Life Partners Holdings, Inc., the life settlements firm already facing a storm of criticism and a Securities & Exchange Commission (SEC) probe over the way it marketed investments, is now the subject of two lawsuits. Both shareholder lawsuits, filed in U.S. District Court for the Western District of Texas, seek class action status.
A life settlement, sometimes called a viatical settlement, is the sale of an existing life insurance policy to an investor who will pay required premiums on the policy, collecting its proceeds once the insured dies. Texas-based Life Partners is accused of routinely using unrealistic life expectancy data that produced inaccurately short life expectancy reports, which were subsequently used to sell life settlement policies to investors.
Recently, a Wall Street Journal investigation reported a significant portion of insured individuals were outliving Life Partners’ life expectancy estimates, a factor that would cut investors’ returns. Among other things, the Journal reported that Life Partners Holdings gets life expectancy estimates “from a doctor in Reno, Nev., who has testified for a court case that he never checks the accuracy of his prior predictions.”
According to the Journal report, life expectancy estimates provided to investors on Life Partners’ Life Settlements were often inaccurate. For example, In 2002, for example Life Partners put a life expectancy of two years or less on the insured person in a third of the 297 policies it sold, and four years or less on all but a handful. If the projections were accurate, almost all of those policies should have â€œmatured,â€ with the insured dead, by the end of 2009, but instead the insured had outlived the estimate in 283 of the 297 policies, according to the Journal.
Last month, following the publication of the Journal articles, Life Partners confirmed the SEC was investigating its practices.
The Life Partners lawsuits claim the firms not only relied on life expectancy projections that were much too short, but that the underestimation allowed the company to charge investors larger fees when brokering life settlements. Since Life Partners’ revenues had benefited from the use of these alleged business practices, the firm’s financial statements were false and misleading, the suits claim. This resulted in artificially-inflated stock prices, and shareholders suffered when the value of the company’s shares plummeted.