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Life Partners Holdings Inc., which buys life-insurance policies at a discount and sells shares to investors, said Friday that it could face civil charges stemming from a federal investigation into how it forecasts the insured's life expectancy.
The news sent shares of Life Partners tumbling $1.42, or about 20 percent, to close at $5.62 on Friday.
Life Partners said in a filing with the Securities and Exchange Commission that it received a so-called "Wells Notice" from the SEC on Monday. The notice said that SEC staff will recommend that regulators bring civil action against the company and two of its executive officers and directors, Brian D. Pardo and R. Scott Peden, alleging securities law violations.
Pardo has been CEO of Life Partners Inc. since 1991, according to the company's website. Peden is general counsel of Life Partners Holdings and president of Life Partners Inc.
In January, Life Partners disclosed that it was the target of an SEC probe, a month after The Wall Street Journal raised questions about how the company estimates life expectancies.
The life-expectancy projections are important because Life Partners charges investors more to buy into policies on people expected to pass in the nearer future, since those policies will pay out sooner. If the insured person lives longer than Life Partners predicted, the payout is delayed and investors must continue paying premiums, reducing their eventual returns.
The proposed civil action "relates to our knowledge of and disclosures about the accuracy of the estimates of the life expectancies of settlors," Life Partners said. The Wells Notice gives Life Partners a chance to argue against further action, before the SEC decides whether to move forward.
Life Partners said it will respond "by setting forth our positions and explaining why we believe an enforcement action is not warranted."
A phone call by The Associated Press to the company's Waco, Texas headquarters seeking further comment was not immediately returned.