Sec. & Exch. Comm'n v. Life Partners Holdings, Inc.

• Decision Date: 02 December 2014
• Docket Number: Civil Action No. 1–12–CV–33–JRN.
• Citation: 71 F.Supp.3d 615
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff v. LIFE PARTNERS HOLDINGS, INC., Brian Pardo, and R. Scott Peden, Defendants.
• Court: U.S. District Court — Western District of Texas

71 F.Supp.3d 615

SECURITIES AND EXCHANGE COMMISSION, Plaintiff

v.LIFE PARTNERS HOLDINGS, INC., Brian Pardo, and R. Scott Peden, Defendants.

Civil Action No. 1–12–CV–33–JRN.

United States District Court, W.D. Texas, Austin Division.

Signed Dec. 2, 2014.

B. David Fraser, Jessica Bogan Magee, Matthew J. Gulde, U.S. Securities and Exchange Commission, Fort Worth, TX, for Plaintiff.

Dana Livingston, Alexander Dubose Jefferson & Townsend LLP, J. Pete Laney, The Law Offices of J Pete Laney, Austin, TX, Elizabeth L. Yingling, Laura J. O'Rourke, Meghan Elizabeth Hausler, Will R. Daugherty, Baker & McKenzie LLP, Jay Ethington, Law Office of Jay Ethington, Robert Allen Hawkins, S. Cass Weiland, Squire Patton Boggs (US) LLP, Dallas, TX, for Defendants.

FINAL JUDGMENT ORDER

JAMES R. NOWLIN, District Judge.

Before the Court are Defendants' Motion for Entry of Judgment (Dkt. No. 292); Plaintiff's Motion for Judgment as a Matter of Law (Dkt. No. 293); Defendants' Response in Opposition to Plaintiff's Motion (Dkt. No. 297); and Plaintiff's Reply to Defendants' Response to Plaintiff's Motion for Judgment as a Matter of Law. (Dkt. No. 298).

I. OVERVIEW

The Commission alleged, and the jury found, that Defendants committed fraud in violation of Section 17(a)(1) of the Securities Act of 1933 (“Securities Act”). The jury also found that LPHI, aided and abetted by Pardo and Peden, filed numerous false and misleading Forms 10QSB, 10–Q, 10KSB, and 10–K in violation of Section 13(a) of the Securities and Exchange Act of 1934 (“Exchange Act”) and Rules 12b–20, 13a–1, and 13a–13 thereunder. The jury also found that Pardo violated Exchange Act Rule 13a–14 by knowingly certifying false public reports that LPHI filed with the Commission during that period. The Court set aside the jury's 17(a)(1) verdict, but left the remainder of the jury's findings undisturbed.

II. DISCUSSION

The question now before the Court is what sanctions should result from the jury's findings. Defendants argue that no sanctions are necessary. The Commission, on the other hand, requests an Order from this Court (1) permanently enjoining Defendants from future violations of the relevant securities laws; (2) requiring Defendants to jointly and severally disgorge their ill-gotten gains received as a result of wrongdoing; (3) requiring each Defendant to pay civil penalties; and (4) requiring Pardo to reimburse LPHI $13,340,371 in accordance with Section 304 of the Sarbanes–Oxley Act of 2002.

A. Each Defendant's Conduct Warrants Entry Of A Permanent Injunction.

Plaintiff argues that permanent injunctive relief is appropriate since Defendants' actions were egregious and accompanied by scienter, and since there is an ongoing risk that Defendants will violate securities laws again in the future.

Section 21(d) of the Exchange Act allows for the entry of permanent injunctions in enforcement actions brought by the Commission when the evidence establishes a “reasonable likelihood” that a Defendant will engage in future violation of the securities laws. See 15 U.S.C. § 77t(b) ; 15 U.S.C. § 78u(d)(1) ; SEC v. Zale Corp., 650 F.2d 718, 720 (5th Cir.1981) ; SEC v. Murphy, 626 F.2d 633, 655 (9th Cir.1980) ; see also SEC v. Koracorp Indus., Inc., 575 F.2d 692 (9th Cir.1978), cert. denied sub nom., Helfat v. SEC, 439 U.S. 953, 99 S.Ct. 348, 58 L.Ed.2d 343 (1978). “[T]he Commission is entitled to prevail when the inferences flowing from the defendant's prior illegal conduct, viewed in light of present circumstances, betoken a ‘reasonable likelihood’ of future transgressions.” Zale Corp., 650 F.2d at 720 ; see SEC v. Caterinicchia, 613 F.2d 102 (5th Cir.1980) ; SEC v. Blatt, 583 F.2d 1325 (5th Cir.1978). In predicting the likelihood of future violations, courts evaluate the totality of the circumstances. Zale Corp., 650 F.2d at 720.

