SEC v. Life Partners Holdings, Inc. , 854 F.3d 765 ( 2017 )

Case: 14-51353 Document: 00513963948 Page: 1 Date Filed: 04/21/2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fif h Circuit
No. 14-51353 FILED
April 21, 2017
Lyle W. Cayce
SECURITIES AND EXCHANGE COMMISSION, Clerk
Plaintiff - Appellee Cross - Appellant
v.
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.
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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.
I
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.
1 LPI’s activity constituted LPHI’s entire business activity. For purposes of this
appeal, there is no meaningful difference between the two entities; therefore, this opinion
refers to both entities as LPHI, unless otherwise noted.
2 A viatical settlement is the sale of an existing life insurance policy on the life of an
individual with a terminal illness. A life settlement is the sale of an existing life insurance
policy on the life of an individual who is at least sixty-five years old and has a life expectancy
of ten years or less but does not have a terminal illness.
2
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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
3
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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
4
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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.
3 The defendants had moved to exclude Rubin’s testimony as unreliable and
irrelevant, but the district court ultimately denied their motion.
5
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II
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.
A
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.
1
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
6
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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.
7
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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.,
4 In Daubert, the Supreme Court provided “an illustrative, but not an exhaustive, list
of factors that courts may use in evaluating the reliability of expert testimony:” (1) whether
the theory or technique has been tested; (2) whether the theory or technique has been
subjected to peer review; (3) the known or potential rate of error of the method used and the
existence and maintenance of standards controlling the technique’s operation; and (4)
whether the theory or method has been generally accepted by the scientific community.
Pipitone, 288 F.3d at 244; see also Curtis v. M&S Petroleum, Inc., 174 F.3d 661, 669 (5th Cir.
1999).
8
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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.
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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
http://goo.gl/i63ygl. 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
5 As noted above, we have adopted the Ninth Circuit’s requirement in Daubert of an
objective, independent validation of the expert’s methodology. See Moore, 151 F.3d at 276
(citing Daubert, 43 F.3d at 1316).
6 We take judicial notice of the ASB’s adoption of ASOP 48. See United States v.
Herrera-Ochoa, 245 F.3d 495, 501 (5th Cir. 2001) (an appellate court may take judicial notice
of facts, even if such facts were not noticed by the trial court).
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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.”
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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 opinion was certainly probative of the SEC’s allegations that
the LEs were materially short, which is at the heart of this case. Thus, we find
no abuse of discretion in the district court’s determination that Rubin’s opinion
was relevant, and, overall, we find no abuse of discretion in the admission of
Rubin’s opinion.
2
The appellants argue that there was insufficient evidence to support the
jury’s verdict that LPHI violated the reporting requirements of section 13(a) of
the Securities Exchange Act and that Pardo and Peden aided and abetted such
violation. The appellants therefore challenge the district court’s denial of
judgment as a matter of law as to this claim.
We review a district court’s denial of a judgment as a matter of law de
novo, applying the same standard the district court applied. MM Steel, L.P. v.
JSW Steel (USA) Inc., 806 F.3d 835, 843 (5th Cir. 2015). Courts may grant
judgments as a matter of law only if the “facts and inferences point ‘so strongly
and overwhelmingly in the movant’s favor that reasonable jurors could not
reach a contrary conclusion.’” Id. (quoting EEOC v. Boh Bros. Constr. Co., 731
F.3d 444, 451 (5th Cir. 2013)). We can reverse a denial of judgment as a matter
of law only if “the jury’s factual findings are not supported by substantial
evidence or if the legal conclusions implied from the jury’s verdict cannot in
law be supported by those findings.” Am. Home Assurance Co. v. United Space
All., LLC, 378 F.3d 482, 486–87 (5th Cir. 2004). “Substantial evidence is
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something more than ‘a scintilla of evidence.’” MM Steel, 806 F.3d at 843
(Hunnicutt v. Wright, 986 F.2d 119, 122 (5th Cir. 1993)).
Section 13(a) and Rules 13a-1 and 13a-13 require issuers of registered
securities to file with the SEC annual reports on Form 10-K and quarterly
reports on Form 10-Q. 15 U.S.C. § 78m(a); 17 C.F.R. §§ 240.13a-1, 240.13a-13.
Rule 12b-20 requires the issuer to disclose any material information as may be
necessary to ensure that the reports are not misleading. 17 C.F.R.
§ 240.12b-20. Here, the SEC alleged that, from January 2007 through
November 2011, LPHI and the appellants “misrepresented, failed to disclose,
and/or made misleading omissions” in public filing with the SEC “regarding:
(i) a material risk to the Company’s business, (ii) a material trend impacting
the Company’s revenues, and (iii) the Company’s revenue recognition policies.”
