SEC vs. LPHI - Defendant's Motion to Dismiss

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS

AUSTIN DIVISION

SECURITIES AND EXCHANGE COMMISSION, :

Plaintiff,

v.

LIFE PARTNERS HOLDINGS, INC., BRIAN PARDO,R.SCOTTPEDEN,AND DAVID M. MARTIN

Defendants.

Civil Action No.: 1-12-cv-00033

DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISS AND BRIEF IN SUPPORT

J Pete Laney State Bar No. 24036942 E-Mail: [email protected]

LAW OFFICES OF J PETE LANEY 1122 Colorado Street Suite 111 Austin, TX 78701-2159 Tel: (512) 473-0404 Fax: (512) 672-6123

Elizabeth L. Yingling State Bar No. 16935975 E-Mail: [email protected] Laura J. 0 'Rourke State Bar No. 24037219 E-Mail: [email protected] Will R. Daugherty State Bar No. 24053170 E-Mail: [email protected]

BAKER & McKENZIE LLP 2300 Trammell Crow Center 2001 Ross Avenue Dallas, TX 75201 Tel.: (214) 978-3000 Fax: (214) 978-3099

ATTORNEYS FOR DEFENDANTS, LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN

Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 of 32

TABLE OF CONTENTS

I. PRELIMINARY STATEMENT ......................................................................................... 1

II. BACKGROUND ................................................................................................................. 2

III. STANDARDS ON A MOTION TO DISMISS .................................................................. .4

IV. ARGUMENTS AND AUTHORITIES ................................................................................ 5

A. Plaintiff Failed to Adequately Plead a Section 10(b) Claim based upon Alleged Short Life Expectancies ............................................................................... 5

1. Plaintiff Failed to Adequately Plead Motive ................................................. 6

2. Plaintiff Failed to Adequately Plead Conscious Behavior and Failed to Adequately Plead Material Misstatements or Omissions .............................. 8

a. Neither Dr. Cassidy's Methodology nor Peden's Alleged Incorrect Descriptions thereof Impose Liability on Defendants ............................. 8

b. Defendants did not Know that Dr. Cassidy's LEs were Materially Short ......................................................................................................... 9

c. Plaintiffs Allegation that LPHI Artificially Inflated its Revenues Defies Common Sense ........................................................................... 13

d. The Contingency Discussed in the Risk Disclosures had not Occurred ................................................................................................. 14

e. Plaintiff Failed to Adequately Allege Misrepresentations by Pardo ..... 17

B. Plaintiff Failed to Adequately Plead a Section 10(b) Claim for Accounting Fraud ..................................................................................................... 18

1. Plaintiff Failed to Plead Scienter with Respect to Revenue Recognition .................................................................................................. 18

2. Plaintiff Failed to Plead Scienter with Respect to Impairment .................... 20

C. Plaintiff Failed to Adequately Plead an Insider Trading Claim against Peden ........ 22

D. Plaintiff Failed to Adequately Plead a Section 17(a) Claim ................................... .23

E. Plaintiff Failed to Adequately Plead Section 13 Claims and Claims for Violations of Various Exchange Act Rules ............................................................................... 24

IV. CONCLUSION ........................................................................................................ 26

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TABLE OF AUTHORITIES

Page(s) CASES

Aaron v. SEC, 446 U.S. 680 (1980) ................................................................................................................. 23

ABC Arbitrage v. Tchuruk, 291 F.3d 336 (5th Cir. 2002) ..................................................................................................... 5

Abrams v. Baker Hughes, Inc., 292 F.3d 424 (5th Cir. 2002) ........................................................................................... 7, 8,20

Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937 (2009) ............................................................................ 4, 10, 17

Bell At!. Corp. v. Twombly, 550 U.S. 544 (2007) ................................................................................................................... 5

Belodoffv. Netlist, Inc., No. SACV 07-00677 DOC (MLGx), 2009 U.S. Dist. LEXIS 78309 (C.D. Cal. September 1, 2009) ........................................................................................... 16, 17

Dirks v. SEC, 463 U.S. 646 (1983) ................................................................................................................. 22

Dorsey v. Portfolio Equities Inc., 540 F.3d 333 (5th Cir. 2008) ............................................................................................... 3, 11

Ellington Mgmt. Group, LLC v. Ameriquest Mortgage Co., No. 09 Civ. 0416 (JSR), 2009 U.S. Dist. LEXIS 91204 (S.D.N.Y. Sept. 29, 2009) ............... 14

Gonzalez v. Bank of Am. Ins. Servs., No. 11-20174,2011 U.S. App. LEXIS 25237 (5th Cir. Dec. 12,2011) ................................ 5, 9

In re Enron Corp. Sec. Litig., 258 F.Supp. 2d 576 (S.D. Tex. 2003) ...................................................................................... 17

In re Novatel Wireless Sec. Litig., No. 08cv1689 AJB RBB, 2011 U.S. Dist. LEXIS 135602 (S.D. Cal. Nov. 23,2011) ........... 18

In re Sterling Foster & Co. Sec. Litig., 222 F. Supp. 2d 289 (E.D.N.Y. 2002) ..................................................................................... 14

In re Sun Microsystems, Inc. Sec. Litig., No. C 89 20351 RPA, 1990 U.S. Dist. LEXIS 18740 (N.D. Cal. Aug. 20,1990) .................. 12

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In re Verifone Sec. Litig., 11 F.3d 865 (9th Cir. 1993) ..................................................................................................... 18

Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) ............................................................................................................. 24

Jarrett v. Chase Home Fin. LLC, No. 3:10-CV-1907-M, 2011 U.S. Dist. LEXIS 47317 (N.D. Tex. May 3,2011) ..................... 5

Kurtzman v. Compaq Computer Corp., No. H-99-779, 2002 U.S. Dist. LEXIS 26569 (S.D. Tex. Mar. 30, 2002) ........................ 12, 20

Lovelace v. Software Spectrum, Inc., 78 F.3d 1015 (5th Cir. 1996) ................................................................................................. 3, 6

Nathenson v. Zonagen, Inc., 267 F.3d 400 (5th Cir. 2001) ..................................................................................................... 8

Gran v. Stafford, 226 F.3d 275 (3rd Cir. 2000) ................................................................................................... 17

Plotkin v. IP Axess Inc., 407 F.3d 690 (5th Cir. 2005) ................................................................................................... 17

SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998) ............................................................................................... 23

SEC v. Cohen, No. 4:05-CV-371-DJS, 2007 U.S. Dist. LEXIS 28934 (B.D. Mo. Apri119, 2007) .... 19, 20, 25

SECv. Gann, No. 3:05-CV-0063-L, 2006 U.S. Dist. LEXIS 9955 (N.D. Tex. Mar. 13,2006) ................... .23

SEC v. Guenther, 395 F. Supp. 2d 835 (D. Neb. 2005) ................................................................................. .18, 19

SECv. Horn, No. 10-CV-955, 2010 U.S. Dist. LEXIS 135000 (N.D. Ill. Dec. 16,2010) ........................... .23

SEC v. Kelly, No. 08-Civ-04612 (CM), 2011 U.S. Dist. LEXIS 108805 (S.D.N.Y. Sept. 22,2011) ........ 5, 24

SEC v. Life Partners, Inc., 87 F.3d 536 (D.C. Cir. 1996) ........................................................................................... 2, 8, 14

SEC v. Morgan Keegan & Co., No. 1:09-cv-1965-WSD, 2011 U.S. Dist. LEXIS 71481, (N.D. Ga. June 28,2011) ................ 9

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SEC v. Shanahan, 646 F.3d 536 (8th Cir. 2011) ............................................................................................... 6, 20

SEC v. Shanahan, No. 4:07CV270JCH, 2010 U.S. Dist. LEXIS 2101 (E.D. Mo. Jan. 12,2010) ........................ 25

SEC v. Shapiro, No. 4:05-CV-364, 2008 U.S. Dist. LEXIS 17039 (E.D. Tex. March 5, 2008) .......................... 5

SEC v. Steffes, No. 10-CV-6266, 2011 U.S. Dist. LEXIS 85496 (N.D. Ill. Aug. 3,2011) ............................. 23

