdict on similar claims in February, and the judge later knocked out the one fraud charge the jury decided in the SEC’s favor. (In addition to accusing Life Partners of misleading investors about its financial state, the SEC also brought insider trading charges against CEO Pardo and general counsel Scott Peden.)
Baker & McKenzie’s Elizabeth Yingling is representing Life Partners in both the SEC case and the class action. Yingling was unavailable when we tried to reach her on Friday, and a company spokeswoman didn’t immediately respond to our call. Steve Berman of Hagens Berman Sobol Shapiro, a lead lawyer for the plaintiffs, also wasn’t available to comment. The plaintiffs are also represented by Pomerantz Haudek Grossman & Gross, Glancy Binkow & Goldberg, Harwood Feffer and Ferguson Law Group.