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Securities and Exchange Commission v. Life Partners Holdings, Inc.

United States Court of Appeals, Fifth Circuit

April 21, 2017

SECURITIES AND EXCHANGE COMMISSION, Plaintiff - Appellee Cross - Appellant
LIFE PARTNERS HOLDINGS, INCORPORATED, Defendant-Appellant BRIAN D. PARDO; R. SCOTT PEDEN, Defendants-Appellants Cross - Appellees

         Appeals from the United States District Court for the Western District of Texas

          Before STEWART, Chief Judge, and JONES and DENNIS, Circuit Judges.

          JAMES L. DENNIS, Circuit Judge

         The Securities and Exchange Commission (SEC) brought this enforcement action against Life Partners Holdings, Inc. (LPHI) and two of its senior officers, Brian Pardo and Scott Peden, alleging violations of reporting and anti-fraud provisions of the federal securities laws. LPHI is in the business of facilitating the sales of existing life insurance policies to investors. The SEC alleges that LPHI knowingly underestimated life expectancies for the insureds in public filings with the SEC.

         Relevant to this appeal, a jury found the defendants liable for violations of section 17(a) of the Securities Act of 1933 and section 13(a) of the Securities Exchange Act of 1934. The district court sustained the jury's verdict as to section 13(a) but set aside the verdict as to section 17(a). In its final judgment, the district court imposed civil penalties on the defendants and issued injunctions restraining them from committing additional violations of the relevant securities laws. However, the district court declined to order Pardo to reimburse LPHI for compensation under section 304 of the Sarbanes-Oxley Act. The appellants, Pardo and Peden, challenge both the jury's verdict and the district court's judgment. The SEC cross-appeals, challenging the court's judgment.


         LPHI is a publicly held company that, through its wholly owned subsidiary, Life Partners, Inc. (LPI), [1] engaged in the business of facilitating "viatical" and "life settlement" transactions.[2] Pardo is LPHI's majority shareholder, and, during the time relevant to this appeal, he was also the chairman of the board of directors and chief executive officer of both LPI and LPHI. Peden was president of LPI, general counsel of both LPI and LPHI, and a director of LPHI. As officers of LPHI and LPI, both Pardo and Peden participated in creating the various reports filed by LPHI with the SEC, and they both signed, and Pardo certified, the filed reports.

          LPHI derived its revenue from commission fees it collected when facilitating the sale of existing life insurance policies or fractional interests in such policies to individual and institutional investors. In a typical transaction, the life insurance policy owner, the insured, sold the policy for an amount less than the death benefit but more than the cash surrender value of the policy. The purchaser of the policy undertook to pay future premiums to maintain the policy until the insured died. Thus, the purchaser would realize a profit if, when the policy matured upon the death of the insured, the policy benefits paid were greater than the purchase price plus any additional costs, including the premiums paid by the purchaser to maintain the policy. An insured's life expectancy estimate (LE) was therefore of critical importance in determining the policy's sale price. And, if an insured lived longer than expected, thereby increasing the cost of maintaining the policy, the purchaser received a lower return or even lost money.

         LPHI evaluated policies, obtained LEs for each policy, and determined the sale price, from which it received its commission fees. LPHI priced policies such that shorter LEs promised greater returns to purchasers. In order to ensure that policies were maintained during the insured's LE period, LPHI required purchasers to place a certain amount of funds in escrow, from which premium payments were to be made during this period. If an insured lived past his or her LE, the purchaser was required to make additional premium payments in order to keep the policy from lapsing. In addition to facilitating sales to institutional and individual purchasers, LPHI acquired interests in life insurance policies for its own investment portfolio.

         Starting in 1999, LPHI obtained LEs from a sole service provider, Dr. Donald Cassidy, a board-certified oncologist and internal medicine physician. Cassidy calculated an insured's LE by using the Center for Disease Control general population mortality table to determine the anticipated life span for the insured and adjusting that anticipated life span based on his medical judgment after reviewing the insured's medical records. Cassidy reported his result in a range of years, and LPHI used the top end of the range as the insured's LE. In public filings with the SEC, LPHI identified certain risks associated with its underestimation of LEs. In March 2011, after the SEC launched an investigation regarding LPHI's LEs, the company started acquiring LEs from another provider, a company called 21st Services, in addition to Cassidy.