SEC v. Truong, 98 F. Supp. 2d 1086 (N.D. Cal. 2000) ..................................................................................... 22

Southland Sec. Corp. v. Inspire Ins. Solutions Inc., 365 F.3d 353 (5th Cir. 2004) ..................................................................................................... 6

Tuchman v. DSC Comm 'ns Corp., 14 F.3d 1061 (5th Cir. 1994) ............................................................................................. 5, 6,8

United States v. Lloyds TSB Bank PLC, 639 F. Supp. 2d 326 (S.D.N.Y. 2009) ...................................................................................... 10

Vachon v. Baybanks, Inc., 780 F. Supp. 79 (D. Mass. 1991) ............................................................................................. 14

STATUTES

15 U.S.C. §78j(b) ................................................................................................................... passim

OTHER AUTHORITIES

Fed. R. Civ. P. 8(a) ............................................................................................................. 1,24,25

Fed. R. Civ. P. 9(b) ................................................................................................................ passim

Fed. R. Civ. P. 12(b)(6) ........................................................................................................ 1,24,25

21 5t Services, Life Settlement Services, Issues and Answers on 21 5t Services' Mortality Study, http://www.21stservices.com/science/cdrg.aspx ........................................................... .4

A. Hasan Qureshi and Michael V. Fasano, "Measuring Actual to Expected Accuracy for Life Settlement Underwriting," Reinsurance News, July 2010, Issue 68 .................................. 4

Ed Mohoric, FSA, MAAA, and Robert O. Kinney, M.D., FLMI, "Life Settlement Mortality Considerations and Their Effect on Portfolio Valuation," March 1, 2008 ............... .4

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Joseph T. King Jr., MD, MSCE, et al., Long-Term HIVIAIDS Survival Estimation in the Highly Active Antiretroviral Therapy Era, Medical Decision Making, Jan.-Feb. 2003 ............ 3

Michael L. Closen, Symposium on Health Care Policy: What Lessons Have We Learned from the AIDS Pandemic: Article: The Decade of Supreme Court Avoidance of AIDS: Denial of Certiorari in HIV-AIDS Cases and its Adverse Effects on Human Rights, 61 Alb. L. Rev. 897 (1998) ............................................................................................................. 3

Paul Siegert, Evolution of Life Expectancies in the Life Insurance Secondary Market ... Current Trends and New Developments, Life Insurance Settlement Series Edition No. VI (Aug. 4, 2010) ................................................................................................................ 8

-IV-


UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS

AUSTIN DIVISION

SECURITIES AND EXCHANGE COMMISSION, :

Plaintiff,

v.

LIFE PARTNERS HOLDINGS, INC., BRIAN PARDO, R. SCOTT PEDEN, AND DAVID M. MARTIN

Defendants.

Civil Action No.: 1-12-cv-00033

DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISS AND BRIEF IN SUPPORT

Defendants, Life Partners Holdings, Inc. ("LPHI") and R. Scott Peden ("Peden")

(collectively "Defendants"), file this Motion to Dismiss, pursuant to Rules 8(a), 9(b), and

12(b)(6) of the Federal Rules of Civil Procedure, and respectfully show the Court as follows:

I. PRELIMINARY STATEMENT

Plaintiff seeks to hold Defendants liable for alleged misrepresentations and omissions in

violation of the federal securities laws. However, in fact, the Complaint contains only partial

disclosures and blatant misrepresentations of fact. By way of example, Plaintiff claims that

reports Life Partners, Inc. ("LPI") filed with the Texas Department of Insurance established that

insureds underlying 80% of matured policies facilitated by LPI using Dr. Donald Cassidy's life

expectancy estimates had outlived those estimates. In truth, more than 44% of those insureds

died at or prior to the estimates provided by Dr. Cassidy, making Plaintiff s 80% figure an

impossibility.

DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISS AND BRIEF IN SUPPORT - Page 1


In addition, although the bulk of the Complaint is devoted to LPI's business practices in

facilitating viatical and life settlements, and although Plaintiff misleadingly defines "Defendant[]

Life Partners Holdings, Inc." to specifically include LPI, LPI is not a party to this action, nor

could it be. More than a decade ago, Plaintiff sued LPI, claiming that the viatical settlements it

facilitated were securities under the federal securities laws - Plaintiff lost that case. See SEC v.

Life Partners, Inc., 87 F.3d 536, 549 (D.C. Cir. 1996). Now, well aware of its lack of

jurisdiction, Plaintiff attempts to bootstrap a case regarding LPI's business practices into one of

securities fraud by way of risk disclosures contained in LPHI's Forms 10-K. However,

Plaintiffs attempt to do so falls woefully short of the pleading requirements set forth in the

Federal Rules of Civil Procedure.

In short, and despite more than a year of investigation and Plaintiffs receipt of millions

of pages of documents, the Complaint, riddled with conclusory and misleading assertions, is

devoid of facts sufficient to plead the claims on which Plaintiff seeks relief.

II. BACKGROUND

LPHI is a publicly-traded company and the parent company of LPI since 2000. LPI, a

private company incorporated in 1991, is engaged in the secondary market for life insurance

known generally as "life settlements." Defendant Brian D. Pardo ("Pardo") is the CEO and

Chairman of the Board for LPHI and has held those positions since 2000. Peden is the General

Counsel, Secretary and Board member for LPHI, and has held those positions since 2000. He is

also the President of LPI. Defendant David M. Martin ("Martin") is the CFO of LPHI and LPI.

Martin became the CFO in February 2008.

When LPI commenced business in 1991, it facilitated the sale of viatical settlements,



which are life insurance policies sold by a tenninally-ill person to another party.! More than

ninety percent (90%) of the viatical settlements that LPI facilitated were for viators living with

AIDS.2 Although only first identified in the early 1980s, as of mid-1997, more than 500,000

people in the U.S. had been diagnosed with AIDS, and approximately half of those had died.3 In

order to address this catastrophic illness, a multitude of experimental drugs were introduced,

with mixed results. As of 2003, studies emerged indicating that antiretroviral therapy appeared

to prolong survival in HIV/AIDS patients by 4 to 6 years, although "no long-tenn survival data

[was yet] available.,,4 Such antiretroviral therapy had been introduced in response to a prior drug

therapy thought to be significantly life-sustaining, but which was later shown to provide only a

one-time, six-month benefit.s The foregoing exemplifies the era of uncertainty in which AIDS

patients lived during the first three decades of the known existence of the disease. While,

ultimately, medical discoveries resulted in the extension of the lives of AIDS patients, such

longevity extensions could not have been predicted, but rather, were only detennined in

hindsight, after lengthy in-depth studies.

In light of the unprecedented medical breakthroughs in the treatment of AIDS patients,

beginning in fiscal year 2004, LPI began facilitating retail life settlements. 6 A life settlement

involves the sale of a life insurance policy by an insured who is not tenninally-ill but, rather, is a

1 LPHI 2006 Form 10-KSB, p. 3, found at www.sec.gov. On a motion to dismiss, the Court may rely on '''matters of which a court may take judicial notice.'" Dorsey v. Portfolio Equities Inc., 540 F.3d 333, 338 (5th Cir. 2008)(quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)). This includes documents required to be filed with the SEC. See Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1018 (5th Cir. 1996). 2 LPHI 2005 Form 10-KSB, p. 6, found at www.sec.gov. 3 Michael L. Closen, Symposium on Health Care Policy: What Lessons Have We Learnedfrom the AIDS Pandemic: Article: The Decade of Supreme Court Avoidance of AIDS: Denial of Certiorari in HIV-AIDS Cases and its Adverse Effects on Human Rights, 61 Alb. L. Rev. 897, at 906 (1998). 4 Joseph T. King Jr., MD, MSCE, et al., Long-Term HIVIAIDS Survival Estimation in the Highly Active Antiretroviral Therapy Era, Medical Decision Making, Jan.-Feb. 2003, at pp. 9-10, 14. 5Id. at p. 15. 6 LPHI 2004 Form 10-KSB, p. 3, found at www.sec.gov.



senior citizen over the age of sixty-five.? Notably, because insurance companies generally do not

sell life insurance policies to senior citizens and, accordingly, do not have sufficient actuarial

data to track the mortality of such persons, there has been a lack of sufficient experience with

long-term mortality rates for the life settlement industry. For example, a March 1, 2008 public

report noted that "[t]he long-term experience in life settlement mortality is unknown. Short-term

experience is only beginning to emerge."s Indeed, as of July 2010, commentators were still

debating the methodology to be utilized in measuring the accuracy of life expectancies in the life

settlement market. 9

Despite the very public uncertainty regarding life expectancies experienced by all

companies in the viatical and life settlement market, and despite LPHI's repeated risk disclosures

regarding the impossibility of predicting any person's life expectancy exactly, Plaintiff, by the

Complaint, seeks to hold Defendants liable because - according to Plaintiff - the life expectancy

assessments made by a non-party medical doctor were not always "accurate." The fallacy of

Plaintiffs premise is ultimately the reason why the Complaint fails to state a claim for relief.

