Texas Supreme Court Says Life Partners Sold Securities

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Law360, Dallas (May  2015) — The Texas Supreme Court ruled Friday that life settlements sold by Life Partners Inc. are securities under state law, breathing new life into lawsuits brought by the Texas State Securities Board and a putative class of investors.

Life Partners has faced a flood of litigation over its sale of life settlements, or fractional interests in life insurance policies. The company is being accused of selling unregistered securities and fraudulently advertising that policyholders had materially short life expectancies that would result in larger investor payouts.

In the Texas cases brought by the state securities regulator and a group of investors, Life Partners had won trial court dismissals. But appeals courts in Austin and Dallas revived the claims after finding the life settlements were investment contracts, not insurance contracts, making them securities under state law.

In a unanimous decision Friday authored by Justice Jeff S. Boyd, the Texas Supreme Court said the life settlements, sometimes called viatical settlements, are securities because they constitute transactions through which a person pays money to participate in a common enterprise with the expectation of receiving profits, under circumstances in which the failure or success of the enterprise and the person’s realization of the expected profits is at least predominately due to the entrepreneurial or managerial efforts of others.

The court also refused Life Partners’ request to apply the holding only prospectively, which would have freed the company from any liability to the putative class or the state.

“We believe that retroactive application of our holding furthers the operation and enforcement of the Securities Act, and in light of the decades of precedent on which we rely, the results impose no inequities on Life Partners,” the court said.

Keith Langston of Langston Law Firm, representing the investors, said that they are very pleased with the court’s opinion and that the investors’ legal team is “exploring every option possible to get them full restitution on these investments.”

“It’s a good victory for our clients, a good victory for anybody who invested in Life Partners products and a good victory for anybody who invested in a life settlement company other than Life Partners,” Langston said. “It’s a good victory for Texas consumers as a whole. It provides them with the requisite security that anybody who wants to do this in the future now is required to register these products with the Texas State Securities Board, and future investors will now have access to all the information necessary to make an informed decision before they invest.”

Langston said he expects their claims to shortly make their way to bankruptcy court.

Life Partners Holdings Inc. filed for Chapter 11 protection in January, in a bid to buy time while it appeals a $47 million judgment won by the U.S. Securities and Exchange Commission against the holding company and Life Partners executives Brian Pardo and Scott Peden, who resigned in February. The bankruptcy judge in March appointed a trustee, and in April authorized the trustee to file bankruptcy petitions on behalf of LPHI subsidiaries, including Life Partners Inc. and LPI Financial Services Inc.

A spokesman for the TSSB praised the court’s ruling in a statement Friday, saying it maximizes the protections the Texas Securities Act provides to the investing public.

“We are pleased with today’s Texas Supreme Court decision in the Life Partners case, which clarifies and affirms the scope of the Texas Securities Act to protect investors from fraudulent investment schemes, regardless of the labels or terminology used by promoters,” spokesman Robert Elder said.

The TSSB sued Life Partners Inc. and publicly traded Life Partners Holdings Inc. in August 2012, alleging the companies were “perpetuating a massive fraud upon the investing public” by advertising artificially short life expectancies.

In the second case, a putative class of investors sued Life Partners and Milkie/Ferguson Inc., which sold some of the life settlements, seeking rescission of what the class claims are unregistered securities. That suit alleges Life Partners set the price paid by investors and gave investors the only information they ever had about the health and life expectancy of the insureds whose policies Life Partners was selling.

In both cases, Life Partners argued Texas should follow the D.C. Circuit’s lead and adopt its reasoning in a 1996 case that found the profitability of life settlements depends on the mortality of the underlying policyholders and not on Life Partners’ actions before offering the life settlements. The company contended that holding meant the offerings were never securities.

The Texas appeals court in Waco previously followed the D.C. Circuit, but the appellate courts in Dallas and Austin declined to sign on to the federal circuit court’s reasoning.

The two cases were consolidated in Texas Supreme Court for oral argument, which was held in January.

Attorneys for Life Partners did not immediately respond to requests for comment Friday.

Life Partners is represented by Douglas W. Alexander, Wallace B. Jefferson and Susan Vance of Alexander Dubose Jefferson & Townsend LLP, Harriet O’Neill of the Law Office of Harriet O’Neill PC and Kevin Buchanan of Kevin Buchanan & Associates PLLC.

The class is represented by Keith Langston of Langston Law Firm, Robert T. Cain Jr. of Alderman Cain & Neill PLLC, and Scott C. Skelton of Skelton Slusher Barnhill Watkins Wells PLLC.

The state is represented by Kristofer S. Monson of the Texas attorney general’s office.

The cases are Life Partners Inc. et al. v. Arnold et al., case number 14-0122, and Life Partners Holdings Inc. et al. v. Texas, case number 14-0226, in the Supreme Court of the State of Texas.