         In 2013, the SEC brought an enforcement action against LPHI, Pardo, and Peden, alleging that they knowingly used materially underestimated, or "short, " LEs in connection with life settlement policies and that they misrepresented an existing reality of materially and systematically short LEs as a contingent risk in LPHI's public filings with the SEC between 2007 and 2011. The SEC claimed that the defendants violated the anti-fraud provisions in section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a). The SEC also contended that LPHI, aided and abetted by Pardo and Peden, violated the reporting requirements of section 13(a) of the Securities Exchange Act, 15 U.S.C. § 78m(a), and the SEC's rules thereunder, 17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13. As to Pardo only, the SEC alleged that he violated 17 C.F.R. § 240.13a-14. Finally, the SEC asked that Pardo be ordered to reimburse LPHI for certain compensation and trading profits under section 304(a) of the Sarbanes-Oxley Act of 2002 (SOX), 15 U.S.C. § 7243(a).

         At trial, Larry Rubin, the SEC's expert witness, testified that LPHI's LEs were materially and systematically short based on various analyses he conducted using LPHI's data.[3] Relevant to this appeal, the jury subsequently found that LPHI, Pardo, and Peden violated section 17(a) of the Securities Act, that LPHI violated section 13(a) of the Securities Exchange Act and rules thereunder, and that Pardo and Peden aided and abetted LPHI's section 13(a) violations. However, the jury found that the defendants did not violate section 10(b) of the Securities Exchange Act. The defendants then moved the district court for judgment as a matter of law.

         Ultimately, the district court denied the defendants' motion for judgment as a matter of law as to section 13(a) violations, but it granted the motion for judgment as a matter of law as to section 17(a) violations and set aside the jury's verdict as to the latter. The SEC moved for reconsideration of the court's section 17(a) ruling, but the district court denied that motion. At the remedies stage, the district court imposed second-tier civil penalties on the defendants and issued injunctions restraining the defendants from committing additional violations of the relevant securities laws. However, the district court declined to order Pardo to reimburse LPHI for compensation under section 304 of SOX and later denied the SEC's motion for reconsideration of this ruling.

         The appellants, Pardo and Peden, challenge the district court's denial of judgment as a matter of law on the SEC's section 13(a) claim. They also argue that the district court erred in imposing second-tier penalties, in assessing their amounts, and in issuing the injunctions. The SEC cross-appeals, challenging the court's grant of judgment as a matter of law on the SEC's section 17(a) claim and the court's refusal to order SOX reimbursements.


         We discuss the appellants' challenges, first to the jury's verdict and then to the district court's judgment, before turning to discuss the SEC's cross-appeal.


         The appellants challenge the jury's verdict that LPHI violated the reporting requirements of section 13(a) and that Pardo and Peden aided and abetted this violation, arguing that it was not supported by substantial evidence. As part of their challenge to the sufficiency of the evidence, the appellants contend that the district court abused its discretion in denying their motion to exclude the testimony of Rubin, the SEC's expert witness. We discuss this issue before turning to the assessment of the sufficiency of the evidence as a whole.


         Rubin, the SEC's expert witness, is an actuary with thirty years of actuarial experience, specializing in the life settlement industry. Using data from LPHI, Rubin conducted different analyses, each leading him to conclude that LPHI's LEs were materially and systematically short. First, Rubin reviewed LPHI's "actual results" by conducting a cohort analysis of life insurance policies facilitated by LPHI; Rubin divided LPHI's portfolio of policies into separate groups according to year of issuance and analyzed the performance of each yearly cohort. Rubin testified that this analysis did not require actuarial training to conduct. Based on this analysis, Rubin concluded that the LEs LPHI used to facilitate the sale of life insurance policies were systematically and materially short, "[r]egardless of how policies are analyzed (e.g., length of life expectancy estimate, retail investors versus institutional investors, pre-HIV/AIDS triple cocktail therapies versus post-HIV/AIDS triple cocktail therapies, [or] senior life settlements versus viaticals . . .)."