III. STANDARDS ON A MOTION TO DISMISS

A motion to dismiss should be granted where a plaintiff is unable to delineate "enough

facts to state a claim to reliefthat is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 129 S.

Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "The

Court will not accept 'threadbare recitals of the elements of a cause of action, supported by mere

conclusory statements,' which 'do not permit the court to infer more than the mere possibility of

7 Id. 8 Ed Mohoric, FSA, MAAA, and Robert O. Kinney, M.D., FLMI, "Life Settlement Mortality Considerations and Their Effect on Portfolio Valuation," March 1, 2008, at p. 6; see also 21 st Services, Life Settlement Services, Issues and Answers on 21 st Services' Mortality Study, http://www.21stservices.comlscience/cdrg.aspx ("[T]he [life settlement] industry has such a small data pool that mortality results are extremely volatile. The full shape of the mortality curve is not yet fully known."). 9 A. Hasan Qureshi and Michael V. Fasano, "Measuring Actual to Expected Accuracy for Life Settlement Underwriting," Reinsurance News, July 2010, Issue 68, at p. 26.



misconduct.'" Jarrett v. Chase Home Fin. LLC, No. 3:10-CV-1907-M, 2011 U.S. Dist. LEXIS

47317, at *7-8 (N.D. Tex. May 3, 2011)(quoting Iqbal, 129 S. Ct. at 1949-50). In short, a district

court "'retain[ s] the power to insist upon some specificity in pleading before allowing a

potentially massive factual controversy to proceed. '" Twombly, 550 U.S. at 558.

Because Plaintiff has asserted claims of securities fraud, the Complaint must satisfy the

heightened pleading requirements of Rule 9(b). In order to state a claim under Rule 9(b),

plaintiffs generally must plead the who, what, where, and when of the alleged fraud. ABC

Arbitrage v. Tchuruk, 291 F.3d 336, 349 (5th Cir. 2002); see also Gonzalez v. Bank of Am. Ins.

Servs., No. 11-20174, 2011 U.S. App. LEXIS 25237, at *8-9 (5th Cir. Dec. 12, 2011) (a

complaint must state the "time, place and contents of the false representations, as well as the

identity of the person making the misrepresentation and what [that person] obtained thereby").

IV. ARGUMENTS AND AUTHORITIES

A. Plaintiff Failed to Adequately Plead a Section lOeb) Claim based upon Alleged Short Life Expectancies.

In order to state a claim under Section 1 O(b) and Rule 10b-5 promulgated thereunder,

Plaintiff must allege that each of the Defendants: (1) used a fraudulent device, made a material

misrepresentation or omission, or committed an act that operated as a fraud or deceit; (2) in

connection with the purchase or sale of a security; and (3) acted with scienter. 10 SEC v. Shapiro,

No. 4:05-CV-364, 2008 U.S. Dist. LEXIS 17039, at *10 (E.D. Tex. March 5, 2008). To

adequately plead scienter, Plaintiff "must set forth specific facts that support an inference of

fraud." Tuchman v. DSC Comm 'ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994). Although a

10 Other than reciting the elements of Rule 1 Ob-5( a) and 1 Ob-5( c) claims, Plaintiff failed to allege any facts to support such claims separate and apart from its misrepresentation claim under Rule lOb-5(b). Compl., ~157(i),(ii). However, "where the primary purpose and effect of a purported scheme is to make a public misrepresentation or omission, courts have routinely rejected the SEC's attempt to bypass the elements necessary to impose 'misstatement' liability under subsection (b) by labeling the alleged misconduct a 'scheme' rather than a 'misstatement. '" SEC v. Kelly, No. 08-Civ-04612 (CM), 2011 U.S. Dist. LEXIS 108805, at *8 (S.D.N.Y. Sept. 22, 2011). Accordingly, Plaintiffs claim for liability claims under Rule 10b-5(a) and (c) claims must be dismissed.



finding of scienter may be based upon "severe recklessness," "[i]t is insufficient to show that a

defendant should have known that a material statement or omission was false or misleading."

SEC v. Shanahan, 646 F.3d 536, 544 (8th Cir. 2011). "Alleged facts are sufficient to support an

inference of scienter if they either (1) show a defendant's motive to commit securities fraud, or

(2) identify circumstances that indicate conscious behavior on the part of the defendant."

Lovelace, 78 F.3d at 1018. In the absence of sufficient allegations of motive, "the strength of the

circumstantial allegations [indicating conscious behavior on the part of the defendant] must be

correspondingly greater." Tuchman, 14 F.3d at 1068. Further, when assessing allegations of

scienter relating to a corporate defendant, courts must address the allegations of scienter as to

each individual officer defendant to determine whether the complaint satisfies the heightened

pleading requirements of scienter. Southland Sec. Corp. v. Inspire Ins. Solutions Inc., 365 F.3d

353, 366 (5th Cir. 2004).

Plaintiff s "disclosure" fraud claims are premised upon the unsupported allegation that

"Life Partners systematically used materially underestimated LEs"ll and that Defendants

misrepresented "that the underestimation ofLEs was a contingent risk." I 2 Yet, Plaintiff failed to

adequately plead motive, knowledge, or a material misstatement or omission, and thus, the

"disclosure" claims must be dismissed.

1. Plaintiff Failed to Adequately Plead Motive.

Plaintiff does not plead motive with respect to Defendant Martin.13 In fact, the

Complaint's only allegations of motive are that Defendants Pardo and Peden sold LPHI stock. 14

However, allegations of insider trading by corporate defendants are only probative of scienter if

11 "LEs" is a shorthand term for life expectancy estimates. 12 Compl., ~~1, 10. 13 See generally, Compl. 14 Compl., ~~14, 138-43.



the trading occurs in suspicious amounts or at suspicious times. Abrams v. Baker Hughes, Inc.,

292 F.3d 424, 435 (5th Cir. 2002). As to Peden, Plaintiffrelies on a June 18, 2007 sale of LPHI

stock, but alleges no facts establishing that the amount of the trade was suspicious. IS In fact,

public filings establish that, after his sale, Peden retained 44,097 (pre-split) shares of LPHI stock

(over 81% of his shares).16 Moreover, the timing of the sale was not suspicious, given that the

sale occurred more than fifteen (15) months after Peden purportedly became aware that Life

Partners systematically underestimated LEs.17 Finally, because the price of LPHI stock

increased substantially after his stock sale, Peden clearly did not sell to "maximize personal

profit" or to prevent imminent losses in the value of his shares. 18

Similarly, Plaintiff cites Pardo Family Trust stock sales, without any allegations that such

sales were in suspicious amounts or at suspicious times. 19 Rather, according to the Complaint,

the first sale occurred one (1) year after Pardo purportedly knew of the underestimation of LEs.2o

In addition, the Complaint also alleges that, as of June 2010, Pardo directly or indirectly owned

more than 50% of LPHl,21 Had Pardo been in possession of material non-public infonnation and

intended to "maximize his personal profit," one would think he would have caused the Pardo

Family Trust to dispose of significant shares long before news of the SEC investigation hit the

market. Nor are there allegations in the Complaint that the sales were unusual or out of line with

historical trades for Pardo or the Pardo Family Trust. See Abrams, 292 F.3d at 435 (allegations

of insider trading not probative of scienter because no allegations that the sales were "out of line

with prior trading practices or at times calculated to maximize personal profit"); see also

15 CompI., ~~138-43. 16 See Form 4 Statement of Changes in Beneficial Ownership of Securities filed on June 25, 2007, a true and correct copy of which is included in the Appendix as Exhibit A. 17 See CompI., ~138. 18 See http://finance.yahoo.com/gihp?s=LPHI+Historical+Prices. 19 See CompI., ~139. 20 See CompI., ~139. 21 CompI., ~23.