When evaluating SEC requests for injunctive relief, Courts consider: (1) the egregiousness of the defendant's conduct; (2) the degree of scienter; (3) the isolated or recurrent nature of the violation; (4) the sincerity of the defendant's recognition of his transgression; and (5) the likelihood of the defendant's job providing opportunities for future violations. SEC v. Gann, 565 F.3d 932, 940 (5th Cir.2009) ; Blatt, 583 F.2d at 1334.

Defendants argue that their conduct was not egregious. In support, Defendants note that the SEC did not ultimately succeed in obtaining favorable outcomes on the Commission's core allegations against LPHI. Yet these “minor” charges are not minor at all. In finding that the SEC proved that LPHI, aided and abetted by Defendants Pardo and Peden, violated Section 13(a) of the Securities and Exchange Act of 1934 and Rules 12b–20, 13a–1, and 13a–13, the jury judged that LPHI, Pardo, and Peden 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.

Additionally, contrary to Defendants arguments, the record contains a great deal of evidence that Defendants understood that Life Partners may not have been complying with the company's legal obligations. Nevertheless, the evidence suggests that Defendants resisted any change of course.¹ For instance, when Ernst and Young (LPHI's outside auditors) informed Pardo that it could not sign off on LPHI's financial disclosures due to its belief that LPHI's accounting practices were not in compliance with GAAP, Pardo did not respond by investigating the validity of Ernst and Young's observations. Instead, Pardo authored an email in which he threatened to sue his own auditor unless it signed off on LPHI's accounting methods.

The egregiousness of Defendants conduct is further underscored by Defendants' histories of misconduct. For instance, in 1991, Defendant (and current LPHI CEO) Brian Pardo settled a case brought against him by the Commission. In so doing, Pardo assented to the entry of a permanent injunction against him which prohibited him from ever again violating Section 13a of the of the Exchange Act. (Dkt. No. 293, Ex. B). More recently, in 2007, Life Partners settled a lawsuit filed by Colorado securities regulators alleging, among other things, that Defendants use of materially short LE's violated Colorado securities laws. (Dkt. No. 293, Ex. G–141).

Despite Pardo and his companies' history of securities issues, Life Partners exhibited—at best—a casual attitude toward ensuring that it followed the law.

Given Pardo's history with securities regulators, one would think that Pardo would have been especially cautious when it came to matters of compliance with the nation's securities laws. If, perhaps, Pardo had grown careless along the way, Life Partners' ouster from the Colorado market after the company settled a bevy of charges against it filed by Colorado securities regulators should certainly have alerted Pardo and the Life Partners management team (as well as the company's Board of Directors) of a need to strengthen its oversight and compliance regime. As CEO and controlling shareholder, Pardo had the power to make these things happen. The evidence, however, shows that oversight and compliance at Life Partners were non-existent.

Consider the testimony of Tad Ballantyne. Mr. Ballantyne was and remains a director of LPHI. He also has served as the head of the company's risk and compliance committee, a fact that makes the testimony he gave all the more remarkable.

At trial, Ballantyne testified—under oath—that he had never read, seen, or even heard of a The Wall Street Journal story which dissected Life Partners' business practices and questioned not only the fundamentals of its business practices, but also raised the question of whether Life Partners was systematically defrauding its retail investors.² (1–29–14p.m. Tr., pp. 117– 119). When the SEC's counsel asked Ballantyne to explain how he could have completely missed such an important story, Mr. Ballantyne explained that he does not regularly read The Wall Street Journal, or even industry publications covering Life Partners' business. (Id. at pp. 104–130).

Many months have passed since the Court witnessed Ballantyne's testimony—he also testified that he was completely unaware that Ernst & Young required Pardo to retract public statements falsely claiming the firm had audited Dr. Cassidy's LEs—yet the Court continues to marvel at what it heard.

As controlling shareholder and CEO of LPHI, Brian Pardo had and continues to have the power to hand pick which distinguished citizens to entrust with the responsibility of serving as Directors of LPHI. At one point, Life Partners was a very hot company (it traded well above $20 a share before the financial crisis hit in 2008). Undoubtedly, there were scores of qualified, diligent citizens who would have jumped at the chance to serve as an LPHI director. Mr. Pardo apparently ignored them all. Instead, he chose Tad Ballantyne—a man whose testimony revealed him to be either profoundly dishonest³ or amazingly uninformed about the company whose shareholders he has a fiduciary responsibility to protect.

Just as telling, though, is the fact that, despite the embarrassing and uninformed testimony Ballantyne provided in open court during the trial, he remains on the Board. This is not altogether surprising. No one—not Pardo, not Peden, not the members of LPHI's Board—has been held responsible for the company's failure to abide by the law and keep the investing public fully informed. 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 that this is because Pardo does not want anything to change.⁴ Even after all of the problems it has had with regulators and the outcome of the trial in this case, LPHI remains a company run and controlled by a man with a history of violating securities laws, and overseen by an apparently blind Board of Directors. Plainly, the Court...