         Next, Rubin conducted an "actual-to-expected, " or "A/E, " analysis, using actuarial methods and published mortality tables to compare the number of deaths expected based on the LEs at a given point in time to the actual number of deaths that occurred. Based on this analysis, Rubin calculated an actual-to-expected performance ratio of 13% for the life settlements LPHI facilitated between 2004 and 2008. Rubin explained that 100% would mean perfect performance, that 80% is considered very poor performance, and that in thirty years as an actuary he had never seen an A/E performance ratio as low as 13%. Applying three standard deviations, Rubin calculated a 41% performance ratio with a 99% confidence that the actual ratio is no higher.

         Finally, Rubin calculated "calibrated life expectancies." He explained this analysis in the following way:

To determine an appropriately developed life expectancy estimate or "calibrated life expectancy, " I applied the actual to expected mortality ratio with the adjustment for three standard deviations described previously to the respective underlying mortality table (2005 CDC and 2008 VBT) and summed the resulting probability of survival from the age the policy was transferred to [LPHI] to the end of the valuation period (i.e., end of the particular calendar year) for each life. The purpose of a calibrated life expectancy is to calculate and reflect appropriate adjustments to the initial life expectancy estimates using data gleaned from an underwriter's historical performance, as reflected by the underwriter's actual to expected mortality ratios. These adjustments result in an A/E ratio of 100%. This means given the three standard deviations, I am only 1% confident that the LEs used by [LPHI] are correct and 99% confident they are still too short.

         Based on this analysis, again, Rubin concluded that LPHI's LEs for life settlements were materially and systematically short. In his deposition, Rubin indicated that his analysis was "governed by the Actuarial Standards Board" (ASB).

         The appellants challenge the district court's admission of Rubin's expert testimony, arguing that it was both unreliable and irrelevant. "A trial judge has wide latitude in determining the admissibility of expert testimony . . . and his or her decision will not be disturbed on appeal unless 'manifestly erroneous.'" Whitehouse Hotel Ltd. P'ship v. C.I.R., 615 F.3d 321, 330 (5th Cir. 2010) (alterations and some internal quotation marks omitted) (quoting Watkins v. Telsmith, Inc., 121 F.3d 984, 988 (5th Cir. 1997)). "'Manifest error' is one that 'is plain and indisputable, and that amounts to a complete disregard of the controlling law.'" Guy v. Crown Equip. Corp., 394 F.3d 320, 325 (5th Cir. 2004) (quoting Venegas-Hernandez v. Sonolux Records, 370 F.3d 183, 195 (1st Cir. 2004)).

         Expert testimony is admissible only "if it is both relevant and reliable." Pipitone v. Biomatrix, Inc., 288 F.3d 239, 244 (5th Cir. 2002) (citing Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589 (1993)). The reliability prong requires that an expert opinion "be grounded in the methods and procedures of science."[4] Johnson v. Arkema, Inc., 685 F.3d 452, 459 (5th Cir. 2012) (internal quotation marks omitted) (quoting Curtis v. M&S Petroleum, Inc., 174 F.3d 661, 668 (5th Cir. 1999)). "This requires some objective, independent validation of the expert's methodology." Moore v. Ashland Chem. Inc., 151 F.3d 269, 276 (5th Cir. 1998) (en banc) (citing Daubert v. Merrell-Dow Pharmaceuticals, Inc., 43 F.3d 1311, 1316 (9th Cir. 1995) (on remand)). "The relevance prong requires the proponent to demonstrate that the expert's 'reasoning or methodology can be properly applied to the facts in issue.'" United States v. Kuhrt, 788 F.3d 403, 420 (5th Cir. 2015) (quoting Curtis, 174 F.3d at 668).

         The appellants advance two basic arguments attacking the reliability of Rubin's expert opinion. First, they argue that his opinion-particularly his A/E analysis-was not based on recognized methodologies that "had been tested, subjected to peer review and publication, or generally accepted by the life settlement provider industry." Second, the appellants argue that Rubin's analysis relies on data from both viatical and life settlements, thereby "skew[ing] the results in 'favor' of the viatical policies that went long, " and preventing him from offering a reliable evaluation of life-settlement LEs alone.

