Securities & Exchange Commission v. Life Partners Holdings, Inc.
854 F.3d 765
| 5th Cir. | 2017Background
- Life Partners Holdings, Inc. (LPHI) facilitated purchases of existing life insurance policies; life-expectancy estimates (LEs) determined pricing and investor returns. CEO/chair Brian Pardo and company counsel/director Scott Peden signed and certified SEC filings.
- From 1999–2011 LPHI relied primarily on Dr. Donald Cassidy for LEs; the SEC alleged Cassidy’s LEs were materially and systematically understated ("short").
- The SEC sued LPHI, Pardo, and Peden for violations of §17(a) (Securities Act), §10(b) (Exchange Act), §13(a) reporting rules, and sought SOX §304 reimbursement from Pardo.
- A jury found liability on §17(a) and §13(a) (with Pardo and Peden aiding and abetting §13(a) violations), but not on §10(b). The district court set aside the §17(a) verdict, sustained §13(a), imposed second-tier penalties, issued injunctions, and denied SOX reimbursement.
- On appeal the Fifth Circuit: affirmed denial of JMOL on §13(a); upheld expert evidence; vacated civil penalties for recalculation; affirmed injunctions; reversed the JMOL on §17(a) (reinstating the jury verdict); and reversed the SOX reimbursement ruling, remanding to calculate SOX relief.
Issues
| Issue | Plaintiff's Argument (SEC) | Defendant's Argument (Pardo/Peden/LPHI) | Held |
|---|---|---|---|
| Admissibility of SEC expert Rubin’s testimony | Rubin used cohort, A/E, and calibrated-LE analyses consistent with actuarial standards to show LEs were systematically short; testimony was relevant and reliable | Methodology untested/unsupported by industry, mixed viatical and life-settlement data, and hindsight analysis made it irrelevant | Court affirmed admission: Rubin’s methods comported with actuarial standards (ASOP 48) and were probative; district court not abuse of discretion |
| Sufficiency of evidence for §13(a) reporting violations and aiding/abetting | Evidence (Rubin, internal analyses, employee reports, and failures to investigate Cassidy) showed LEs were materially short and defendants knew or consciously avoided confirming that fact | Defendants argued lack of evidence that LEs were short, no misrepresentation because risk was disclosed, and lacked knowledge | Affirmed: substantial evidence supported that LPHI misrepresented known risk and that Pardo/Peden knew and substantially assisted; JMOL denied |
| Civil-penalty tiering and calculation | SEC sought second-tier penalties for reckless conduct and calculated multiple violations by multiplying rules violated by false filings | Defendants argued no jury finding of fraud/recklessness and the court could not multiply violations; Seventh Amendment concerns | Court affirmed use of second-tier penalties (recklessness implicit from aiding/abetting finding) but vacated penalty amounts and remanded: agreed calculation included conceded errors (mixing 10-K/10-Q rule applications) requiring recalculation |
| Injunction scope and necessity | Injunctions tailored to prevent future filing of false/misleading forms and aiding/abetting such violations | Defendants contended injunctions were overly broad and lacked evidentiary basis for future risk | Affirmed: district court did not abuse discretion—past recurrent, egregious conduct and scienter supported reasonable likelihood of future violations; injunctions were specific to §13(a) conduct |
| JMOL on §17(a) claim (cross-appeal) | The January 2007 filing (incorporating prior annual disclosures) and evidence of practices supported §17(a)(2)/(3) negligent misrepresentation liability | Defendants argued insufficient evidence tied to January 2007 filings and challenged scienter-based theory | Reversed district court: jury verdict on §17(a) reinstated as supported by substantial evidence for negligent (§17(a)(2)/(3)) liability; remanded for remedies |
| SOX §304 reimbursement for Pardo | Restatement of 2009–2010 financials linked to materially short LEs and impairment methodology changes; the restatements were required "due to" misconduct => reimbursement required | District court found restatements resulted from auditor position change and good-faith reliance, not necessarily misconduct-caused requirement for restatement | Reversed: district court clearly erred. The court held LPHI’s knowing use of materially short LEs contributed to GAAP noncompliance and restatement requirement; remanded to determine SOX reimbursement amount |
Key Cases Cited
- Daubert v. Merrell Dow Pharm., 509 U.S. 579 (gatekeeping standards for expert testimony)
- Moore v. Ashland Chem. Inc., 151 F.3d 269 (5th Cir. en banc) (need for objective validation of expert methodology)
- Pipitone v. Biomatrix, Inc., 288 F.3d 239 (5th Cir. 2002) (expert testimony must be relevant and reliable)
- Tull v. United States, 481 U.S. 412 (jury right on liability; judge may determine penalty amount)
- Lipson v. SEC, 278 F.3d 656 (7th Cir. 2002) (district court determines penalty amount consistent with jury liability)
- SEC v. Capital Sols. Monthly Income Fund, LP, 818 F.3d 346 (8th Cir. 2016) (remedies-stage factual findings may be made by judge so long as they do not conflict with jury verdict)
- Meadows v. SEC, 119 F.3d 1219 (5th Cir. 1997) (mens rea standards for §17(a) subsections)
- SEC v. Gann, 565 F.3d 932 (5th Cir. 2009) (standards for permanent injunctions in SEC actions)