Specifically, as noted above, the SEC’s primary theory at trial was that LPHI
misrepresented the allegedly known fact that its LEs were short as an
unmaterialized contingent risk. 7
Section 20(e) of the Securities Exchange Act permits the SEC to bring an
action against “any person that knowingly provides substantial assistance” to
a primary violator of the securities laws. 8 15 U.S.C. § 78t(e) (2006). To prove
a violation of this section, the SEC must prove: (1) a primary violation of the
7 In its brief on appeal, the SEC also briefly argues that the jury could have concluded
that LPHI violated section 13(a) by misrepresenting the source of its LEs in claiming that “to
foster the integrity of LPHI’s pricing systems, [it used] both in-house and outside experts,
including medical doctors and published actuarial data.” However, beyond a conclusory
assertion, the SEC makes no argument and cites no authority to establish that any such
misrepresentation would have been material. This argument is therefore forfeited. See, e.g.,
L & A Contracting Co. v. S. Concrete Servs., Inc., 17 F.3d 106, 113 (5th Cir. 1994) (deeming a
party’s challenge abandoned for being inadequately briefed).
8 The Dodd-Frank Act of 2010 amended Section 20(e) to add the words “or recklessly”
after “knowingly.” Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub.L. No.
111-203, 124 Stat. 1376, § 929O (codified at 15 U.S.C. § 78t(e)). In this case, the jury was
instructed on the pre-Dodd-Frank version.
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securities laws; (2) that the aider and abettor had knowledge of this violation
and of his or her role in furthering it; and (3) that the aider and abettor
knowingly provided substantial assistance in the commission of the primary
violation. See Abbott v. Equity Group, Inc., 2 F.3d 613, 621 (5th Cir. 1993); see
also SEC v. Goble, 682 F.3d 934, 947 (11th Cir. 2012); SEC v. Shanahan, 646
F.3d 536, 547 (8th Cir. 2011); SEC v. DiBella, 587 F.3d 553, 566 (2d Cir. 2009).
The appellants attack the jury’s findings as to the first two elements, i.e.,
that LPHI violated section 13(a) and the SEC’s rules thereunder by
misrepresenting the risk that its LEs were short and that the appellants knew
of this misrepresentation. First, as to the finding of a primary violation by
LPHI, the appellants argue that the SEC provided no competent evidence to
establish that LPHI’s LEs were short. And, the appellants contend, even if
LPHI’s LEs were short, this does not establish a misrepresentation. To
establish a misrepresentation, they imply, the SEC had to prove that
underestimated LEs actually harmed LPHI’s business. The appellants also
claim that there was no misrepresentation because LPHI priced its policies to
remain profitable even if the insured lived several years beyond his or her LE.
These arguments are meritless. Rubin’s testimony that LPHI’s LEs were
systematically and materially short was plainly sufficient for the jury to
conclude that this was the case. Moreover, in order to show that LPHI
misrepresented a material risk to its business, as the SEC alleged, the SEC
need not show that the relevant risk was actually realized. See SEC v. Recile,
10 F.3d 1093, 1098 n.16 (5th Cir. 1993) (“[M]ateriality is defined as what a
reasonable investor would consider important in making his investment
decision.”); SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985) (“[T]he
Commission is not required to prove that . . . the misrepresentations caused
any investor to lose money.”). Further, that LPHI’s policies remained
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profitable even when the insured lived past LE is irrelevant: when a policy
exceeded LE, purchasers were required to pay additional premiums to
maintain the policy and therefore received a lower rate of return; and LPHI
recognized in its filings with the SEC that underestimation of LEs posed a risk
to its business.
Second, the appellants argue that they had no knowledge of any violation
of section 13(a) by LPHI because they did not know during the relevant time
that the LEs LPHI used to facilitate its life settlements were short. However,
the record contains sufficient evidence to allow a reasonable fact finder to
conclude that the appellants knew that LPHI’s LEs were short.
Initially, there is evidence in the record tending to show that the
appellants knew that the LEs LPHI used in life settlement policies were short.
In August 2008, Mark Embry, the company’s chief information officer,
conducted an analysis of life settlement transactions completed by LPHI in
2004. Embry’s analysis showed that out of thirty-seven policies sold in 2004,
none had matured and twenty-one would exceed their LEs by the end of 2008.
Embry reported his findings to the appellants, noting that he does not “see any
trends or anomalies that indicate 2004 as an off year.” Pardo replied, “Mark,
this information is highly confidential and should not be distributed to anyone
beyond those copied.” According to Embry’s testimony, Pardo did not discuss
the email or report with him further. The appellants argue that Pardo’s
response to Embry indicated his concern that the data was not reliable;
however, the jury was entitled to discredit this contention and conclude that
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Pardo was aware that LPHI’s life-settlement LEs were short but wished to
conceal this information from the public. 9
Moreover, this direct evidence of the appellants’ knowledge of short life-
settlement LEs is fortified by additional indirect evidence from which the jury
could reasonably infer such knowledge. For instance, the record suggests the
appellants had actual knowledge that the LEs LPHI used in viatical policies
were short. In 2003, LPHI’s audit committee expressed concern over “the small
number of policies paying off during” the previous nine months and
recommended that the board discuss with management the possibility of
“obtaining an independent review” of LPHI’s “underwriting criteria.” Further,
in May 2007, the Colorado Securities Commissioner initiated an enforcement
action against LPI, alleging that viatical insureds outlived its LEs at a “high
frequency rate.” Lastly, Nina Piper, the company’s chief financial officer,
testified that she offered to “grade” Cassidy but Pardo told her not to do it.
