Michael Abraham

Eide Bailly, a previous auditor for Life Partners Holdings, said that its audit for the fiscal year ended Feb. 28, 2009 can no longer can be relied upon, Life Partners said in a filing with the Securities and Exchange Commission.

Eide Bailly notified Life Partners’ Audit Committee Chairman Tad Ballantyne Tuesday that based upon disclosures by Ernst & Young, the firm’s most recent auditor, that it believed its audit for 2009 “may have material misstatements related to improper revenue recognition.”

Eide Bailly said that until an analysis has been done on Life Partners’ revenue-recognition policy, the report on the firm’s financial statements and effectiveness of its internal controls over its financial reporting can no longer be relied upon.

Ernst & Young resigned as Life Partners’ auditor on June 3 after Life Partners chief executive Brian Pardo threatened to take action against the firm and the SEC unless Life Partners’ annual report for the last fiscal year was approved soon. Pardo made the threat in a memo to Life Partners’ sales network and investors. It was published by The Life Settlements Report June 2.

In its resignation letter, Ernst & Young said that Life Partners should revise its revenue-recognition policy because it recognizes income when an agreement had been reached to buy a policy. It would be better to recognize revenues at the final closing of escrowed funds, Ernst & Young said.

Neither Pardo nor Scott Peden, general counsel for parent company Life Partners Holdings and president of provider Life Partners, responded to a call or email from The Life Settlements Wire seeking comment.

In his letter to his sales network and investors, Pardo opposed changing the revenue recognition policy. “Restating for any period, for any reason is viewed by the market as an implicit admission that prior quarters were probably misstated, which they were not,” he wrote.

“There is no reason to restate because any proposed adjustment is immaterial under GAAP [generally accepted accounting principles] guidelines,” Pardo stated. “E&Y signed off on our revenue recognition criteria policy last year and every other audit firm has as well since we went public in 2000.”

Liz Stabenow, director of communication for Eide Bailly in Fargo, N.D., declined to comment, stating that it’s the firm’s policy not to comment on current or past clients.

Source: SEC Filing

Commentary by Michael Abraham:

Having been closely involved and damaged by the collapse of MBC I still can’t quite understand how a company run on almost the exact same model as MBC has traded a further 7 years since MBC was closed.  However, having said that what one can see is the wolves gathering and the institutions ‘running for the hills’. 

Pardo seems to be quite formidable and I for one wish him luck in managing his way out of this situation because the main losers if the ‘wolves’ get their way is that close on 30,000 will end up losing most if not all of their investment.  And the industry take another knock!

U.K.-based Centurion Fund Managers said it has suspended redemptions from the Argent Fund to protect investors in the fund, according to the International Adviser.

The story said Centurion sent a letter to investors last week after several large investors asked to withdraw their money.

Centurion blamed a liquidity imbalance in the fund to the increase in the expected discount rate on purchase of policies and lower number of maturities in the fund.

In the June, 5, 2008, issue of The Life Settlements Report, Centurion said it had listed the $85 million Argent Fund on the Euro Multi Lateral Trading Facility in Luxembourg. It said that Argent is a fund of funds.

Commentary by Michael Abraham:

This will always be a problem for small funds in illiquid assets and gating the fund is the right thing to do.  Large investors are normally professional investors and are well aware of the issues when investing in such a fund.  Any fund manager worth his salt would agree phased redemption with such investors at the time of investment but of course it depends on how desperately the manager wants that investment and how concerned he is for his shareholders.

A lawsuit was filed earlier this month in federal court against the board of Life Partners, alleging breaches of fiduciary duty resulting from “gross and reckless mismanagement.”

The plaintiff, Life Partners shareholder Harriet Goldstein, filed suit June 9 in U.S. District Court in Waco, Texas. She named Brian Pardo, Scott Peden, Fred Dewald, Tad Ballantyne and Harald Rafuse.

Goldstein also alleged that Pardo, chief executive of Life Partners Holdings, the parent company of Waco, Texas, provider Life Partners, and Peden, general counsel of the parent company, benefited from “insider-selling” non-public information when they sold artificially inflated shares of stock in the firm between 2007 and 2009.

The suit said Pardo sold 368,807 shares in the Pardo family trust for $7.5 million and Peden sold 19,531 shares for $301,270.

The suit alleges derivative claims of breach of fiduciary duty, breach of fiduciary duty for failing to oversee the company and maintain internal controls, gross mismanagement and unjust enrichment.

Commentary by Michael Abraham:

I wonder which liquidator is supporting this action!