854 F.3d 765 (5th Cir. 2017), 14-51353, Securities & Exchange Commission v. Life Partners Holdings, Inc.

Docket Nº:14-51353
Citation:854 F.3d 765
Opinion Judge:JAMES L. DENNIS, Circuit Judge:
Party Name:SECURITIES AND EXCHANGE COMMISSION, Plaintiff - Appellee Cross - Appellant v. LIFE PARTNERS HOLDINGS, INCORPORATED, Defendant - Appellant; BRIAN D. PARDO; R. SCOTT PEDEN, Defendants - Appellants Cross - Appellees
Attorney:For SECURITIES AND EXCHANGE COMMISSION, Plaintiff - Appellee Cross-Appellant: Benjamin M. Vetter, Hope Hall Augustini, Senior Litigation Counsel, U.S. Securities & Exchange Commission, Washington, DC. For BRIAN D. PARDO, ROBERT SCOTT PEDEN, Defendants - Appellant Cross-Appellees: Charles Alfred M...
Judge Panel:Before STEWART, Chief Judge, and JONES and DENNIS, Circuit Judges.
Case Date:April 21, 2017
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
SUMMARY

The SEC brought an enforcement action against LPHI and two of its senior officers, Pardo and Peden, alleging violations of reporting and anti-fraud provisions of the federal securities laws. The SEC alleged that LPHI, a company in the business of facilitating the sales of existing life insurance policies to investors, knowingly underestimated life expectancies for the insureds in public filings with the SEC. A jury found defendants liable for violations... (see full summary)

 
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Page 765

854 F.3d 765 (5th Cir. 2017)

SECURITIES AND EXCHANGE COMMISSION, Plaintiff - Appellee Cross - Appellant

v.

LIFE PARTNERS HOLDINGS, INCORPORATED, Defendant - Appellant; BRIAN D. PARDO; R. SCOTT PEDEN, Defendants - Appellants Cross - Appellees

No. 14-51353

United States Court of Appeals, Fifth Circuit

April 21, 2017

Appeals from the United States District Court for the Western District of Texas.

For SECURITIES AND EXCHANGE COMMISSION, Plaintiff - Appellee Cross-Appellant: Benjamin M. Vetter, Hope Hall Augustini, Senior Litigation Counsel, U.S. Securities & Exchange Commission, Washington, DC.

For BRIAN D. PARDO, ROBERT SCOTT PEDEN, Defendants - Appellant Cross-Appellees: Charles Alfred Mackenzie, Esq., Law Office of C. Alfred Mackenzie, Waco, TX.

Before STEWART, Chief Judge, and JONES and DENNIS, Circuit Judges.

OPINION

JAMES L. DENNIS, Circuit Judge:

The Securities and Exchange Commission (SEC) brought this enforcement action against Life Partners Holdings, Inc. (LPHI) and two of its senior officers, Brian Pardo and Scott Peden, alleging violations of reporting and anti-fraud provisions of the federal securities laws. LPHI is in the business of facilitating the sales of existing life insurance policies to investors. The SEC alleges that LPHI knowingly underestimated life expectancies for the insureds in public filings with the SEC.

Relevant to this appeal, a jury found the defendants liable for violations of section 17(a) of the Securities Act of 1933 and section 13(a) of the Securities Exchange Act of 1934. The district court sustained the jury's verdict as to section 13(a) but set aside the verdict as to section 17(a). In its final judgment, the district court imposed civil penalties on the defendants and issued injunctions restraining them from committing additional violations of the relevant securities laws. However, the district court declined to order Pardo to reimburse LPHI for compensation under section 304 of the Sarbanes-Oxley Act. The appellants, Pardo and Peden, challenge both the jury's verdict and the district court's judgment. The SEC cross-appeals, challenging the court's judgment.

I

LPHI is a publicly held company that, through its wholly owned subsidiary, Life Partners, Inc. (LPI),1 engaged in the business of facilitating " viatical" and " life settlement" transactions.2 Pardo is LPHI's majority shareholder, and, during the time relevant to this appeal, he was also the chairman of the board of directors and chief executive officer of both LPI and LPHI. Peden was president of LPI, general counsel of both LPI and LPHI, and a director of LPHI. As officers of LPHI and LPI, both Pardo and Peden participated in creating the various reports filed by LPHI with the SEC, and they both signed, and Pardo certified, the filed reports.