Nathenson v. Zonagen, Inc., 267 F.3d 400,420-21 (5th Cir. 2001).

Finally, the absence of allegations that Defendant Martin engaged in improper trading

activity further establishes that Pardo's and Peden's sales do not support an inference of scienter.

See Abrams, 292 F.3d at 435 (unsual sales by one insider "do not give rise to a strong inference

of scienter" when other defendants did not sell shares). Accordingly, Plaintiff's allegations

concerning Pardo's and Peden's stock sales are insufficient to support an inference of scienter

based upon motive, and therefore, Plaintiff's allegations of conscious behavior are subject to a

more stringent standard for establishing scienter. See Tuchman, 14 F.3d at 1069.

2. Plaintiff Failed to Adequately Plead Conscious Behavior and Failed to Adequately Plead Material Misstatements or Omissions.

a. Neither Dr. Cassidy's Methodology nor Peden's Alleged Incorrect Descriptions thereof Impose Liability on Defendants.

Plaintiff alleges that Dr. Cassidy's practices in projecting LEs for LPI's use in facilitating

life settlements deviate from the purported "standard practices" in the life settlement industry

because he is a medical doctor and not an actuary, and because he uses mortality data generated

by the U.S. Govemment.22 However, because this is not a suit against LPI, its use of Dr. Cassidy

and, thus, his methodology, are not at issue, nor could they be since the life settlement

transactions are not securities under the federal securities laws.23

Knowing this, Plaintiff attempts to bootstrap Dr. Cassidy's methodology into a claim for

securities fraud when it alleges that Peden, in October and November 2008, misrepresented "to

an investor" and to a non-investor, respectively, that Dr. Cassidy used a different actuarial table

22 See Compl., ~~5, 32, 35. Defendants dispute that a "standard practice" actually exists in the industry and, to the extent it exists, the timing of when such "standard practice" emerged. See, e.g., Paul Siegert, Evolution of Life Expectancies in the Life Insurance Secondary Market ... Current Trends and New Developments, Life Insurance Settlement Series Edition No. VI (Aug. 4, 2010)("[U]nderwriting guidelines vary substantially among LE underwriters, and most of the life settlement underwriters have developed unique mortality curves based on their own experience of mortality patterns."). 23 See SEC v. Life Partners, 87 F.3d at 549; see also 15 U.S.C. §78j(b) (requiring misstatements or omission "in connection with" the purchase or sale of a security).



than what he was actually using.24 The foregoing allegations fail to set forth the time and place

for the statements, the identities of the persons to whom the statements were made, and what

Peden "obtained thereby." Therefore, the allegations are insufficient under Rule 9(b). Gonzalez,

2011 U.S. App. LEXIS 25237, at *8-9.

Moreover, for Peden's alleged statements to be actionable, such statements must have

been made "in connection with" the purchase or sale of a security.25 Thus, Peden's November

2008 statement to a non-investor cannot give rise to liability or establish a strong inference of

scienter. Nor does Peden's October 2008 statement to an alleged "investor" give rise to such

liability or establish scienter. More specifically, the Complaint refers to purchasers of viatical

and life settlements as "investors," as distinguished from its references to "shareholders" of

LPHI,26 thereby confirming that Peden's October 2008 statement was not made to a purchaser of

LPHI securities and, thus, was not made "in connection with" the purchase or sale of a security.27

In short, both Dr. Cassidy's methodology and Peden's alleged incorrect statements

related thereto are red herrings, providing no basis for liability or a finding of scienter against

any Defendant.

b. Defendants did not Know that Dr. Cassidy's LEs were Materially Short.

Plaintiffs repeated allegations that Defendants knew Dr. Cassidy's LEs were materially

short not only defy logic, but also are refuted by the very documents on which Plaintiff

purportedly relies in support of its claim.

24 Compl., ~~43-44. 25 15 U.S.C. §78j(b). 26 Compare Compl., ~~2, 3, 4, 5, 9, 11 with ~~1, 14. 27 Moreover, even a purportedly inaccurate statement by Peden to a "shareholder" would not alter the total mix of information available to LPHI's shareholders, thus precluding any liability with respect to that statement. See, e.g., SEC v. Morgan Keegan & Co., No. 1:09-cv-1965-WSD, 2011 U.S. Dist. LEXIS 71481, at *31-37 (N.D. Ga. June 28, 2011)(rejecting SEC's argument that statements made to four investors were sufficient to impose liability, holding that "[t]he SEC must do more than show a few isolated instances of alleged ... misconduct to obtain the relief it seeks.").



As conceded in the Complaint, Dr. Cassidy did not begin providing LE estimates to LPI

until after his predecessor, Dr. Kelly, passed away.28 Thus, Dr. Cassidy's first LE estimates were

not provided until October 1999.29 According to Plaintiff, the average LE generated by Dr.

Cassidy from 2000-2005 was 3.8 years. 30 By way of example, then, the insureds underlying

policies facilitated for the first half of calendar year 2000 would not have reached the estimated

LE until, on average, the latter half of calendar year 2003. For policies facilitated in latter half of

calendar year 2000, the insureds would not have reached the estimated LE until, on average, the

first half of calendar year 2004, and so on.

Despite the foregoing, Plaintiff relies on LPHI Audit Committee minutes discussing the

nine months ended November 30, 2002 in alleging that "at least as early as 2003, it was apparent

... that the LEs used ... were materially short.,,31 Plaintiff then assumes that the reference in

the minutes related to Dr. Cassidy's LEs when Plaintiff alleges that Pardo and Peden did not

"determine why Life Partners was not seeing the expected number of maturities based on

Cassidy's LEs.,,32 However, neither the minutes nor Plaintiffs conclusory allegation establish

"knowledge" regarding the purported inaccuracy of Dr. Cassidy's LEs as of November 2002,

especially when considered in light of Dr. Cassidy's 3.8 year average LE. As the U.S. Supreme

Court has noted, "[ d]etermining whether a complaint states a plausible claim for relief will, ...

be a context-specific task that requires the reviewing court to draw on its judicial experience and

common sense." Iqbal, 129 S.Ct. at 1950; see also United States v. Lloyds TSB Bank PLC, 639

F. Supp. 2d 326, 342 (S.D.N.Y. 2009)(applying common sense in rejecting the Government's

28 CompI., ~5. 29 Dr. Kelly passed away on September 20, 1999. See the redacted, certified copy of Dr. Kelly's death certificate, included in the Appendix as Exhibit B. 30 CompI., ~40. 31 CompI., ~49 (emphasis added). 32 CompI., ~50.



claim of securities fraud). Common sense dictates that Plaintiffs conclusory leap of faith must

be rejected as a basis for imposing knowledge, and thus, securities fraud liability on Defendants.

What is most shocking about the Complaint's allegations is the inexcusable

misrepresentation of LPI's annual filings with the Texas Department of Insurance ("TDI").

