(16) CONTINGENCIES

On January 3, 2012, we and certain current directors and current and former officers were sued by the SEC in an action styled Securities and Exchange Commission v. Life Partners Holdings, Inc., Brian D. Pardo, R. Scott Peden and David M. Martin, Civil Action No.: 6:12-CV-00002. The suit was filed in the Federal District Court for the Western District of Texas (Austin Division) and alleged that we, our Chairman and CEO, Brian Pardo, General Counsel, Scott Peden, and former Chief Financial Officer, David Martin, had knowledge of, but failed to disclose to our shareholders, the alleged underestimation of the life expectancies of settlors of viatical and life settlement policies. The suit further claimed that we prematurely recognized revenues from the sale of the settlements and that we understated the impairment of our investments in policies. The suit also claimed that Mr. Pardo and Mr. Peden sold shares while possessing inside information (i.e., the alleged knowledge of the underestimation of life expectancies and the purported impact on revenues from such practice). In addition, the suit alleged that the defendants misled the auditors about our revenue recognition policy.

Trial before a jury was held in February 2014. The jury found that neither we, Mr. Pardo nor Mr. Peden committed securities fraud under Section 10(b) of the Exchange Act and Rule 10b-5 and that Mr. Pardo and Mr. Peden did not engage in insider trading. In March 2014, the Federal court ruled that the SEC failed to prove any of its fraud claims against us, Mr. Pardo and Mr. Peden under Section 17 of the Securities Act of 1933 (the “Securities Act”), finding that there was no evidence to support the allegations related to revenue recognition for the period of time in question and ordered that judgment be entered in favor of us, Mr. Pardo and Mr. Peden on that issue. As a result of this ruling, the Company, Mr. Pardo and Mr. Peden were completely exonerated from any allegations of fraud alleged by the SEC.

The Court let stand the jury's findings against us, Mr. Pardo and Mr. Peden for violations of various revenue recognition matters. However, the court ultimately ruled there was no evidence of fraud.

In February and March of 2011, six putative securities class action complaints were filed in the U.S. District Court for the Western District of Texas, Waco Division. On July 5, 2011, these actions were consolidated into the case styled Selma Stone, et al. v. Life Partners Holdings, Inc., Brian D. Pardo, R. Scott Peden, and David M. Martin , Civil Action No. DR-11-CV-16-AM in the U.S. District Court for the Western District of Texas, Del Rio Division. On February 10, 2012, plaintiffs filed their first amended complaint alleging the same claims that were asserted in the prior complaint. In the amended complaint, plaintiffs assert substantially similar, and at times identical, facts and allegations to those asserted by the SEC in its complaint. Plaintiffs seek damages and an award of costs on behalf of a class of shareholders who purchased or otherwise acquired our common stock between May 26, 2006, and June 17, 2011. On March 26, 2012, defendants filed their motion to dismiss the amended complaint. The court denied defendants’ motion to dismiss on March 15, 2014. With the ruling on the motion to dismiss, we anticipate that the parties will now commence discovery. No trial date has been set.

We, our directors, and certain present and former officers were named as defendants in a shareholder derivative suit, which is based generally on the same alleged facts as the putative class action suits. On June 1, 2011, Gregory Griswold filed, in the United States District Court for the Western District of Texas, Waco Division, a shareholder derivative complaint styled Gregory Griswold, Derivatively on Behalf of Life Partners Holdings, Inc. v. Brian D. Pardo, R. Scott Peden, David M. Martin, Tad M. Ballantyne, Fred Dewald, Harold E. Rafuse, & Nina Piper, and Life Partners Holdings, Inc. as a Nominal Defendant, Case Number 6:11-CV-00145. On June 9, 2011, Harriet Goldstein filed a second derivative complaint in the United States District Court for the Western District of Texas, Waco Division, styled Harriet Goldstein, Derivatively on Behalf of Life Partners Holdings, Inc. v. Brian D. Pardo, R. Scott Peden, David M. Martin, Tad M. Ballantyne, Fred Dewald, Harold E. Rafuse, & Nina Piper, and Life Partners Holdings, Inc. as a Nominal Defendant, Case Number 6:11-CV-00158. The Goldstein and Griswold and another similar case were all consolidated in the Del Rio Division under Consolidated Case Number 2:11-CV-00043. On August 18, 2011, Griswold and another plaintiff, Steven Zackian, filed a consolidated and amended complaint asserting claims of breach of fiduciary duty, gross mismanagement, and unjust enrichment. This complaint dropped Goldstein as a plaintiff. The complaint alleges that the defendants breached their fiduciary duties to us (the company) through the use of excessive life expectancies and incorrect accounting practices. The complaint also claimed that the defendants caused us to pay “abnormally large dividends” for the benefit of Pardo; and the defendants subjected us to “adverse publicity” as well as lawsuits and regulatory investigations. The complaint also claims that Pardo and Peden had “used their knowledge of Life Partners’ material, non-public information to sell their personal holdings while [our] stock was artificially inflated,” and that the Audit Committee had failed to exercise proper oversight. On December 20, 2011, the independent directors filed an amended motion to dismiss all claims in the complaint, based on the findings of their investigation in response to plaintiffs’ demands. The plaintiffs have conducted limited discovery in response to the motion to dismiss and filed their response on July 15, 2013. A hearing on the motion to dismiss was held in November 2013. On May 7, 2014, the court issued an order and notice of conversion of the motion to dismiss to a motion for summary judgment and ordered the parties to submit additional materials and briefs in support of or opposition to a motion for summary judgment. A hearing date for the motion for summary judgment has not been set.

