Trustee: Life Partners fraud cost investors ‘hundreds of millions’

By Caroline Salls

Pittsburgh, March 7 – Life Partners Holdings, Inc. Chapter 11 trustee H. Thomas Moran II said the company, chief executive officer Brian Pardo and others “executed a wide-ranging, long-term scheme to defraud investors,” according to the report of Moran’s investigation into the company’s pre-bankruptcy business conduct, which was filed Saturday with the U.S. Bankruptcy Court for the Northern District of Texas.

“Life Partners was built by Brian Pardo and those acting in concert with him as a vehicle for profiting themselves at the expense of tens of thousands of individual investors, who were exploited, lied to, and misled at every turn,” Moran said in his report, adding that many of the investors who were hurt the most by these actions were elderly.

“Due to the massive and wide-ranging fraud of Pardo and his accomplices, investors are not making millions,” Moran said. “Instead, hundreds of millions of Life Partners’ investor dollars have been lost because of the fraud and rampant self-interest and self-dealing of Pardo and those acting in concert with him.

“The Life Partners fraud deserves a place in Texas history as one of the largest and longest-standing fraud schemes ever perpetrated in this state. The scheme has already cost thousands of innocent investors hundreds of millions of dollars, which in many cases represented a material portion of, or their entire, life savings.”

Specifically, the trustee said Life Partners sold its investment contracts by misleadingly generating expectations of “double digit returns” that would be realized from the investment and the length of time it would take for the investment to mature.

For its typical investor, Moran said Life Partners never adequately disclosed the significant risks that accompany life settlement investments in general, including that premiums would have to be paid well after the initial escrow was exhausted, the limitation of life expectancy reports and the fact that, unless all investors who have premium payment obligations related to a policy continue to pay premiums, “the policy may lapse and never pay out a dime.”

Misleading life expectancies

In addition, the trustee said the life expectancies (LE) the company used to market its investments “were misleadingly short in most instances and often were significantly shorter than those provided to Life Partners on the same insureds by independent, third-party LE providers in the industry.”

For most of its history, Moran said Life Partners did not disclose to its investors that it had a longer life expectancy that it had used to purchase the underlying policy nor that the doctor who provided life expectancies to Life Partners was untrained “and had no qualifications, expertise, or experience whatsoever rendering LEs before Life Partners hired him to do so.”

“Life Partners also hid its massive fees and commissions, never disclosing that roughly one-third of all investment dollars were pocketed by Life Partners and its accomplices,” Moran said.

Because Life Partners had misled investors about the actual life expectancies of the insureds, the trustee said the investors’ escrowed funds were rarely enough to pay the needed premiums, meaning investors were frequently called upon to make additional premium payments.

When investors could not or would not meet the unexpected, continuing premium obligations, Moran said Life Partners propped up the “distressed policies” by paying premiums with fees taken from other investors’ money.

‘Ponzi fashion’

“In Ponzi fashion, the Life Partners business became dependent on an ever-increasing flow of new investor funds to provide Life Partners with capital sufficient to pay premiums to keep an ever-increasing number of distressed policies in force and maintain appearances that the business model was working in order to encourage new investments,” the report said.

At the height of the scheme, the trustee said Pardo, his family and others were taking millions of dollars a year from investors in the form of illegitimate dividends paid by Life Partners as well as compensation and lavish benefits paid by the company.

According to the report, Pardo and his accomplices knew or should have known that the information being given to investors “was replete with misleading statements and omissions,” the Life Partners life expectancies provided to investors were misleadingly short and investors were paying almost one-third of their investment dollars in hidden fees and commissions.

Licensee payments

In addition to the amounts paid out to Pardo, his family and close advisers, the trustee said Pardo facilitated the payment of more than $160 million of commissions to licensees.

Also, Moran said Pardo began to charge a “platform services fee” for most investors when his sources of fraudulent revenue began to dry up. The trustee said the servicing fees generated millions of dollars that, rather than fund and build a reserve for operations of the failing enterprise, “were used, among other things, to continue lining the Pardo family’s pockets through dividends paid by LPHI.”

Waco, Texas-based Life Partners is engaged in the secondary market for life insurance. The company filed for bankruptcy on May 20, 2015. Its Chapter 11 case number is 15-40289.

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