When I heard on vacation last week that Life Partners Holdings, Inc. (LPHI) was sued by the SEC, I knew it would be my first newsletter of 2012.

What is LPHI?

LPHI is a company that buys the life insurance policies of seniors and sells them in a fractional ownership structure to accredited investors.  Yes, LPHI is part of the life settlement industry.

To explain the LPHI model in a simple manner, think of the risk of one investor buying the life insurance policy of an elderly person.  The risk for the investor is fairly significant that the insured will live longer than expected. This would harm the profitability of the purchase and increase the risk to the investor who is on the hook for the annual policy premiums each year until the insured dies.

The LPHI model looks for multiple investors to buy a fractional part of a life insurance policy to spread the risk.  An investor who has $100,000 to invest might buy a small interest in five different policies instead of buying one policy. This again spreads the risk.

Why is the SEC (Securities and Exchange Commission) suing LPHI for fraud?  The allegations state that LPHI systematically and materially underestimated the life expectancy estimates that it used to price transactions before LPHI sold stock to investors. What does that mean?  It means that they told investors in LPHI that the actuarially determined date of death of insureds whose  policies were purchased was understated. In other words, the insureds were supposed to live longer than what LPHI put forth to investors. 
The entire investment model of buying life insurance policies of seniors is predicated on the fact that they will die within a certain time horizon; and if that happens, the investment in each policy will be profitable. If insureds live too long, not only will the investment not turn out as good as advertised but, ultimately, could result in significant losses.

Who cares if LPHI was sued for fraud?
Thousands of insurance agents and securities licensed advisors who pitched the LPHI platform to clients.
What's amazing is that in many states you do not need a securities license to be paid a referral fee when clients invest money with LPHI.  There was a huge pitch to life-insurance-only licensed advisors to sell LPHI investments to their clients so they could be paid a referral fee.

While investors into the actual life policies brokered by LPHI were not the reason the SEC sued LPHI, the ultimate outcome of using inaccurate actuarial numbers when determining when insureds will die is that investors will not be paid off as soon or with as much money as they thought.  Some may not receive any money from their investments.

Could this lead to lawsuits against advisors who brokered LPHI investment?
I think it could and it will.  Even if it doesn't result in multiple individual or class-action lawsuits, clients sold investments that don't work out can significantly damage the reputation of an advisor in a local community.

If you sold LPHI investments to your clients, you are now on notice of the problem.

To read the actual SEC complaint against LPHI, click on the following link:

            www.sec.gov/news/press/2012/2012-2.htm 

The following are some articles on LPHI's problems. Click on each to read more. 

            -Shares of Life Partners Holdings plummet on SEC charges

            http://uk.reuters.com/article/2012/01/04/us-lifepartnersholdings-shares-idUKTRE8030W720120104

            -Life Partners Holdings, Inc. -- Newest Viatical Settlement Scam

            http://www.securitiesarbitrations.com/Securities-Arbitration-Blog/Article/2/2011/94/Life-Partners-Holdings--Inc-----Newest-Viatical-Settlement-Scam