Nevertheless, in November 2007, on her own initiative and against Pardo’s
prior instruction, Piper conducted an analysis of all life insurance policies
facilitated by LPHI from January 2002 through November 2007. According to
Piper, her analysis showed that only two percent of the insureds died within
Cassidy’s LEs. She testified that she informed the appellants of her findings;
Pardo turned away and appeared angry, and Peden later told her that they
9 Pardo testified that he had asked the company’s data department to check the data,
but the only evidence in the record that the data was rechecked is an analysis Embry
conducted in 2013, which according to Embry showed that his original analysis was wrong.
At trial, the SEC attempted to impeach Embry’s 2013 analysis, arguing that the document
containing the analysis was “misrepresentative,” but the district court disallowed the SEC’s
questioning, ruling that the document containing the analysis “speaks for itself.” Regardless
of the accuracy of Embry’s later analysis, however, the jury could have reasonably inferred
that his August 2008 analysis alerted Pardo and Peden to problems with LPHI’s life-
settlement LEs.
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have “fixed the problem” by moving the company from viaticals to life
settlements. Though it may be plausible that the appellants believed that the
problem with Cassidy’s LEs was isolated to viaticals, the jury reasonably could
have inferred that the appellants knew that Cassidy’s LEs were simply not
reliable.
Moreover, record evidence suggests that LPHI and the appellants could
easily have learned that LPHI’s life-settlement LEs were short if they had
assessed Cassidy’s LEs for accuracy, but there is evidence suggesting that they
consciously chose not to do so despite having concerns. The record shows that
LPHI used a proprietary system called “LifeApps,” which stored all the
information regarding its life insurance policies, including Cassidy’s LEs and
the date of maturity, if and when available. LifeApps allowed LPHI to
generate reports on the maturities of policies relative to LEs. And, as
evidenced by his August 2008 analysis, Embry actually generated such reports
using LifeApps. According to Rubin, the SEC’s expert witness, in 2008, a
simple analysis of LPHI’s data would have made it “crystal clear they have a
problem.” As mentioned above, Piper testified that she offered to “grade”
Cassidy but Pardo told her not to do so. Although one of the defendants’
attorneys suggested, in cross-examining Piper, that Pardo simply thought
Piper had “more important things to do,” the jury could have reasonably
inferred that Pardo wished to avoid assessments of Cassidy’s LEs because he
knew that such assessments would not be favorable.
Around November 2008, Peden became aware that several companies
that provided actuarial LEs lengthened their LEs after concluding that their
current calculations were producing short LEs. That month, Peden emailed
himself a reminder to “call [C]assidy on accuracy.” But Peden never called
Cassidy to discuss whether the changes other LE providers have made affected
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his LEs in any way. Nevertheless, when an investment advisor asked Peden
if the changes another LE provider made to its methodology affected LPHI,
Peden replied that these change had no effect on LPHI “because our medical
consultant uses a different methodology.” From these facts, too, the jury
reasonably could have inferred that the appellants consciously chose not to
evaluate Cassidy’s LEs, even though they had concerns regarding their
accuracy.
Overall, there is more than a scintilla of evidence in the record that LPHI
and the appellants knew that LPHI’s life-settlement LEs were materially
short. Coupled with the evidence that those LEs were, in fact, systematically
and materially short, and that LPHI misrepresented this known fact as a mere
potential risk, the evidence is sufficient to support the jury verdict that the
appellants aided and abetted LPHI’s violation of section 13(a) and Rules
thereunder. Accordingly, we affirm the district court’s refusal to set aside the
jury verdict on this issue.
B
We now turn to consider the appellants’ appeal of the district court’s
judgment. They challenge the court’s (1) imposition of second-tier civil
penalties, (2) calculation of the number of violations to which they were held
responsible, and (3) issuance of injunctions against them. We discuss each of
these challenges in turn.
1
We review the district court’s imposition of civil penalties for an abuse of
discretion. SEC v. United Energy Partners, Inc., 88 Fed. App’x. 744, 747 (5th
Cir. 2004) (citing R&W Tech. Serv. Ltd. v. CFTC, 205 F.3d 165, 177 (5th Cir.
2000)). The Securities Exchange Act provides a three-tiered, escalating
structure for assessing civil penalties. See 15 U.S.C. § 78u(d). As relevant
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here, first-tier penalties for natural persons are capped at either $6,500 or
$7,500 for each violation, depending on the date of the relevant violation. See
15 U.S.C. § 78u(d)(3)(B)(i); 17 C.F.R. §§ 201.1003-04. Also as relevant here,
second-tier penalties have a much higher cap, of $65,000 or §75,000, depending
on the date of the violations. See 15 U.S.C. § 78u(d)(3)(B)(ii); 17 C.F.R.