More specifically, Plaintiff represented that "[t]he reports filed by Life Partners for 2003 through

2009 reveal that insureds underlying approximately 80% of matured policies that the Company

brokered had outlived Cassidy's LEs.,,33 To the contrary, however, the TDI reports establish that

45.6% of the matured policies from 2003-2009 that were arguably based on Dr. Cassidy's LEs

actually matured before, or in the month of, the estimated LE.34 Moreover, the reports

establish that an additional 14.64% of the policies matured within 1 year of the LE projection,

and another 12.97% matured within 2 years of the LE projection.35 Therefore, more than 73%

of the maturities from 2003-2009 were on, before, or within 2 years of Dr. Cassidy's estimates-

hardly an indication that Dr. Cassidy's LEs were 8 to 9 years off.36

In addition to the foregoing, Plaintiff provides its own table in the Complaint, from

unknown origin, claiming that it purports to depict the policies exceeding Dr. Cassidy's LEs "for

the universe of policies from which his success rate is measurable.,,37 However, the chart and

surrounding allegations fail to satisfy the Rule 9(b) requirements, as the chart fails to specifically

allege the source of the information, and fails to specify whether each of the Defendants received

such information, in what form, when, and whether the conclusions Plaintiff now draws were

drawn by Defendants during the relevant time periods. Absent that information, the chart and

33 Compl., ~51. 34 Included in the Appendix as Exhibits C-l through C-7 are true and correct copies of the portions of LPI's reports filed with the TDI from 2003-2009 showing the maturities during each of those respective years. It is appropriate for Defendants to include same with the Motion to Dismiss because they are referred to in the Complaint. Dorsey, 540 F.3d at 338. Exhibit D in the Appendix is a chart summarizing the Cassidy-related data set forth in Exhibit C. 35 See Exhibits C and D in the Appendix. 36 See Compl., ~40. 37 Compl, ~~41, 54.

DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISS AND BRIEF IN SUPPORT Page 11


associated allegations must be rejected. See Kurtzman v. Compaq Computer Corp., No. H-99-

779, 2002 U.S. Dist. LEXIS 26569, at *10-18, 38-50 (S.D. Tex. Mar. 30, 2002)(rejecting

scienter claims based on general references to reports where there were no allegations about the

actual contents of the reports, whether defendants read the reports, or whether the information in

the reports had been reported to defendants).

One of the Complaint's more puzzling allegations is the contention that LPHI "disclosed

in its periodic filings with the Commission that it advanced money to pay premium payments ...

when the amounts escrowed for premiums was depleted.,,38 Plaintiff then uses this public

disclosure to support its allegation that Defendants knew the LEs were short.39 If, in fact,

Plaintiff is correct, and the disclosure of the "steady" increase in premium payments imputed

knowledge to Defendants of the LE underestimation, then, because that increase was publicly

disclosed, the public, in tum, was provided with the knowledge of the LE underestimation, and

Plaintiffs fraud claim vanishes. See, e.g., In re Sun Microsystems" Inc. Sec. Litig., No. C 89

20351 RP A, 1990 U.S. Dist. LEXIS 18740, at * 7 (N.D. Cal. Aug. 20, 1990)("If the material

containing the alleged omission actually discloses the facts that plaintiffs claim are absent there

is obviously no omission.").

Plaintiff next alleges that a "consultant" retained by a "firm" in 2006 recommended in a

"report" that LPI "track, analyze and validate" Dr. Cassidy's LEs.40 This allegation fails to

satisfy Rule 9(b) because it fails to specifically identify the "firm," the "report," to whom the

report was provided, and when the report was provided. Further, and more importantly, the

allegation fails to support any basis for the imputation of knowledge of the alleged

underestimation of LEs - indeed Plaintiff makes no claim that the report so found. Thus, this

38 Compl., ~52. 39 Compl., ~52. 40 Compl., ~53.



allegation must also be disregarded.

Finally, Plaintiff relies on a complaint filed by, and a subsequent settlement LPI made

with, the Colorado Securities Division as apparent support for Defendants' knowledge of the

underestimation of LEs.41 Importantly, Plaintiff does not allege that the Colorado action was

based, in whole or in part, on Dr. Cassidy's LEs. Indeed, the only allegation regarding LEs

contained in the Colorado Securities Commission's 17-page complaint is the one quoted by

Plaintiff.42 It is impossible to discern from this one statement whether the allegation related in

any way to Dr. Cassidy's LEs. Notably, the publicly-available settlement of the Colorado case

contained no findings or admissions regarding the accuracy or inaccuracy of Dr. Cassidy's LEs,

as the settlement only related to the claim by Colorado that the life settlements were securities

under Colorado law.43 Thus, Plaintiffs reliance on the Colorado case is yet another red herring,

having no bearing on this case or on Defendants' alleged knowledge of the asserted

underestimation of LEs.

c. Plaintiff's Allegation that LPHI Artificially Inflated its Revenues Defies Common Sense.

Perhaps the most obvious example of Plaintiff s attempt to bootstrap a business practices

case against a private company not engaged in the sale of securities into a federal securities fraud

case against the public parent company is the following allegation:

Using Cassidy's materially short LEs enabled Life Partners to artificially inflate its revenues, as the Company extracted significantly more money from investors than it would have had it priced life settlements based on appropriately

41 CompI., ~55. 42 See CompI., ~55 (quoting from the Colorado complaint the following allegation: "the high frequency rate in which viators outlived life expectancies predicted by Life Partners."). See First Amended Complaint for Injunctive and Other Relief filed in Joseph v. Life Partners, Inc., Case No. 2007 CV 5218, ("Colorado Action"), a true and correct copy of which is included in the Appendix as Exhibit E. 43 See Stipulation for Permanent Injunction and Other Relief, filed in the Colorado Action, and attached order of Permanent Injunction and Other Relief, a true and correct copy of which is included in the Appendix as Exhibit F. Conveniently omitted from the Complaint is a reference to the Stipulation that resolved the action, wherein the Colorado Securities Commission represented that "no investor has alleged or asserted any impropriety against Defendants with respect to their investment . . . ."



developed LEs. During fiscal years 2006 through 2011, Life Partners extracted more than $400 million of revenue from the life settlement transactions it brokered.44

On its face, this allegation is nonsensical, as how could LPI (or LPHI) have artificially inflated

revenues if, as the Plaintiff concedes, LPI actually received $400 million in revenues? In reality,

Plaintiff is not complaining that LPI (or LPHI) claimed it made $400 million in revenues when,

in fact, it did not. Rather, Plaintiff asserts that, in its opinion, LPI received too much money

from the facilitation of life settlement transactions, i.e., from non-securities transactions: "Thus,

by overvaluing its policies using materially short LEs, Defendants were able to extract from

investors ... approximately $555 million more than they could have reasonably expected to earn

using appropriately developed LEs.,,45 However, Plaintiff lacks jurisdiction to complain of those

transactions in light of SEC v. Life Partners, Inc.46

d. The Contingency Discussed in the Risk Disclosures had not Occurred.

Plaintiff seeks to reverse-engineer a business practices case into a securities fraud case by

threading its claims through a risk disclosure contained in LPHI's Forms 10-K, only portions of

which Plaintiff quoted in the Complaint. However, because the risk disclosures were accurate,

and the "contingency" addressed by the disclosures had not occurred, Plaintiff s claims based on

such disclosures must be dismissed.47

44 Compl., '1145 (emphasis added). 45 Compl., '1148. 46 Further, Plaintiffs hypothetica1s regarding how LPI might have priced a particular policy with a six-year LE, as opposed to a four-year LE, (Compl., '1147), and what the returns on investment might be with "appropriately developed LEs" (Compl., '1148) fails to satisfy the heightened pleading requirements of Rule 9(b). See, e.g., Ellington Mgmt. Group, LLC v. Ameriquest Mortgage Co., No. 09 Civ. 0416 (JSR), 2009 U.S. Dist. LEXIS 91204, at *10 (S.D.N.Y. Sept. 29, 2009)(rejecting, under Rule 9(b), plaintiffs' attempt to substitute "indirect, hypothetical allegations for more directly applicable factual allegations"); In re Sterling Foster & Co. Sec. Litig., 222 F. Supp. 2d 289,307 (E.D.N.Y. 2002); Vachon v. Baybanks, Inc., 780 F. Supp. 79, 82 (D. Mass. 1991). 47 Plaintiffs quotation from the risk disclosure contained in LPHI's 2006 Form lO-K is inappropriate, as Plaintiff has not asserted claims against Defendants based on the 2006 Form lO-K. It is also unclear whether or not Plaintiff is asserting a claim related to LPHI's 2011 Form lO-K, as discussed infra. See Compl., '11'11147,152,162, 168, 175, 178,181,182.