Six putative class action complaints were filed during 2011 on behalf of purchasers of life settlement interests through Life Partners, Inc. All of these suits were consolidated on June 23, 2011, under the case styled Turnbow et al. v. Life Partners, Inc., Life Partners Holdings, Inc., Brian D. Pardo, and R. Scott Peden, Civil Action No. 3:11-CV-1030-M. On August 25, 2011, the plaintiffs filed their consolidated class action complaint, alleging claims of breach of fiduciary duty against LPI, aiding and abetting breach of fiduciary duty against us, Pardo and Peden, breach of contract against LPI, and violation of California Unfair Competition Law by LPI, Pardo, and Peden. All of the plaintiffs’ claims arose out of the alleged provision of underestimated life expectancies by Dr. Cassidy to LPI and LPI’s use thereof in the facilitation of life settlement transactions in which the plaintiffs acquired interests in life insurance policies. On July 9, 2013, the Federal court issued an order denying class certification. On December 2, 2013, plaintiffs filed a motion for voluntary dismissal without prejudice and a general release by the plaintiffs releasing all defendants from all claims brought in the action. On the same day, the Court issued an order dismissing the action. Copies of the dismissing documents can be found at: http://www.lphi.com/doc/Release_20131203.pdf. Because this action was dismissed voluntarily by the plaintiffs, we consider this matter to be concluded. On March 11, 2011, a purported class action suit was filed in the 191^st Judicial District Court of Dallas County, Texas, styled Helen Z. McDermott, Individually and on Behalf of all Others Similarly Situated v. Life Partners, Inc., Cause No. 11-02966. The original petition asserted claims for breach of contract, breach of fiduciary duty, and unjust enrichment on behalf of a putative class of all persons residing in the United States who purchased any portion of a life settlement that matured earlier than the estimated maximum life expectancy. Pursuant to three amendments to the Petition, the plaintiff revised the putative class of persons on whose behalf the plaintiff seeks to represent to be limited to all persons residing in the United States who purchased any portion of one particular life settlement. The plaintiff seeks as purported damages the amount of funds placed in escrow for policy maintenance that was allegedly not needed or used for policy maintenance and was not returned or paid to the plaintiff or the putative class members as well as attorneys’ fees and costs. The plaintiff also seeks certain equitable relief, including injunctive relief, restitution, and disgorgement. Following briefing by the parties and a hearing before the court, the court certified a class consisting of 38 persons residing in the United States that purchased any portion of a life settlement interest in the designated policy. On December 4, 2012, LPI filed a notice of appeal of the district court’s order certifying class with the Fifth District Court of Appeals, Dallas, Texas, which automatically stayed the underlying case until resolution of the appeal. Appellate briefing has been completed by the parties and the Court has heard oral arguments. The Court has not issued a ruling.