§§ 201.1003-04. Second-tier penalties may only be imposed for violations that
involve “fraud, deceit, manipulation, or deliberate or reckless disregard of a
regulatory requirement.” 15 U.S.C. § 78u(d)(3)(B)(ii). The third tier is not
implicated in this case.
Based upon the jury’s verdict on the appellants’ aiding and abetting of
LPHI’s violation of section 13(a) and rules thereunder, the district court
assessed second-tier civil penalties of $6,161,843 against Pardo and $2,000,000
against Peden, finding that their conduct was, at the very least, reckless. The
appellants argue that the district court erred in imposing second-tier penalties
because the jury verdict did not establish any “fraud, deceit, manipulation, or
deliberate or reckless disregard of a regulatory requirement” on their part, as
the statute requires. 15 U.S.C. § 78u(d)(3)(B)(ii). They insist that, pursuant
to the Seventh Amendment, only the jury can find the predicate facts for the
imposition of second-tier violations. Citing Tull v. United States, 481 U.S. 412
(1987), the SEC argues in response that a jury need only determine the
defendant’s liability and that the actual amount of civil penalties is left to the
discretion of the district court.
In Tull, the Supreme Court held that the Seventh Amendment grants a
right to a jury trial on liability for civil penalties under the Clean Water Act,
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33 U.S.C. §§ 1251, 1319(d), 10 Tull, 481 U.S. at 425, but determined that
Congress could constitutionally authorize judges to assess the amount of civil
penalties, see Tull, 481 U.S. at 426–27. Courts of appeals have since applied
Tull in the context of civil penalties under the Securities Exchange Act as well.
See SEC v. Capital Sols. Monthly Income Fund, LP, 818 F.3d 346, 354–55 (8th
Cir. 2016) (defendant in securities action was entitled to a jury trial on liability
but not on the amount of civil penalties); SEC v. Lipson, 278 F.3d 656, 662 (7th
Cir. 2002) (same). At the remedies stage, trial judges may make factual
findings and rely on such findings in assessing the amount of civil penalties so
long as the court’s findings do not conflict with the jury’s findings as to liability.
See Capital Sols. Monthly Income Fund, 818 F.3d at 354–55 (affirming civil
penalties judgment because the defendant “has not shown how the district
court’s factual findings conflict with the jury’s findings”); Lipson, 278 F.3d at
at 662 (“[I]t was for the judge to decide, consistent with the jury’s finding of
liability, . . . the amount of the civil penalty.”).
The appellants claim that the district court’s finding that their conduct
was reckless conflicts with the jury’s finding that they were not liable for
section 10(b) violations. Rather than conflict with the jury’s verdict, however,
the district court’s finding of recklessness was required by it. As we noted
above, to find that the appellants aided and abetted LPHI’s violations of section
13(a), the jury had to find that they had knowledge of LPHI’s violation and of
their role in furthering it. See Abbott v. Equity Group, Inc., 2 F.3d 613, 621
(5th Cir. 1993). And, as previously explained, the SEC’s theory at trial was
that LPHI violated section 13(a) by misrepresenting the known fact that its
10 The Clean Water Act provided that violators of certain sections of the Act “shall be
subject to a civil penalty not to exceed $10,000 per day” during the period of the violation.
Tull, 481 U.S. at 414.
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LEs were short as a contingent risk. The appellants were LPHI’s top officers
and the ones who created, signed, and certified filings containing the relevant
misrepresentations. If the appellants had knowledge of LPHI’s violations and
of their role in furthering them, as the jury found, they also necessarily
exhibited “deliberate or reckless disregard of a regulatory requirement.” 15
U.S.C. § 78u(d)(3)(B)(ii). Accordingly, we affirm the district court’s imposition
of second-tier penalties.
2
In assessing the amount of civil penalties, the district court determined
that Pardo was responsible for sixty-eight individual violations and that Peden
was responsible for eighty-five violations. The district court reached these
numbers by multiplying the number of statutory and regulatory provisions the
appellants had violated by the number of LPHI’s false filings with the SEC.
The appellants raise multiple challenges to the district court’s
calculations. First, they argue that the jury verdict does not establish that it
found more than a single violation in a single public filing. The appellants
highlight that the jury was only asked to decide whether LPHI (and therefore
the appellants) committed “one or more violations of section 13(a).” Thus, they
contend that the district court could only have imposed penalties for a single
violation. 11
As we have explained in discussing the district court’s imposition of
second-tier penalties, the appellants had no Seventh Amendment right to a
jury trial at the remedies stage of this securities action, and the court acted
within its power to make factual findings not in conflict with the jury’s verdict.
11The appellants make this argument notwithstanding the fact that they conceded in
response to the SEC’s requested penalties, below, that the district court could find as many
as seventeen violations.
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See Tull, 481 U.S. at 425; Sols. Monthly Income Fund, 818 F.3d at 354–55;
Lipson, 278 F.3d at 662. Thus, the jury’s verdict, which established at least
one violation of section 13(a) by the defendants, did not preclude a finding of
multiple violations by the district court.