The following language is an excerpt from the risk disclosure contained in LPHI's 2008

Form 10-KJA. While some of the wording changed slightly, this excerpt is substantially the

same as that contained in each of LPHI's Forms 10-K for fiscal years 2007-2011:

Life expectancies are generally estimated from standard medical and actuarial data based on the historical experiences of similarly situated persons. The data is necessarily based on averages involving mortality and morbidity statistics. The outcome of a single settlement may vary significantly from the statistical average. It is impossible to predict anyone insured's life expectancy exactly. To mitigate the risk that an insured will outlive his or her predicted life expectancy, we price life settlements to yield competitive returns even if this life expectancy prediction is exceeded. . ..

If we underestimate the average life expectancies and price our transactions too high, our purchasers will not realize the returns they seek, demand may fall, and purchasers may invest their funds elsewhere . ...

We cannot assure you that, despite our experience in settlement pricing, we will not err by underestimating or overestimating average life expectancies or miscalculating reserve amounts for future premiums. If we do so, we could lose purchasers or policy sellers, and those losses could have a material adverse effect on our business,jinancial condition, and results of operations.48

Accordingly, the fact that LEs could be underestimated and the potential negative impact

underestimation could have on future business operations was clearly disclosed as a risk. There

is nothing even arguably misleading about the foregoing that needed to be corrected.

Plaintiff asserts, however, that LPHI had a duty to disclose that the "contingency" had

already occurred.49 Plaintiffs assertion is misplaced. The "contingency" disclosed in the above-

quoted risk disclosure is a contingency that, to the extent life expectancies are underestimated

and LPI prices the transactions too high, then LPI could lose purchasers or could lose policy

sellers, and those losses could then have a material adverse effect on the "business, financial

48 LPHI 2008 Form lO-KI A, p. 11 (emphasis added). True and correct copies of excerpts from LPHI's Forms lO-K for 2007-2011, setting forth the applicable risk disclosures, are contained in the Appendix at Exhibits G - K. 49 Compl., ~56.



condition, and results of operation.,,5o Such a contingency did not occur, and Plaintiff has not

contended otherwise. 51

On this issue, Belodoffv. Netlist, Inc., is instructive. 52 In that case, plaintiff alleged that

the defendant failed to disclose that customer demand for its products was in significant

decline. 53 The court originally dismissed the complaint based, in part on this allegation, but gave

plaintiff leave to amend, holding that if the defendant "already knew that its customers were

significantly reducing their orders at the time of the lPO and had been for some time, Defendants

[sic] representation of such an event as a contingency in the risk disclosure statement would be

deceitful.,,54 In dismissing the same claim from plaintiffs second amended complaint, the court

noted that the sales figures set forth in defendant's public filings demonstrated "an increase and

flat-lining of sales up and through the lPO," thereby defeating plaintiffs claim that defendants

knew of the "significant decline in customer demand. 55 Likewise, in this case, LPHI's business,

financial condition, and operations for fiscal years 2007-2010, consistently exhibited dramatic

improvement, with revenues increasing from $30.3 million in fiscal year 2007 to $108.8 million

in fiscal year 2010, and net income increasing from $3.8 million in fiscal year 2007 to $26.1

million in fiscal year 2010.56 Such figures refute Plaintiffs claim that LPHI failed to disclose a

known risk. This is especially true in light of the inadequacy of Plaintiffs allegations regarding

Defendants' knowledge of the purported underestimation of LEs, as discussed, supra. For the

50 See id. 51 See generally, Compl. 52 No. SACV 07-00677 DOC (MLGx), 2009 U.S. Dist. LEXIS 78309 (C.D. Cal. Sept. 1,2009). 53 2009 U.S. Dist. LEXIS 78309, at *19. 54 [d. at *8. 55 [d. at *22-26. 56 See excerpt from LPHI's 2011 Form 10-K, in the Appendix as Exhibit K. While LPHI's revenue and net income decreased in fiscal year 2011 from fiscal year 2010, the 2011 numbers were still dramatically higher than those posted in fiscal years 2007 and 2008. Importantly, to the extent Plaintiff contends that the 2011 risk disclosure was materially misleading, Plaintiff ignores the disclosure in the same Form 10-K describing Plaintiffs allegations regarding the inaccuracy of the LEs. See Exhibit K. Thus, any claim regarding the 2011 Form 10-K must be dismissed as failing to allege a material misstatement or omission.



same reasons, Plaintiff s claim that Defendants' risk disclosure was misleading because it failed

to disclose "a material trend impacting [LPHI's] revenues" in contravention of Item 303 of

Regulation S-K must also be rejected. See Belodoff, 2009 U.S. Dist. LEXIS 78309 at *27-28.57

e. Plaintiff Failed to Adequately Allege Misrepresentations by Pardo.

Plaintiff alleges that Defendant Pardo misrepresented the rates of return for LPI

customers in October 2007 and October 2008 conference calls.58 However, Plaintiff fails to

specify any documents establishing that the ROls were inaccurate, and whether and how Pardo

knew they were inaccurate at the time of his statements. 59 Thus, the allegation violates Rule 9(b)

and must be rejected. See Plotkin v. IP Axess Inc., 407 F.3d 690,696 (5th Cir. 2005).

In addition, Plaintiffs allegation that LPI, when conveying "historic ROI," did not take

into account "policies that remained active beyond their LE,,,60 must be rejected as defying

common sense. It goes without saying that a life insurance policy that is still "active" is a policy

for which the insured is still living. Because purchasers of viaticals or life settlements do not

receive death benefits until the insured has died, it would be impossible to provide an accurate

ROI for "active" policies, for such cannot be appropriately calculated until there are "returns" to

calculate. 61 Thus, common sense requires a rejection of this allegation. See Iqbal, 129 S.Ct. at

1950. Further, to the extent, by this claim, Plaintiff is alleging that Defendants had a duty to

predict or speculate what the ROls would be for policies that will mature in the future, such an

57 Notably, "a violation ofItem 303 's reporting requirements does not automatically give rise to a material omission under Rule 10b-5." Gran v. Stafford, 226 F.3d 275, (3rd Cir. 2000); see also In re Enron Corp. Sec. Litig., 258 F.Supp. 2d 576, 633 n.63 (S.D. Tex. 2003). 58 Compl., ~~6l-62. 59 Compl., ~62. 60 See Compl., ~63. 61 See, e.g., Return on investment, http://financial-dictionary.thefi·eedictionary.com/return+on+investment, at p. 1 (citing Farlex Financial Dictionary) (ROI defined as "[t]he money that a person or company earns as a percentage of the total value invested."); Return on Investment (RO!): Meaning and Use, http://www.solutionmatrix.com/returnon-investment.html at p. 2 ("Return on investment is frequently derived as the 'return' (incremental gain) from an action divided by the cost of that action.").



allegation must also be rejected. See, e.g., In re Verifone Sec. Litig., 11 F.3d 865, 868-869 (9th

Cir. 1993)(rejecting securities fraud allegations based on failures to make a forecast of future

events).

B. Plaintiff Failed to Adequately Plead a Section 1 OCb) Claim for Accounting Fraud.62

Plaintiff alleges that Defendants are liable under Section 1 O(b) because LPHI issued a

Restatement regarding a variety of accounting issues, including revenue recognition. 63 However,

Plaintiff has failed to adequately allege scienter, necessitating dismissal of this claim. This is

especially true with respect to Defendants Pardo and Peden who are not alleged to be

accountants or to have any accounting expertise sufficient to challenge the treatment given to any

particular transaction. See In re Novatel Wireless Sec. Litig., No. 08cv1689 AJB RBB, 2011

U.S. Dist. LEXIS 135602, at *41 (S.D. Cal. Nov. 23,2011). Furthermore, even as to Defendant

Martin, who was the CFO for only part of the time the SEC alleges Defendants engaged in

accounting fraud, Plaintiff makes no allegations that he was aware of any wrongdoing or directed

any improper activity. Accordingly, the "accounting fraud" claims must be dismissed.

