Life Partners Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of financial services company Life Partners Holdings (Nasdaq: LPHI  ) were showing a definite lack of life today as they slid as much as 16% in intraday trading on heavier-than-average volume.

So what: Earlier this year, Life Partners revealed that it was under investigation by the Securities and Exchange Commission and, based on a filing from the company today, the results don't look good. Specifically, the company said that it had received a Wells notice from the SEC that recommended civil action against CEO Brian Pardo and general counsel Scott Peden related to the company's disclosures about the life expectancies of the settlors of the insurance policies it was brokering.

Now what: Life Partners sells its clients the rights to life-insurance settlements and the longer the insured lives, the lower the return for the clients who purchased the rights. At issue here is whether Life Partners was intentionally understating life expectancies to be able to show higher returns to potential clients and thereby increase sales. In its filing, the company emphasized that the Wells notice is "neither a formal allegation nor a finding of wrongdoing" and said that it will present its side of the story to try to avoid an enforcement action.

But for investors, this whole crackdown may be bad news whether or not an enforcement action is handed down. If the company has to start taking a more conservative view of settlors' life expectancies, it could continue to put the brakes on the company's formerly snappy growth rate.

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Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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  • Report this Comment On May 13, 2011, at 8:07 PM, antislapp1 wrote:

    Matt, you don't understand how bad this is. This won't just change the growth rate. It will bankrupt the company.

    LPI is a one trick pony stock. They have one fractional product to sell to accredited investors through a MLM-styled sales franchise. Now the salespeople have to disclose the State of Colorado fraud settlement, the stock fraud suits filed in US District Court, the RICO suits, the registration suit, the fiduciary suit (alledging two sets of books), & the SEC Wells letter. HOW MANY FRACTIONAL INVESTORS WILL INVEST WITH ALL THIS DISCLOSURE?

    I'll give you an answer: Sales will be down going forward by 80% -90%. This means they maybe earn $0.30 for the next fiscal year. With no growth likely, you can put a 5x multiple and get a value of $1.50 for the stock.

    LPI is in a Catch-22. They cannot change to another LE provider without admitting that the old provider was off by 50%. If they change providers now, they will easily lose their many lawsuits. They are stuck.

    Do the dividend buyers of the stock understand this? I seriously doubt it. At current levels, this stock is a short.

    Disclosure: I am very short the name.

  • Report this Comment On May 13, 2011, at 8:35 PM, antislapp1 wrote:

    Part II:

    From the 8K: "On May 9, 2011, we received a "Wells notice" from the staff of the SEC stating that the staff will recommend that the SEC bring a civil injunctive action against us... "

    Matt, an "injuctive action" is an extraordinary remedy likely sought after as means stop what the SEC believes is an injustice. I am surprised the SEC did not go after LPI based upon the Third Prong of Howey, but I suppose an injuctive action is much quicker.

    If the Dr. Cassidy LEs are stopped, LPI has to use other providers that will extend mortality by approximately 50%. This will prevent them from advertising "double digit" and "above market returns" (see: http://www.youtube.com/watch?v=AUPvSccaWrM). It will also lead to a huge drop in their margins since policies with longer LEs are worth less.

    Again, I believe their long term prospects are doomed and expect a sales drop of at least 80% for the next fiscal year.

    Disclosure: I am very short the name.

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