Next, the appellants contend that the district court abused its discretion
in calculating the total number of violations for which each appellant was
responsible by multiplying the number of false filings with the SEC by the
number of statutes and rules those filings violated. They claim that section
13(a) and the relevant rules thereunder cannot give rise to “discrete” violations
because they are interdependent.
However, the appellants did not properly object to this calculation below.
In response to the SEC’s contention below that Pardo and Peden were
responsible for eighty-five and sixty-eight violations, respectively, the
appellants argued, “In essence, . . . there is only one primary violation: the
failure to disclose information in SEC reports. At most, then, Defendants could
be charged with no more than 17 violations.” This somewhat opaque objection
to the application of the SEC’s suggested calculation in the appellants’ case
was not sufficient to put the district court on notice of the appellants’ broader
claim on appeal that the district court’s methodology was legally erroneous as
a general matter. See United States v. Vontsteen, 950 F.2d 1086, 1091 (5th Cir.
1992) (holding that general plea for leniency was not sufficient to put the
district court on notice of the defendant’s particular claim on appeal).
We review unpreserved challenges in civil cases for plain error. E.g.,
Crawford v. Falcon Drilling Co., 131 F.3d 1120, 1123 (5th Cir. 1997). To satisfy
the plain-error standard, the appellants must show that (1) there was error;
(2) the error was clear and obvious; (3) the error affected their substantial
rights; and (4) the error seriously affects the fairness, integrity, or public
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reputation of judicial proceedings. See Puckett v. United States, 556 U.S. 129,
135 (2009). Only if those four prongs are satisfied does this court have
discretion to remedy the error. See id. We find no occasion to exercise such
discretion in this case, as any error in the district court’s use of the challenged
methodology was not plain.
The relevant civil-penalty provision of the Securities Exchange Act
provides maximum penalty amounts “for each violation,” 15 U.S.C.
§ 78u(d)(3)(B), but the term “violation” is not defined in the statute. Neither
below nor on appeal have the appellants pointed to any authority that stands
for their position that section 13(a) and the SEC Rules thereunder cannot
establish discrete violations under § 78u. The appellants therefore have not
met their burden to establish a plain error. See United States v. Jackson, 549
F.3d 963, 978 (5th Cir. 2008) (a question of first impression cannot form the
basis for plain error); United States v. Hull, 160 F.3d 265, 272 (5th Cir. 1998)
(no plain error where proponent’s theory requires extension of precedent).
Nevertheless, the SEC concedes that section 13(a) cannot serve as the
basis for an independent violation in this case. It also concedes that the district
court’s calculation was flawed because it included purported violations of Rule
13a-1, which pertains to Form 10-Ks, in connection with Form 10-Qs and
purported violations of Rule 13a-13, which pertains to Form 10-Qs, in
connection with Form 10-Ks. In light of these concessions by the SEC, we
vacate the district court’s assessment of civil penalties against the appellants.
We remand the case specifically for recalculation of the number of violations
without the flaws conceded by the SEC and for reassessment of the amounts
of civil penalties imposed on the appellants.
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3
As part of its judgment, the district court granted injunctive relief,
enjoining the appellants from future violations of section 13(a) and from aiding
and abetting such violations through certain specified conduct. 12 The
appellants challenge these injunctions, arguing that there was no evidentiary
basis to support the need for them and that they are impermissibly broad.
We review the grant of a permanent injunction for abuse of discretion.
SEC v. Gann, 565 F.3d 932, 939 (5th Cir. 2009). A permanent injunction is
appropriate only if a “defendant’s past conduct gives rise to an inference that,
in light of present circumstances, there is a ‘“reasonable likelihood” of future
transgressions.’” Id. at 940 (quoting SEC v. Zale Corp., 650 F.2d 718, 720 (5th
Cir. 1981)). In deciding this issue, the court must consider “the (1)
egregiousness of the defendant’s conduct, (2) isolated or recurrent nature of the
violation, (3) degree of scienter, (4) sincerity of [the] defendant’s recognition of
his transgression, and (5) likelihood of the defendant’s job providing
opportunities for future violations.” Id. Applying these factors, the district
court determined that the appellants’ conduct was egregious, constituted a
knowing or reckless violation of the securities laws, and was recurrent in that
the appellants caused LPHI to file multiple misleading reports. The court also
recounted evidence that indicated the appellants’ indifference to proceedings
against them, in that they had taken no steps to correct obvious deficiencies in
the management of LPHI even after the trial.
12Specifically, the district court’s order restrains the appellants from “filing forms
with the Commission containing false statements of material fact or failing to include
material information that is necessary to make the statements not misleading” and from
“knowingly providing substantial assistance to an issuer that fails to file timely with the
Commission all accurate and complete information, documents, and reports required by the
rules and regulations prescribed by the Commission.”
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The appellants argue that the SEC presented no evidence establishing a
reasonable likelihood of future violations, noting that LPHI began using two
sets of LEs in March 2011 and that the SEC failed to prevail on the vast
majority of its claims below. The appellants’ arguments regarding this issue
are meritless. The cessation of the violations does not preclude a finding of
reasonable likelihood of future violations, as it does not establish a lack of
opportunities for future violations. Gann, 565 F.3d at 940. And the appellants
do not even address the district court’s determinations regarding scienter, the
recurrent nature of their violations, and their lack of remorse. Accordingly,
the district court did not abuse its discretion in concluding that there was a
reasonable likelihood of future violations by the appellants.