1. Plaintiff Failed to Plead Scienter with Respect to Revenue Recognition.

"[T]o give rise to section 1 O(b) liability for fraud, the mere second-guessing of

calculations will not suffice; the [SEC] must show that defendants' judgment - at the moment

exercised - was sufficiently egregious that a reasonable accountant reviewing the facts and

figures should have concluded that the company's financial statements were misstated and that

as a result the public was likely to be misled." SEC v. Guenther, 395 F. Supp. 2d 835, 845 (D.

62 Although Plaintiff asserts Section 10(b) claims against Defendants "through November 2011," Plaintiff does not specify what statements made by Defendants in 2011 are false. While the Form 10-K that contained the restatements at issue was filed in November 2011, Plaintiff does not assert that any of the financial data was inaccurate. On its face, then, this claim fails to satisfy Rule 9(b). 63 See CompI., ~~64-137, 152.



Neb. 2005). The Complaint fails to adequately allege that any of Defendants Pardo, Peden or

Martin (1) knew that revenue was not being properly recorded; (2) knew that the disclosed

revenue recognition policy was not being followed; or (3) knew that any backdating of

documents was occurring that could impact revenue recognition.64 Indeed, based upon the

Complaint's allegations, it appears that the backdating of documents occurred throughout the

year, and that such backdating did not occur only at quarter or year end in a concerted effort to

alter revenue. Further, the fact that restated revenues for fiscal years 2007-2010 and the first

three quarters of 2011 showed that, for some periods, revenue was understated, as opposed to

overstated, evidences a lack of intent to systematically overstate revenues. Absent allegations of

knowledge, participation or motive, Plaintiffs claims in this regard must be dismissed.

Strikingly similar claims made by Plaintiff in another case were rejected due to the same

deficiencies. In SEC v. Cohen, the SEC sued the CFO of a public company that issued an

accounting restatement as a result of improper revenue recognition.65 The SEC alleged that, as

the CFO, defendant knew that the company was prematurely recording revenue and, further, that

the CFO was motivated to manipulate the revenues in order to inflate the company's revenues

and earnings, facilitate the company's secondary offering, and derive personal gain from annual

bonuses and stock sales.66 After a bench trial, the court found that the SEC had failed to prove

scienter because (1) there was "no evidence that defendant knew the various managers assigned

to properly report the revenue were not performing their jobs correctly," and (2) there was "no

evidence that the managers were pressured by defendant to accelerate revenue.,,67 Further,

because the restatement of revenues resulted in both over- and understatements, the court found

64 See CompI., ~~69-118, 159. 65 No. 4:05CV371-DJS, 2007 U.S. Dist. LEXIS 28934, at *3, 25-27 (E.D. Mo. April 19, 2007). 66Id. at *48-53. 67Id. at *48-49.



that it could not "discern a pattern where ... [the] revenue was strategically shifted.,,68 Finally,

the court rejected the argument that the CFO's single sale of stock "significantly below the all-

time high and at months away from the secondary offering" supported scienter.69 Although the

Cohen case was a bench trial in which the SEC had an opportunity to present evidence of

scienter, the fact that Plaintiff has not even asserted such allegations in this case - or, to the

extent it has, has only done so improperly - further highlights the necessity for dismissal of

Plaintiff s claims in this case.

Plaintiff improperly attempts to allege "knowledge" of improper revenue recognition

when it asserts that Martin reviewed and approved quarter-end accrual journal entries, and

asserts that Pardo and Peden "monitored daily, monthly, quarterly, and annual contract activity,

including contract funding status .... ,,70 However, Plaintiff fails to specifically identify to

which reports Plaintiff refers, and how those reports revealed to each Defendant that revenue was

being recognized improperly; therefore, the allegations are violative of Rule 9(b). See Abrams,

292 F.3d at 432; Kurtzman, 2002 U.S. Dist. LEXIS 26569 at *10-18, 38-50.71 Likewise,

Plaintiffs claim that "Pardo, Peden and Martin were aware of periodic cancellations and

rescission of Seller Agreements, which exposed the impropriety of Life Partners' revenue

recognition practices" is conclusory and fails to sufficiently state a claim for scienter.72 See SEC

v. Shanahan, 646 F.3d at 544.

2. Plaintiff Failed to Plead Scienter with Respect to Impairment.

Plaintiff s allegations regarding the calculation of impairment is premised on the same

faulty analysis of Dr. Cassidy's LEs discussed supra, coupled with improper conclusory claims.

68Id. at *51. 69!d. at *52-53. 70 Compl., ~73. 71 Plaintiff's allegations regarding auditor communications from 2004 (Compl., ~~81-83) must be disregarded, as Plaintiff makes no claims against Defendants for time periods prior to January 2007. 72 Compl., ~88



For example, without any factual support, Plaintiff alleges that, "[d]espite their awareness that

these policies may have been impaired when acquired, Defendants failed to properly evaluate

potential impairment.,,73 This allegation fails to satisfy the pleading requirements for scienter.

Plaintiff further improperly alleges that "Pardo, Peden, and Martin understood that the

Company's impairment calculations depended on the validity of Cassidy's LEs.,,74 However,

Plaintiff provides no factual basis to support the claim that (1) the policies at issue were all

purchased using Dr. Cassidy's LEs, (2) Defendants Pardo, Peden and Martin knew, at the time

that the policies were purchased, that the policies were "impaired," or (3) assuming Defendants

knew the policies were impaired, that Defendants knew the extent of the impairment.

Next, Plaintiff contends that in the summer of 2010, in a response to a request by Ernst &

Young, Defendants Peden and Martin provided a chart "on the most recent 300 maturities of

viatical and life settlement policies sold by Life Partners.,,75 Plaintiff then attempts to attach a

nefarious motive to the provision of the chart, when it alleges that Peden and Martin "failed to

alert E&Y" that insureds underlying 1,200 of the outstanding policies had outlived Dr. Cassidy's

LEs.76 The absurdity of this claim is obvious - if, as readily admitted by Plaintiff, Peden and

Martin provided E& Y with the "most recent" maturities, how was E& Y misled? Plaintiff does

not allege that E& Y requested information regarding all outstanding policies, that Defendants

refused to provide that information, or that Defendants provided false information in response to

such hypothetical request. Absent such assertions, this allegation provides no basis to establish

scienter related to LPHI's impairment analysis.

73 Compl., ~119. 74 Compl., ~126. 75 Compl., ~127. 76 Compl., ~127.



Plaintiff also alleges that E& Y recommended - in May 2010 - that LPHI conduct a

quarterly analysis of the accuracy of initial LEs to determine if adjustments needed to be made to

the underwriting process.77 Of course, this allegation undermines Plaintiff s claim that any of the

Defendants knew that Dr. Cassidy's LEs were significantly underestimated and, further,

undermines Plaintiffs claim that Defendants knew LPHI's impairment analysis was incorrect.

