71 F. Supp. 3d 615
W.D. Tex.2014Background
- SEC sued Life Partners Holdings, Inc. (LPHI), CEO/control shareholder Brian Pardo, and officer Peden for securities-law violations arising from false or misleading public filings and certifications about Life Partners’ life-expectancy (LE) estimates and related disclosures. A jury found violations of Exchange Act Section 13(a) and related rules and that Pardo knowingly certified false reports; the Court set aside the jury’s Section 17(a)(1) fraud finding but left the rest intact.
- Evidence showed persistent disclosure deficiencies, auditor (Ernst & Young) concerns about GAAP compliance, and management resistance to audit findings; Pardo threatened the auditor rather than investigating its concerns.
- Pardo had a prior SEC settlement (1991) including an injunction for Section 13(a) violations and retained a majority ownership and control of LPHI during the relevant period. Board oversight was minimal; at trial a director testified he had not read widely reported criticisms of the company.
- SEC sought permanent injunctions, disgorgement (initially $500 million alleged), civil penalties (statutory tiers up to hundreds of millions), and SOX Section 304 reimbursement of Pardo’s compensation.
- The Court: (1) permanently enjoined LPHI, Pardo, and Peden from specified Exchange Act violations; (2) ordered LPHI to disgorge $15 million; (3) assessed civil penalties of $23,700,000 (LPHI), $6,161,843 (Pardo), and $2,000,000 (Peden); (4) denied SOX 304 reimbursement for Pardo due to insufficient evidence that the restatement was caused by misconduct rather than auditor error.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Permanent injunctions under Exchange Act §21(d) | Injunction needed because defendants’ egregious, scienter-linked, recurrent conduct makes future violations reasonably likely | No injunction necessary; conduct not egregious or unlikely to recur | Court granted permanent injunctions against LPHI, Pardo, and Peden for violations of §13(a) and related rules; enjoined Pardo from Rule 13a-14 violations |
| Disgorgement amount | SEC: disgorge $500 million based on expert’s estimate of investor overpayment tied to misleading LEs | Defendants: SEC’s figure is speculative and overbroad; calculation lacks requisite precision | Court rejected $500M as unreasonable; ordered disgorgement of $15 million as a reasonable approximation and deterrent |
| Civil penalties (tier selection and amounts) | SEC sought third-tier penalties totaling very large amounts | Defendants argued penalties excessive; urged lower tiers or reductions for culpability/ability to pay | Court found second-tier appropriate given recklessness and risk of harm; assessed $23.7M (LPHI), $6,161,843 (Pardo), $2M (Peden) with reasoning on control, history, and relative culpability |
| SOX §304 reimbursement of CEO compensation | SEC: Pardo must reimburse bonuses/incentive/equity compensation received within 12 months after improperly issued financial reports | Pardo: restatement attributable to auditor error/good-faith reliance; SEC failed to prove restatement was caused by misconduct | Court denied SOX §304 relief — insufficient evidence that restatement was caused by misconduct rather than auditor mistakes |
Key Cases Cited
- SEC v. Zale Corp., 650 F.2d 718 (5th Cir. 1981) (standards for injunctions and "reasonable likelihood" of future violations)
- SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980) (injunctive relief principles in SEC enforcement actions)
- SEC v. Huffman, 996 F.2d 800 (5th Cir. 1993) (district court discretion on disgorgement amount)
- SEC v. First City, 890 F.2d 1215 (D.C. Cir. 1989) (burden shifting once SEC offers reasonable disgorgement estimate)
- Allstate Ins. Co. v. Receivable Fin. Co. LLC, 501 F.3d 398 (5th Cir. 2007) (disgorgement need only be a reasonable approximation of profits causally connected to violation)
- SEC v. MacDonald, 699 F.2d 47 (1st Cir. 1983) (doubts in disgorgement calculations resolved against wrongdoer)