         As to the recognition of Rubin's methodology, the lack of scientific consensus or peer review does not necessarily render expert testimony unreliable. Pipitone, 288 F.3d at 246. In Daubert, on remand from the Supreme Court, the Ninth Circuit held that an expert may satisfy the reliability prong by:

explain[ing] precisely how they went about reaching their conclusions and point to some objective source-a learned treatise, the policy statement of a professional association, a published article in a reputable scientific journal or the like-to show that they have followed the scientific method, as it is practiced by (at least) a recognized minority of scientists in their field.

43 F.3d at 1319.[5]

         Here, Rubin's report explains his different analyses in detail, and he has indicated that his analysis was governed by the ASB. The record includes an ASB document, a May 2013 "Exposure Draft" of a document titled, "Proposed Actuarial Standard of Practice: Life Settlements Mortality." This proposed standard of practice was subsequently adopted by the ASB with a few changes. See Actuarial Standards Bd., Actuarial Standard of Practice No. 48: Life Settlements Mortality ("ASOP 48"), at iv-v, available at[6] Rubin's A/E analysis appears consistent with the recommendations contained in ASOP 48.

         The appellants point to the ASB's May 2013 Exposure Draft, not to point out any discrepancies between Rubin's analyses and the ASB's then-proposed standard of practice, but to support their proposition that there were "no specific guidelines or practices for calculating A/E results in the life settlement industry." The appellants fail to recognize, however, that the ASB created the standard of practice for the purpose of "provid[ing] guidance to actuaries . . . evaluating mortality experience associated with life settlements." ASOP 48, at 1. This document is the kind of objective source referenced in Daubert, and it offers the opportunity to evaluate Rubin's analyses against a benchmark of an objective body's guidelines. See 43 F.3d at 1319.

         Next, as to the appellants' argument that Rubin's analysis did not isolate the data relating to life settlements, Rubin clearly distinguishes between life settlements and viaticals in a number of places in his report and testimony. Rubin's report shows an analysis of A/E performance ratios and calibrated life expectancies for life settlements only. At trial, he also testified regarding the A/E ratio for life settlements only, as well as the average LPHI LE for life settlements. The appellants' challenge to Rubin's opinion as to LPHI's LEs for life settlements is therefore unfounded.

         Accordingly, we find that the district court did not abuse its discretion in finding Rubin's opinion sufficiently reliable to be admitted. To the extent the appellants wish to dispute Rubin's conclusions, they had ample opportunity to cross-examine Rubin at trial and to introduce contrary evidence. See Daubert, 509 U.S. at 596 ("Vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.").

         Turning to the relevance prong, the appellants argue that Rubin's expert opinion was irrelevant because he conducted a "hindsight, results-oriented analysis" without examining Cassidy's methodology. Citing Turnbow v. Life Partners, Inc., 2013 U.S. Dist. LEXIS 97275 (N.D. Tex. July 9, 2013), the appellants argue that Rubin's analyses were not probative of the reasonableness of Cassidy's LEs and were therefore not relevant to the issues presented in this case. The SEC responds that Rubin's opinion is relevant to the issues involved in this case: whether LPHI's LEs were materially and systematically short and whether LPHI, Pardo, and Peden knew that they were so. The SEC argues that Turnbow is inapposite because the relevant issue there was whether LPHI "breached its fiduciary and/or contractual duties by using estimates produced by Dr. Cassidy, " and answering that question "require[d] an examination of the reasonableness of Dr. Cassidy's methods, not an ex post facto analysis of the accuracy of Dr. Cassidy's results." 2013 U.S. Dist. LEXIS 97275, at *23. We agree with the SEC on these points: the SEC's theory of the case at trial was that LPHI misrepresented the known fact that its LEs were short as an unmaterialized contingent risk. Whether Cassidy's methodology was "reasonable" at the time is peripheral under this theory. Rubin's ...

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