On August 22, 2014, we discussed the SEC’s outrageous request for a $2 billion award of disgorgement and penalties in SEC v. Life Partners Holdings, even after getting no fraud judgment. See SEC Again Runs Amok, Seeking $2 Billion in Texas Case. The final judgment is now in, and Judge James Nowlin gave a thoughtful and well-reasoned package of relief of just below $50 million, only $1,950,000,000 less than the SEC argued was the proper result. So the SEC can be 2.5% right and still cause a lot of pain. You can read the court’s Final Judgment here: Judgment in SEC v Life Partners Holdings.
Fraud violations of section 17(a)(1) of the Securities Act of 1933 were found by the jury, but the judge set aside that portion of the verdict because the SEC’s only evidence of securities fraud involved a time period not charged in the complaint. Judgment was issued only on the jury’s findings of reporting violations of section 13(a) of the Securities Exchange Act of 1934 and SEC Rules thereunder, but it was plain from the opinion that the judge found serious culpability at least for the individual who controlled and guided the company’s conduct.
Individual defendants Brian Pardo and R. Scott Peden
Judge Nowlin gave short shrift to the testimony of the SEC’s putative “expert,” Larry Rubin, who testified that there should be a “disgorgement” remedy of $500 million, on the theory that “retail investors would have paid $500 million less than they actually did” if Life Partners used accurate life expectancy information in its disclosures. (Life Partners is in the “life settlement” business, acquiring and reselling life insurance policies that generate payments when the insured person dies; longer life expectancies result in delays in revenue or lower resale values.) The court wrote that it “is not satisfied that Larry Rubin’s testimony supports the SECs proposition that $500 million is a reasonable estimate of [Life Partners’] illicit gains…. [T]he task of discerning the good money from the bad — as the law requires — is exceptionally complicated in this case, and the SEC offers a meat cleaver when a scalpel is required. Such an approach is not a reasonable means of calculating how much [Life Partners] should have to pay back.” Slip op. at 9-10.
Judge Nowlin was forced to resort to his own analysis in an effort to do rough justice where the SEC failed to even attempt to do so. He excoriated the defendants’ bad faith in issuing a series of false disclosures, and made an effort to distinguish between gains obtained as a result of misleading Life Partners investors, which was the subject matter of the allegations, and benefits derived from overpricing resales of policies by Life Partners, which were not securities violations. That analysis showed that an order to disgorge $500 million would be “neither justified nor just.” Id. at 11.
Without the benefit of any useful expert analysis, the judge came up with a disgorgement number he felt comfortable with — $15 million. He found this was “sufficiently large — it is more than half the current market capitalization of [Life Partners] — to deter future wrongdoers,” yet he was “confident that it does not overstate the ext[e]nt of [Life Partners’ ill gotten gains.” Id. n.5.
The judge also went through a reasonable analysis of the other forms of relief awarded. He granted the SEC’s request for an injunction against future violations — which the SEC seeks in every case — but not before explaining in detail why injunctive relief was warranted. Here, he explained, the key defendant who controlled the company was a recidivist with a previous injunction against him, who presided over a company that made no efforts to remedy past violations and operated with an ill-informed and inactive Board of Directors. The judge dwelled on how grossly uninformed one the directors was. This was not an example of rote issuance of an injunction merely because a violation was found. See slip op. at 3-7.
The judge also made a reasonable effort to calculate civil penalties, choosing an amount below the maximum ($2 million) for a defendant with lower culpability, and hitting the repeat offender who made the company’s decisions with penalties several times higher ($6 million). Penalties against the company were assessed at $23.7 million. Given the size and economic wherewithal of the company, this is a huge award. The judge justified it based on his review of the evidence showing blatant violations of law that were at least reckless, even though the violations adjudicated against the defendants were non-fraud reporting violations of Section 13(a).
In the end, the SEC obtained major relief against the defendants, but showed truly bad form in doing so. It’s proposed disgorgement and penalties were a joke, and hence were not taken seriously by the judge. Another judge might have reacted more harshly to this combination of puerile gamesmanship and spectacularly poor judgment. But Judge Nowlin did his job notwithstanding the SEC’s overreaching, and it looks like rough justice was done.
December 3, 2104
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