A Texas federal judge has ordered Life Partners Holdings Inc. (LPHI) and two of its executives to pay $47 million for filing false U.S. Securities and Exchange Commission (SEC) reports. This comes after a mixed jury verdict that cleared them of insider trading. U.S. District Judge James R. Nowlin entered permanent injunctions against LPHI, CEO Brian Pardo and general counsel R. Scott Peden barring future securities violations, and ordered LHPI to pay $38.7 million in disgorgement and civil penalties. Pardo will pay $6.3 million in penalties, while Peden will pay $2 million, according to the order.
While the SEC had pressed for a judgment of more than $2 billion, the defendants argued no sanctions were required because they prevailed on nine of the 12 counts against them and there were no findings of fraud. But Judge Nowlin ruled that even though the SEC did not succeed in its core allegations, the so-called minor charges were still significant. Judge Nowlin wrote:
The jury judged that [the defendants] deprived the investing public of the information it needed to make a fully informed decision about whether to invest in Life Partners. Given that disclosure is the basis of American securities law, these are serious violations.
The SEC had accused the Defendants of enticing investors by understating the life expectancies of policyholders whose insurance policies it sold. After the jury found for the SEC on four counts, the Defendants were able to get another claim dismissed for a lack of evidence. Judge Nowlin singled out Pardo in his ruling, finding that he had a history of settlements with securities regulators and that his oversight of LPHI was nonexistent, even after outside auditors flagged its accounting practices. In his order, Judge Nowlin wrote that he was shocked that an LPHI director testified during trial that he never read a media report alleging the company systemically defrauded investors and was even more surprised that Pardo kept him on the board after that embarrassing revelation. Judge Nowlin wrote:
So far as the court can tell, nothing has changed at LPHI as a result of the failures that are the subject of this case, and the court can only assume this is because Pardo does not want anything to change. Plainly, the court would be naive to assume that anything will change at Life Partners absent intervention by outside forces.
The SEC had sought a disgorgement of $500 million with $37.4 million in prejudgment interest, civil penalties ranging from $67.9 million to $1.5 billion and reimbursement of $13.3 million in alleged bonuses and other compensation from Pardo under the Sarbanes-Oxley Act. Judge Nowlin reduced the disgorgement request to $15 million, ruling that shareholders made money based on retail investors’ ignorance and that it would be unfair to repay so much money just to shareholders who later suffered when LPHI’s faulty disclosures were revealed. The judge wrote: “The SEC offers a meat cleaver when a scalpel is required.”
The civil penalties were also lowered to $23.7 million and Judge Nowlin ruled Pardo was not required to pay anything back under Sarbanes-Oxley because there was not enough evidence to show LPHI’s restated financials were caused by the company’s misconduct.
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