As to the substance of the injunctions, the appellants argue that they are
impermissible, overly broad, “obey-the-law” injunctions. Federal Rule of Civil
Procedure 65(d)(1) provides, “Every order granting an injunction . . . must set
the reasons why it was issued; state its terms specifically; and describe in
reasonable detail . . . the act or acts sought to be restrained or required.” Rule
65(d) therefore prohibits “general injunction[s] which in essence order[ ] a
defendant to obey the law.” Meyer v. Brown & Root Constr. Co., 661 F.2d 369,
373 (5th Cir. 1981).
The appellants make no attempt to address the language of the district
court’s injunctions and explain, in light of relevant authority, why this
language is overly broad. Accordingly, they have forfeited their argument in
this respect. See, e.g., L & A Contracting Co. v. S. Concrete Servs., Inc., 17 F.3d
106, 113 (5th Cir. 1994) (deeming a party’s challenge abandoned for inadequate
briefing). At any rate, the district court’s injunction is not overly broad.
“[I]njunctions are problematic when they order a defendant to obey the law but
do not simultaneously indicate what law the defendant needs to obey.” In re
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Rodriguez, 695 F.3d 360, 369 (5th Cir. 2012) (citing Meyer, 661 F.2d at 373).
They are not problematic when they order a defendant to obey a specific law.
See id. (citing Meyer, 661 F.2d at 373). The district court’s injunctions in this
case ordered the appellants to obey section 13(a) by refraining from specified
conduct. Accordingly, we affirm the district court’s injunctions.
III
We now reach the SEC’s cross-appeal, which challenges the district
court’s setting aside of the jury’s verdict as to section 17(a) as well as the court’s
refusal to order Pardo to make SOX reimbursements.
A
As part of its allegations at trial, the SEC claimed that the appellants
violated section 17(a) of the Securities Act. The SEC specifically alleged that,
in public filings with the SEC in January and February of 2007, the appellants
“misrepresented, failed to disclose, and/or made misleading omissions
regarding [LPHI’s] revenue recognition policy.” Following trial, the jury found
that LPHI and the appellants violated section 17(a). Ultimately, however, the
district court granted the appellants’ post-judgment motion for judgment as a
matter of law as to this claim and set aside the verdict, finding that there was
not “a single piece of evidence that support[ed] the jury’s conclusion that [the
appellants] violated Section 17 in January and February of 2007 by misleading
investors about LPHI’s revenue recognition practices.” The SEC moved for
reconsideration, pointing to a January 2007 quarterly report and asserting
that this public filing was sufficient to sustain the jury’s section 17(a) verdict,
but the district court denied the motion.
We review the district court’s grant of judgment as a matter of law de
novo, applying the same legal standards as the district court. Hurst v. Lee Cty.,
Miss., 764 F.3d 480, 483 (5th Cir. 2014). As previously explained, courts may
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grant judgments as a matter of law only if the “facts and inferences point ‘so
strongly and overwhelmingly in the movant’s favor that reasonable jurors
could not reach a contrary conclusion.’” MM Steel, L.P. v. JSW Steel (USA)
Inc., 806 F.3d 835, 843 (5th Cir. 2015) (quoting EEOC v. Boh Bros. Constr. Co.,
731 F.3d 444, 451 (5th Cir. 2013)). Judgment as a matter of law is appropriate
where “the jury’s factual findings are not supported by substantial evidence,”
Am. Home Assurance Co. v. United Space All., LLC, 378 F.3d 482, 486–87 (5th
Cir. 2004), which means “something more than ‘a scintilla of evidence,’” MM
Steel, 806 F.3d at 843 (quoting Hunnicutt v. Wright, 986 F.2d 119, 122 (5th Cir.
1993)). In reviewing the district court’s grant of judgment as a matter of law,
we consider all of the evidence in the light most favorable to the SEC, the non-
movant, drawing all factual inferences in its favor. Meadows v. SEC, 119 F.3d
1219, 1226 (5th Cir. 1997).
Section 17(a) provides in pertinent part:
It shall be unlawful for any person in the offer or sale of any
securities . . .
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement
of a material fact or any omission to state a material fact necessary
in order to make the statements made . . . not misleading, or
(3) to engage in any transaction, practice, or course of business
which operates or would operate as a fraud or deceit upon the
purchaser.
15 U.S.C. § 77q(a). Liability under section 17(a)(1) “attaches only upon a
showing of severe recklessness.” Meadows, 119 F.3d at 1226. However, a
showing of negligence is sufficient to establish liability under sections 17(a)(2)
and 17(a)(3). Id. at 1226 n.15.
On appeal, the SEC reurges that the January 2007 quarterly report was
sufficient to support the jury’s verdict. This quarterly report incorporated
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LPHI’s annual report for the prior fiscal year and advised that the quarterly
report “should be read in conjunction with the financial statements and the
summary of significant accounting policies and notes” in the annual report.
