Avoiding Bad Management

Life Partners Holdings (Nasdaq: LPHI  ) has had a rough go of it lately. Late last year, The Wall Street Journal took aim at the company and accused it of misleading customers. The company's business is selling life insurance policies on one person to somebody else so that when party one -- pardon the French -- croaks, party two gets the insurance payout. Let's ignore the ick factor of that for now.

When somebody is considering investing in somebody else's life insurance policy, a key consideration is how long that person is expected to live. The longer their ticker keeps on a-tickin', the longer the investor has to wait for the payout and has to continue paying premiums on the policy.

Life Partners provides life expectancies when it brokers these deals for investors and uses those expectancies to boast the expected returns for the policy. But those expectancies haven't exactly panned out. According to The Journal:

In 2002, for instance, Life Partners brokered investments in 297 life policies. Actuaries say if life-expectancy calculations on a group of people are well done, half should die by their projected dates. But in 95% of these policies, the insured was still alive at the end of the life expectancy the company supplied to investors.

Since then, the company has decided to seriously ratchet down the returns expectations that it uses in its sales pitch. The company has also revealed that it's received a "Wells notice" from the SEC, which recommends bringing civil action against two Life Partners' executives. The stock has reacted as you might expect -- after trading above $18 in December of last year, it can now be had for $4.40.

Time to jump on it?
Considering the stock is now trading at a head-scratching 2.9 times trailing earnings, some investors' mouths may be watering. I'm not one of them.

Judging a company's management is one of the tougher tasks that an investor faces. If true, the allegations that Life Partners faces paint a pretty ugly picture about the management team. But if the management team was looking for a way to dig a further hole for itself in the eyes of investors, it may have found a way.

You see, in investing, sometimes it's as much about how a management teams says something as it is about what it says.

Yesterday, Life Partners filed a form NT 10-K. Besides the direct meaning of this filing -- that a company's annual report will be delayed -- the NT 10-K is typically a pretty unremarkable filing. In Life Partners' case, though, they buried their preliminary outlook for the just-finished fiscal year in the filing -- an outlook at includes a 17% drop in revenue and a 22% decline in net income. Considering the first nine months of the year showed a mere 3% decrease in net income, this implies a horrific fourth quarter for the company.

For some reason, though, management didn't seem to think that this information warranted a press release. What does the company think is more worthy of press-release status? On May 4 it announced its quarterly dividend and on March 15 it posted a note from the company's Chairman soapboxing about the evils of short-selling.

Was the company trying to hide the preliminary results from investors? I can't say yea or nay on that, but I can say that they were far from transparent.

Like I said, sometimes, it's all about how a management team says something, and yesterday's "release" from Life Partners says an awful lot.

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 Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2011, at 4:16 PM, antislapp1 wrote:

    How about a CEO who keeps his shares offshore in Gibraltar?

    How about paying a dividend of $0.20 (with have going to the CEO who owns 51% of the shares) for the quarter when earning before impairments won’t be that high?

    How about a CEO that promises the fractional investors will receive “well above market returns” and “double digit” returns (see: http://www.youtube.com/watch?v=AUPvSccaWrM and http://www.youtube.com/watch?v=RK73RB2QEhY ?

    How about a company that didn’t announce a SEC investigation for several months, and only did so after a front page Wall Street Journal investigative report?

    How about a CEO whose company doesn’t announce material events on a regular basis.

    How about a CEO whose company's investor relations department won’t respond to requests?

  • Report this Comment On May 18, 2011, at 8:22 PM, neamakri wrote:

    I bought (LPHI) a couple of weeks ago. Since then it dropped over 20%. Ouch! Thanks for clearing that up.

    Since 95% of their policies are still active past the "expiration" date, that means they fudged the numbers 75%-80% to sell their wares. What a bunch of liars...must be ex-bankers.

    I am in deep enough now that I will just wait out the crap storm. Thank goodness for being diversified.

    Keep writing informative articles. Thank you.

  • Report this Comment On May 19, 2011, at 12:02 PM, mikecoursey wrote:

    I bought some shares at $7.23 the day before the issuance of the Wells Notice. Mostly I just looked at the financials without really digging too much into the history of the company or the news surrounding it. If I had I would have stayed well clear of this "value trap".

    Lesson learned: Read any news articles available at least 1 year prior to the date of proposed purchase for relevance to the current price and finacial situation of the company.

  • Report this Comment On May 20, 2011, at 7:34 PM, hodedofome wrote:

    LPHI avoided regulation by making a large donation to Nancy Pelosi's campaign. The CEO's previous company ended in controversy and SEC investigations. I sold my LPHI stock literally 2 weeks before the first SEC allegations came out. I was lucky. In these kind of scenarios, investors need to SELL FIRST, ASK QUESTIONS LATER. Don't risk your money on stuff like this, you might as well buy a chinese reverse merger. Or give it to charity. Either way you aren't gonna see it ever again...

  • Report this Comment On May 20, 2011, at 9:02 PM, coyotebill182 wrote:

    Here's something recently sent to me as an investor in certain LPI life settlements. Had I known the audacity of management, I would not have invested and will likley not be investing any more in the future. The argument that the SEC doesn't have authority over LPI appears specious at best, materially false information at worst, especially from a public company in the United States of America. I'm not sure how or why either of these guys thought it would be a good idea to snub their noses at the SEC. Enjoy...

    "Since the SEC started its non-public inquiry of LPHI in 2010, LPHI has fully cooperated and supplied the SEC investigators with a terabyte of information about every nook and cranny of the operation, and after many months of prodding, poking, and turning over every rock, the findings and recommendations of the local field office of the SEC are in. The only recommendation of the local field office, after all of that, is that a civil injunctive action be initiated against LPHI, and Brian Pardo and R. Scott Peden, two directors and executive officers, apparently regarding life expectancy calculations.

    There are at least two problems with the anticipated recommendation of the local field office: 1) LPHI does not deal in life settlements, but owns another company (LPI) which is not subject to the jurisdiction of the SEC that does; and, 2) since Brian Pardo and R. Scott Peden are executive officers and directors of LPHI, the subject of the “investigation”, and LPHI does not deal in life settlements, what can they be enjoined from doing regarding life expectancy calculations of another company?

    Additionally, it is commonly understood that life expectancy calculations are estimates, and that precise calculation of life expectancies is impossible. Therefore, precise life expectancies are unknown and unknowable, by anyone, and to hold a person or entity responsible for knowledge of the unknown and unknowable and for the disclosure thereof defies logic.

    This is only a recommendation, and LPHI, Pardo and Peden will be able to respond to the recommendation before the Securites and Exchange Commission makes any decisions concerning any further action, if any, and be assured, LPHI, Pardo and Peden will respond.

    For the uninitiated, an injunction is an order from a court of competent jurisdiction forbidding a person or entity from doing some act or forbidding the continuation of that action by that person or entity, and for which there is no adequate remedy at law. Boiled down, don’t do it, and if you are doing it, stop it.

    Just for a frame of reference, a terabyte could hold 1,000 copies of the Encyclopedia Britannica, each copy of which contains more than 30,000 pages. After having the equivalent of 30,000,000 pages of documents within which to find the proverbial “smoking gun”, this is where we are... a broken water pistol."

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