I previously authored two negative articles about Life Partners Holdings (NASDAQ:LPHI) for Seeking Alpha, and I believe the stock is grossly overpriced at $2.36 per share. I am still convinced the stock will eventually trade at $0.25 per share or lower, particularly after the Aug. 15 complaint filed by Texas Attorney General Greg Abbott, who believes LPHI is in a "dire financial situation." The state of Texas asked for a receiver to be appointed for the firm, as well as a temporary restraining order preventing the firm from conducting further business.
On Aug. 15, District Court Judge Orlinda Naranjo agreed to restrain the two top executives, Brian D. Pardo and R. Scott Peden, Esq., from dissipating company assets and destroying any financial records. Abbott believes the company may run out of operating capital within two months.
LPHI is facing numerous class action lawsuits detailed in my first Seeking Alpha article, and one filed in early January from the Securities Exchange Commission. These suits allege, among other things, fraud and stock fraud emanating from questionable life expectancies used to value fractional interests in life insurance policies sold to retail investors. The company is accused of purchasing life insurance policies for clients using industry accepted life expectancies to help value the policies, and then selling the same policies to investors at inflated prices using a substantially lower life expectancy.
Despite these lawsuits, and despite the firm having negative cash flow from operations in recent quarters, the company continues to pay a large dividend with over half of it going to a Pardo Family Trust domiciled in Gibraltar. It is easy to see why Abbott wants restrain company executives from dissipating any more assets, preventing them from using the cash for personal gain.
How fast is LPHI losing money? The most recent 10-Q shows the company's cash and cash equivalents at $12.7 million. After subtracting out the recent quarterly dividend, the company has $10.9 million left before operating losses that now include an increasing amount of legal fees. Note that the cash was bolstered in the previous quarter due to the sale of assets the company deemed "non-essential." The company's cash is substantially down from the past year's 10-K, which showed the Feb. 28, 2011, cash and cash equivalents at $27.6 million. LPHI has seen its cash position drop significantly over the past 18 months, starting with an SEC investigation. Any one of the class action suits against the company, if successful, could easily wipe out its entire cash position.
The state of Texas complaint seems to contradict Pardo's contention in an Aug. 16, 2012, press release that LPHI's "financial ratios are solid." During the past several quarters the company has been losing approximately $1.8 million per quarter, which LPHI deems "manageable" without threatening its ability to operate as a going concern. I believe the state of Texas is looking at more than the current cash, noting in the complaint that the company sold 3,879 policies to 29,000 investors, of which 3,152 policies are now beyond their life expectancy. This means additional money will have to be paid by investors and LPHI (the company owns an investment in policies they repurchased from investors as part of a settlement with the state of Colorado) to prevent the policies from lapsing.
Will the Texas State Securities Board be successful in its attempt to stop LPHI from selling fractional life insurance policies to the public with a temporary injunction? The court will determine that. The state has listed the life expectancy provider (a Reno cardiologist with no previous actuarial experience) and current and previous custodians along with LPHI as defendants. Interestingly, former CFO David M. Martin is the first person listed in the state's Motion for Expedited Discovery as a witness for deposition. Martin resigned unexpectedly last month, and it is currently unknown if he is cooperating with regulators or has simply sought other employment.
Before the recent complaint, LPHI remained untouched by Texas regulators. The company still claims it is not selling securities, and can't be regulated in traditional ways. The Texas Department of Insurance, to the best of my knowledge, has never gone after LPHI or its licensees who sold the allegedly fraudulent life settlement investments. Interestingly, Pardo did lend his personal jet aircraft -- later described as "leased" -- to Texas governor and (then) presidential candidate Rick Perry. In an email to the Wall Street Journal, Pardo stated, "I did not discuss the SEC investigation with the governor, to the best of my recollection."
What should LPHI investors do now? As I wrote in my first article about the stock, investors should sell or go short assuming they understand the risks of short selling. I believe the stock is no longer a dividend play. State regulators contend the quarterly dividend will enrich Pardo and/or his trust by $900,000 at a time when the company is in a "dire financial situation." It seems to me that paying the dividend is not in the best interests of the shareholders, and even if the state of Texas is unsuccessful in its suit the dividend will cease due to the bad publicity. Therefore, dividend holders should sell. I also believe the current TSSB lawsuit, combined with the SEC lawsuit and multiple class action suits, will quickly drain the company of its current cash position. The publicity of these suits has already diminished sales and will continue to do so. LPHI may also implode from the policies it sold to the investing public since so many have now exceeded their life expectancy. Finally, the Texas State Securities Board may get its injunction, immediately shutting down sales for LPHI.
In my first article, I boldly predicted a $0.25 share price for LPHI by July 2012. I was clearly wrong, although the stock did drop to below $2.25 per share. If Texas Attorney General Greg Abbott can obtain an injunction, I may only be a month or two late with my $0.25 prediction.
Disclosure: I am short LPHI.