The SEC argues that this quarterly report included the same kind of
misleading information (or suffered from the same kind of misleading
omissions) as the other filings from 2007 through 2011 that formed the basis
for the jury’s section 13(a) verdict.
The appellants attempt to distinguish the January 2007 filing from the
other filings that supported the section 13(a) verdict based on its timing and
the implication for the appellants’ knowledge. According to the appellants,
even assuming that they knew that LPHI’s LEs were short in November 2011,
for instance, they may not have known that this was the case in January 2007.
However, as the appellants themselves stressed at oral argument, unlike
liability under section 17(a)(1), liability under section 17(a)(2) or 17(a)(3) does
not require proof of scienter. Thus, the jury properly could have found that the
appellants committed violations of section 17(a)(2) or 17(a)(3). 13 Consequently,
we conclude that that the jury’s verdict is supported by substantial evidence.
The record shows: well before 2007, the appellants knew that they had a
problem with viatical LEs; LPHI had the ability to easily assess the accuracy
of its LEs; Piper offered to “grade” Cassidy’s LEs, but Pardo instructed her not
to do so; and Rubin testified that by 2007 it was “becoming clear” that LPHI
had a problem with its life-settlement LEs. This is more than a scintilla of
evidence that the appellants negligently misrepresented the risk of
13Though the jury’s verdict form refers specifically to section 17(a)(1), the appellants
concede that this was a clerical error and that the jury’s finding pertained to section 17(a)
generally.
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underestimated LEs in its January 2007 quarterly report, which incorporated
LPHI’s prior annual report.
The appellants advance no other basis to set aside the jury’s section 17(a)
verdict. Accordingly, the jury’s verdict must stand. We therefore reverse the
district court’s grant of judgment as a matter of law as to section 17(a) and
remand for determination of appropriate remedies.
B
In 2011, LPHI restated its financial statements for fiscal years 2009 and
2010 because its prior quarterly and annual reports did not comply with
generally accepted accounting principles (GAAP). 14 The restatement
explained that LPHI’s Board of Directors, Audit Committee, and management
concluded that LPHI needed to restate its consolidated financial statements
for 2009, 2010, and the first three quarters of 2011, to properly state, inter alia,
investment in policies, which “had been incorrectly accounted for under
[GAAP].” Investment in policies refers to the value of life insurance policies in
LPHI’s own investment portfolio. 15 LPHI further stated that its restatement
of its consolidated financial reports was related, in part, to “impairment
expense for owned policies.” 16 Further explaining the adjustments for
impairment expense, the restatement reported:
14 Securities Exchange Act Rules 13a-1 and 13a-13 require issuers to file quarterly
and annual reports in prescribed forms, and the prescribed forms, in turn, require that
LPHI’s reports include financial statements that comply with GAAP. See SEC v. Jasper, 678
F.3d 1116, 1120 (9th Cir. 2012) (Forms 10-Q and 10-K require financial statements “prepared
in accordance with GAAP”); see also 17 C.F.R. § 210.4-01(a)(1) (GAAP noncompliant financial
statements filed with the SEC are presumptively misleading unless the SEC provides
otherwise).
15 LPHI began acquiring interests in life insurance policies for its own portfolio in
2005. By February 28, 2011, LPHI held interests in over 1,300 policies with an aggregate
face value of over $32,000,000.
16 “Impairment is an accounting principle that describes a permanent reduction in the
value of a company’s asset . . . . When testing for impairment, the total profit, cash flow or
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We improved the method by which we calculate impairment on
Investment in Policies. Impaired value is based on estimates of
life expectancy and the effect of that determination on future
premiums and the date of expected receipt of proceeds from policy
maturities. We improved our methodology for estimating life
expectancies by adding more actuarial data, and our application of
the improved methodology generally increased life expectancies for
the policies we held for investment. 17
The restatement also contains an explanation of a disagreement between
LPHI and Ernst & Young, its auditor, regarding LPHI’s revenue recognition
policy. The restatement indicates that LPHI accepted Ernst & Young’s new
position and applied the new revenue recognition policy both prospectively and
in restating its prior financial statements.
Section 304(a) of SOX provides that “[i]f an issuer is required to prepare
an accounting restatement due to the material noncompliance of the issuer, as
a result of misconduct, with any financial reporting requirement under the
securities laws, the chief executive officer . . . shall reimburse the issuer” for
certain types of compensation and trading profits. 15 U.S.C. § 7243(a). The
SEC asked the district court to order Pardo to reimburse LPHI $13,340,371
because the company issued accounting restatements due to material
noncompliance with securities regulations. The SEC maintained that this
material noncompliance was the result of misconduct, namely, the prior
knowing use of understated LEs in calculating the impairment value of life
other benefit that’s expected to be generated by a specific asset is periodically compared with
that same asset’s book value. If it’s found that the book value of the asset exceeds the cash
flow or benefit of the asset, the difference between the two is written off and the value of the
asset declines on the company’s balance sheet.” Investopedia.com (Impairment),
Investopedia Inc., available at http://www.investopedia.com/terms/i/impairment.asp (last
accessed April 21, 2017).