C. Plaintiff Failed to Adequately Plead an Insider Trading Claim against Peden.

In order to state a claim of insider trading under Section 1 O(b), Plaintiff must plead that

Peden sold LPHI stock while in possession of material, non-public information, and with

scienter. See Dirks v. SEC, 463 U.S. 646, 653-54 (1983). However, "[c]ourts stress that the SEC

can not base insider trading actions on strained inferences and speculation." SEC v. Truong, 98

F. Supp. 2d 1086, 1098 (N.D. Cal. 2000).

Plaintiffs insider trading claim against Peden is based upon a single sale of a fraction of

Peden's holdings of LPHI shares that took place in June 2007.78 Plaintiff asserts that Peden had

the following non-public information in his possession when he made his single trade: "[I]t was

Life Partners' practice to systematically use materially short life expectancy estimates to broker

life settlements, and that this practice had the effects of artificially inflating the Company's

revenues and profit margins, and creating investor demand for the life settlements that Life

Partners brokered and that would not exist but for the Company's practice of doing SO.,,79 As

discussed in Sections A(2)(b),(c), and (d), the Complaint is devoid of sufficient allegations that

would establish Peden's possession of the alleged material, non-pUblic information. Indeed, the

fact that, according to Plaintiff, "Peden did not follow the recommendation to analyze Cassidy's

LEs" allegedly made by an undisclosed "firm" in 2006, only further supports the inference that

77 CompI., ~128. 78 CompI., ~139. 79 CompI., ~154.



Peden was not in possession of material, non-pUblic infonnation.8o Further, any attempt by

Plaintiff to impute knowledge of the "non-public" infonnation concerning LEs to Peden because

that infonnation was accessible to him due to "the Company's internal policy tracking system,,81

is equally unavailing. See, e.g., SEC v. Horn, No. 10-CV-955, 2010 U.S. Dist. LEXIS 135000,

at *17 (N.D. Ill. Dec. 16, 2010) ("[P]roof of access to nonpublic infonnation is not proof of

possession of that infonnation."). Nor has Plaintiff alleged circumstantial evidence against

Peden, such as selling LPHI shares in suspicious amounts or at suspicious times. The absence of

such allegations lies in stark contrast to the more typical insider trading claims. See, e.g., SEC v.

Steffes, No. 10-CV-6266, 2011 U.S. Dist. LEXIS 85496, at *44-45 (N.D. Ill. Aug. 3, 2011)

(unusual trading in amounts and timing supported an inference of scienter); SEC v. Adler, 137

F.3d 1325, 1340 (11th Cir. 1998) (same).

Accordingly, because the Complaint fails to adequately allege scienter, Plaintiffs Section

1 O(b) claims of insider trading against Peden must be dismissed.

D. Plaintiff Failed to Adequately Plead a Section 17(a) Claim.

Plaintiffs Section 17(a) claim is premised upon January and February 2007 filings by

LPHI wherein Plaintiff alleges LPHI, Pardo and Peden made misrepresentations or omissions

regarding revenue recognition.82 To establish a violation of Section 17(a)(1), Plaintiff must

allege the defendants (1) made material misrepresentations or materially misleading omissions,

(2) in the offer or sale of securities, (3) with scienter. Aaron v. SEC, 446 U.S. 680,697 (1980).

The same elements apply under Sections 17(a)(2) and 17(a)(3), except that no scienter is

required. Id. Plaintiffs scienter allegations must be pled, as to each defendant, with requisite

particularity under Rule 9(b). See SEC v. Gann, No. 3:05-CV-0063-L, 2006 U.S. Dist. LEXIS

80 CompI., ~53. 81 CompI., ~54. 82 CompI. ~147.



9955, at *9 (N.D. Tex. Mar. 13,2006).

The Section 17(a) claim based on LPHI's February 2007 public filings must be dismissed

because there were no LPHI filings in that month that referenced LPHI's revenue recognition

policies.83 Further, for each of the reasons set forth in Sections B(l) and C(l) herein, Defendants

cannot be liable under Section 17(a)(1) for the January 2007 Form 10-QSB because Plaintiff has

failed to sufficiently allege scienter. Finally, Defendants cannot be liable under Section 17(a)(2)

or (3) because Plaintiff cannot premise scheme liability on a misrepresentation claim. See SEC

v. Kelly, 2011 U.S. Dist. LEXIS 108805, at *8_15.84

E. Plaintiff Failed to Adequately Plead Section 13 Claims and Claims for Violations of Various Exchange Act Rules.

The Complaint's Third through Sixth Claims allege various violations of the Exchange

Act for the filing of false statements, the failure to maintain books and records, the failure to

maintain and implement internal accounting controls, and the making of false statements to an

accountant. 85 However, many of the same deficiencies previously discussed, similarly, require

dismissal of these claims.

For example, Plaintiffs reliance on the allegation that Defendants failed to disclose a

"material risk" to LPHI's business or a material trend impacting LPHI's revenues in support of

such claims must be dismissed, as Plaintiff has not plead a material misstatement with respect

thereto. 86 Likewise, Plaintiffs aiding and abetting claims against Defendants Pardo, Peden and

83 See Form 4 Statement of Changes in Beneficial Ownership of Securities filed on February 14,2007, and Form 8-K filed on February 20,2007, true and correct copies of which are included in the Appendix as Exhibits Land M. 84 Additionally, Peden cannot be liable for the January 2007 Form 10-QSB because he did not sign same and, thus, did not "make" the statement. See Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2302-2305 (2011); SEC v. Kelly, 2011 U.S. Dist. LEXIS 108805, at *8-15. 85 CompI., pp. 50-53. 86 See Section A(2) herein. Plaintiff expressly relies on these allegations to support the Third Claim for Relief. CompI., ~162. It is unclear whether Plaintiff is relying on these allegations to support their remaining claims for relief. In that regard, the allegations fail to put Defendants on notice of the claims against them in violation of Rule 8(a) and 12(b)(6).



Martin under the Third, Fourth and Fifth Claims for Relief must be dismissed because Plaintiff

has failed to allege that any of the Defendants knew of the problems with LPHI's revenue

recognition or impairment calculations. See SEC v. Cohen, 2007 U.S. Dist. LEXIS 28934, at

*53-59 (dismissing claims under Sections 13(a), 13 (b)(2), 13(b)(5) and related rules based upon

defendant CFO's lack of knowledge of the accounting issues and lack of evidence that defendant

directed someone to falsify company's books and records.). Such is especially true with respect

to Defendants Pardo and Peden, neither of whom are alleged to be responsible for the accounting

books and records or the internal controls related to accounting. See, e.g., SEC v. Shanahan, No.

4:07CV270JCH, 2010 U.S. Dist. LEXIS 2101, at * 15-18 (B.D. Mo. Jan. 12, 2010)(rejecting

Section 13(b )(2)(A) claim "in absence of evidence that defendant was responsible for the

corporation's books and records or for maintaining adequate controls").

Plaintiff s Sixth Claim is based on a conclusory allegation that the individual Defendants

made false and misleading statements "to an accountant.,,87 However, Plaintiff has failed to

adequately plead that any of Pardo, Peden or Martin, when they signed management

representation letters to the auditors,88 knew of the existence of any material errors in LPHI's

financial statements. Nor are there sufficient allegations that, at the time they signed those

letters, the individual Defendants knew that the system of internal controls was inadequate. Such

lack of knowledge (or pleading of same) is fatal to the Sixth Claim for Relief. See SEC v.

Cohen, 2007 U.S. Dist. LEXIS 28934, at *59-60.

87 Compl., ~178. 88 Defendants assume that Plaintiff is relying on the management representation letters to support this claim. However, Plaintiff fails to specify what statements they are relying on in support of their claim, in violation of Rules 8(a) and 12(b)(6).



IV. CONCLUSION

For each of the reasons stated herein, Defendants respectfully request that the Motion be

granted in its entirety, and that Plaintiffs Complaint against them be, in all things, dismissed.

J Pete Laney State Bar No. 24036942 E-Mail: [email protected]

LAW OFFICES OF J PETE LANEY 1122 Colorado Street Suite 111 Austin, TX 78701-2159 Tel: (512) 473-0404 Fax: (512) 672-6123

Respectfully submitted,

/s/ Elizabeth L. Yingling Elizabeth L. Yingling State Bar No. 16935975 E-Mail: [email protected] Laura J. O'Rourke State Bar No. 24037219 E-Mail: [email protected] Will R. Daugherty State Bar No. 24053170 E-Mail: [email protected]

BAKER & McKENZIE LLP 2300 Trammell Crow Center 2001 Ross Avenue Dallas, TX 75201 Tel.: (214) 978-3000 Fax: (214) 978-3099

ATTORNEYS FOR DEFENDANTS, LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN

CERTIFICATE OF SERVICE

I hereby certify that on February 29, 2012, I electronically filed the foregoing document

with the Clerk of the Court using the CMlECF system, which will send notification of such filing

to all counsel who have registered with the Court. All others were served a copy via U.S. mail.

/s/ Elizabeth L. Yingling

DALDMS1707410.5



SEC vs. LPHI - Defendant's Motion to Dismiss

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