LPHI derived its revenue from commission fees it collected when facilitating the sale of existing life insurance policies or fractional interests in such policies to individual and institutional investors. In a typical transaction, the life insurance policy owner, the insured, sold the policy for an amount less than the death benefit but more than the cash surrender value of the policy. The purchaser of the policy undertook to pay future premiums to maintain the policy until the insured died. Thus, the purchaser would realize a profit if, when the policy matured upon the death of the insured, the policy benefits paid were greater than the purchase price plus any additional costs, including the premiums paid by the purchaser to maintain the policy. An insured's life expectancy estimate (LE) was therefore of critical importance in determining the policy's sale price. And, if an insured lived longer than expected, thereby increasing the cost of maintaining the policy, the purchaser received a lower return or even lost money.

LPHI evaluated policies, obtained LEs for each policy, and determined the sale price, from which it received its commission fees. LPHI priced policies such that shorter LEs promised greater returns to purchasers. In order to ensure that policies were maintained during the insured's LE period, LPHI required purchasers to place a certain amount of funds in escrow, from which premium payments were to be made during this period. If an insured lived past his or her LE, the purchaser was required to make additional premium payments in order to keep the policy from lapsing. In addition to facilitating sales to institutional and individual purchasers, LPHI acquired interests in life insurance policies for its own investment portfolio.

Starting in 1999, LPHI obtained LEs from a sole service provider, Dr. Donald Cassidy, a board-certified oncologist and internal medicine physician. Cassidy calculated an insured's LE by using the Center for Disease Control general population mortality table to determine the anticipated life span for the insured and adjusting that anticipated life span based on his medical judgment after reviewing the insured's medical records. Cassidy reported his result in a range of years, and LPHI used the top end of the range as the insured's LE. In public filings with the SEC, LPHI identified certain risks associated with its underestimation of LEs. In March 2011, after the SEC launched an investigation regarding LPHI's LEs, the company started acquiring LEs from another provider, a company called 21st Services, in addition to Cassidy.

In 2013, the SEC brought an enforcement action against LPHI, Pardo, and Peden, alleging that they knowingly used materially underestimated, or " short," LEs in connection with life settlement policies and that they misrepresented an existing reality of materially and systematically short LEs as a contingent risk in LPHI's public filings with the SEC between 2007 and 2011. The SEC claimed that the defendants violated the anti-fraud provisions in section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a). The SEC also contended that LPHI, aided and abetted by Pardo and Peden, violated the reporting requirements of section 13(a) of the Securities Exchange Act, 15 U.S.C. § 78m(a), and the SEC's rules thereunder, 17 C.F.R. § § 240.12b-20, 240.13a-1, and 240.13a-13. As to Pardo only, the SEC alleged that he violated 17 C.F.R. § 240.13a-14. Finally, the SEC asked that Pardo be ordered to reimburse LPHI for certain compensation and trading profits under section 304(a) of the Sarbanes-Oxley Act of 2002 (SOX), 15 U.S.C. § 7243(a).

At trial, Larry Rubin, the SEC's expert witness, testified that LPHI's LEs were materially and systematically short based on various analyses he conducted using LPHI's data.3 Relevant to this appeal, the jury subsequently found that LPHI, Pardo, and Peden violated section 17(a) of the Securities Act, that LPHI violated section 13(a) of the Securities Exchange Act and rules thereunder, and that Pardo and Peden aided and abetted LPHI's section 13(a) violations. However, the jury found that the defendants did not violate section 10(b) of the Securities Exchange Act. The defendants then moved the district court for judgment as a matter of law.

Ultimately, the district court denied the defendants' motion for judgment as a matter of law as to section 13(a) violations, but it granted the motion for judgment as a matter of law as to section 17(a) violations and set aside the jury's verdict as to the latter. The SEC moved for reconsideration of the court's section 17(a) ruling, but the district court denied that motion. At the remedies stage, the district court imposed second-tier civil penalties on the defendants and issued injunctions restraining the defendants from committing additional violations of the relevant securities laws. However, the district court declined to order Pardo to reimburse LPHI for compensation under section 304 of SOX and later denied the SEC's motion for reconsideration of this ruling.

The appellants, Pardo and Peden, challenge the district court's denial of judgment as a matter of law on the SEC's section 13(a) claim. They also argue that the district court erred in imposing second-tier penalties, in assessing their amounts, and in issuing the injunctions. The SEC cross-appeals, challenging the court's grant of judgment as a matter of law on the SEC's (a) claim and the court's refusal to order SOX reimbursements.

II

We discuss the appellants' challenges, first to the jury's verdict and then to the district court's judgment, before turning to discuss the SEC's cross-appeal.

A

The appellants challenge the jury's verdict that LPHI violated the reporting requirements of section 13(a) and that Pardo and Peden aided and abetted this violation, arguing that it was not supported by substantial evidence. As part of their challenge to the...

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