17 Starting in 2011, LPHI began using actuarial LEs purchased from a second
provider, in addition to Cassidy’s LEs.
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settlements owned by LPHI. The district court declined to order
reimbursement under SOX, concluding that the evidence did not establish that
LPHI’s noncompliance with financial reporting requirements was caused by
misconduct rather than by good faith reliance on its auditor. 18 The SEC moved
for reconsideration, but the district court denied the motion. On appeal, the
SEC challenges the district court’s determination that LPHI’s noncompliance
was not necessarily caused by misconduct.
Causation is a question of fact this court reviews for clear error. Urbach
v. United States, 869 F.2d 829, 831 (5th Cir. 1989). A district court’s findings
are clearly erroneous when they are not plausible in light of the record as a
whole or when this court is “left with the definite and firm conviction that a
mistake has been made.” Chemtech Royalty Assocs., L.P. v. United States, 766
F.3d 453, 460 (5th Cir. 2014) (internal quotation marks omitted) (quoting
Streber v. Comm’r of Internal Revenue, 138 F.3d 216, 219 (5th Cir. 1998)).
The SEC argues that LPHI’s use of Cassidy’s materially short LEs
caused defects that made its financial statement GAAP noncompliant.
Specifically, it claims that LPHI’s knowing use of materially short LEs to
prepare its financial statements led to its reporting inaccurate results for its
investment in policies and impairment of investments in policies. LEs affected
the purchase price and the amount of premiums that had to be paid to keep
policies from lapsing, therefore factoring into the initial value of the policies.
LEs also factored into the determination of impairment because when an
insured significantly exceeds LE, policy costs and projected future premiums
exceed the estimated maturity value. The SEC points out that LPHI’s
18 There is no dispute that the remaining elements of section 304(a) were satisfied in
this case.
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No. 14-51353
“improved methodology” for calculating LEs had a dramatic effect on its
impairment charges, increasing them from $151,810 to $2,255,698 in 2009 and
from $281,882 to $2,139,183 in 2010. Thus, the SEC argues, LPHI’s knowing
use of materially short LEs caused its noncompliance with financial reporting
requirements, leading to its obligation to issue a restatement. That LPHI may
have been required to restate its revenues due to its auditor’s change of
position, the SEC contends, does not mean that LPHI was not also required to
issue the restatements as a result of its prior use of materially short LES,
which resulted in GAAP noncompliant statements.
In response, the appellants point primarily to LPHI’s accession to Ernst
& Young’s position regarding revenue recognition policies, asserting that this
was the cause for the restatement and thus that the district court did not err
in concluding that the restatement resulted from good faith reliance on LPHI’s
auditor. As to the SEC’s argument that LPHI’s use of short LEs also required
the restatement, the appellants posit that LPHI’s adoption of improved LE
methodologies and the use of updated LEs for determining asset impairment
were not related to any issue with Cassidy’s LEs. The appellants do not
dispute the SEC’s argument that the use of short LEs rendered the relevant
financial reports GAAP noncompliant.
We agree with the SEC that LPHI’s restatements were not required
solely because of its good-faith reliance on LPHI’s auditor. LPHI’s knowing
use of materially underestimated LEs rendered its financial statements
noncompliant and thus also required a restatement. As the language of the
statute makes clear, it is not the actual issuance of a restatement that must be
caused by misconduct; rather, it is the requirement of a restatement that must
be “due to the material noncompliance of the issuer, as a result of misconduct,”
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No. 14-51353
with financial reporting requirements. 15 U.S.C. § 7243(a). LPHI’s actual
motivation in issuing the restatement is therefore of no moment.
At any rate, LPHI actually issued a restatement using “improved”
methodologies to test for impairments, and this restatement explicitly tied
these new methodologies to the changed calculations of impairment on
investment in policies. The appellant’s contention that the use of new
methodologies—after the SEC had launched its investigation into LPHI’s use
of materially short LEs—had nothing to do with LPHI’s prior knowing use of
materially short LEs is highly implausible in light of the record.
Based on the foregoing, we see no basis in the record on which the district
court could conclude that the restatements were not required by LPHI’s
misconduct in connection with its underestimated LEs; therefore, we conclude
that the district court clearly erred in this respect. Accordingly, we reverse the
district court’s judgment and remand for the court to determine the
appropriate amount of SOX reimbursements.
IV
For the forgoing reasons, we AFFIRM the district court’s denial of
judgment as a matter of law on the SEC’s section 13(a) claim; VACATE the
district court’s civil penalties; AFFIRM the district court’s injunctions;
REVERSE the district court’s grant of judgment as a matter of law on the
SEC’s section 17(a)(1) claim; and REVERSE the district court’s denial of SOX
reimbursements as to Pardo. We remand the case for the district court to
reassess the amounts of civil penalties, determine appropriate SOX
reimbursement amounts, and provide appropriate remedy for the appellants’
section 17(a) violations consistent with this opinion.
33