On March 14, 2011, a putative class action suit was filed in the 14^th Judicial District Court of Dallas County, Texas, styled Michael Arnold and Janet Arnold v. Life Partners, Inc., Life Partners Holdings, Inc., and Abundant Income, Cause No. 11-02995. The plaintiffs ultimately amended their petition several times, adding additional named plaintiffs, and dismissing us (but not LPI) with prejudice. The plaintiffs asserted two causes of action. The first claim asserted that defendants violated the registration provisions of the Texas Securities Act because the life settlements facilitated by LPI were securities and were not registered. The second claim asserted that defendants committed fraud under the Texas Securities Act because they represented that the life settlements were not securities. LPI answered and filed counterclaims against the plaintiffs for the filing of a frivolous lawsuit. On September 26, 2011, the Court entered an order granting LPI’s motion for partial summary judgment. The motion was based on, among other arguments, the arguments that the life settlements had previously been held not to be securities under Federal and state law. As a result of the court order, the plaintiffs’ claims against LPI were dismissed with prejudice. Plaintiffs appealed the Court’s decision dismissing their claims to the Fifth District Court of Appeals, Dallas, Texas. On August 28, 2013, the Fifth District Court of Appeals, Dallas, Texas, in Arnold v. Life Partners, Inc., 5^th Dist. Texas Ct. of App., No. 05-12-00092-CV reversing the trial court’s order granting our motion for summary judgment and held that LPI’s life settlements are securities under the Texas Securities Act. The Court of Appeals affirmed the trial court’s order granting defendants’ motion for summary judgment on some, but not all, of the individual plaintiffs’ claims that were barred by the statute of limitations under the Texas Securities Act. The ruling that the life settlements are securities conflicts with the decision by the Federal Circuit Court for the District of Columbia which ruled in SEC v. Life Partners, Inc. that our transactions are not securities under Federal law, and conflicts with the 2004 Waco Court of Appeals decision in Griffitts v. Life Partners, Inc., that the settlements were not securities under Texas law. We strongly disagree with the court’s analysis and conclusions and note that the decision conflicts with the above-referenced cases as well as a Travis County, Texas District Court case, in each of which LPI had prevailed and in which the courts had held that the life settlements were not securities. On March 24, 2014, we appealed the decision to the Texas Supreme Court seeking a review and reversal of the Court of Appeal’s decision that LPI’s life settlements are securities. We have asked that, if the prior decision is allowed to stand, the Court of Appeal’s decision be given prospective effect only, rather than retroactive effect, which could allow plaintiffs, as well as other purchasers of life settlements through LPI, to seek rescission of their purchases. Briefing for review before the Texas Supreme Court is ongoing. If the prior decision is upheld, it could result in a material adverse effect on our operations and require substantial changes in our business model.

On April 8, 2011, a putative class action complaint was filed in the 40^th Judicial District Court of Ellis County, Texas, styled John Willingham, individually and on behalf of all other Texas citizens similarly situated, v. Life Partners, Inc., Cause No. 82640 (MR). On July 27, 2011, by agreement of the parties, the Willingham case was transferred to the 101st Judicial District Court of Dallas County under Cause No. DC-11-10639. On January 22, 2013, a petition was filed in the 162^nd Judicial District Court, Dallas County, Texas, styled Stephen Eccles, et al vs. Life Partners, Inc., Life Partners Holdings, Inc., Brian D. Pardo and R. Scott Peden on behalf of 23 individuals, all of whom were represented by the same counsel for the plaintiff in the Willingham case. On March 20, 2013, the parties filed a joint motion to consolidate the Eccles case with the Willingham case, which was granted on March 25, 2013. In the current pleadings, plaintiffs assert individual claims of breach of fiduciary duty, common law fraud, civil conspiracy, aiding and abetting breach of fiduciary duty and common law fraud, and negligence against us, LPI, Pardo and Peden. The plaintiff seeks economic and exemplary damages, disgorgement and/or fee forfeiture, attorneys’ fees and costs, and post and pre-judgment interest. On April 9, 2013, an original petition was filed in the 352^nd Judicial District Court, Tarrant County, Texas, styled Todd McClain, et al v. Life Partners, Inc., Life Partners Holdings, Inc., Brian D. Pardo, and R. Scott Peden. This suit is virtually identical to the Willingham case. On May 15, 2013, the defendants filed a motion to transfer the McClain and Willingham cases to a Multi-District Litigation Panel for the purposes of transferring and consolidating the Willingham case and the McClain case to a single forum for pretrial purposes. On August 16, 2013, the Multidistrict Litigation Panel issued an opinion granting the motion to transfer, and on September 9, 2013, the Panel issued an Order transferring the McClain case to Judge Slaughter of the 191^st District Court of Dallas County and consolidating the McClain case (and any tag along cases subsequently filed) with the Willingham case. The consolidated MDL case is styled In re Life Partners, Inc. Litigation (the “MDL Proceedings”). In the MDL Proceedings, all of plaintiffs’ claims are based upon the alleged failure to engage in “premium optimization,” as well as the alleged provision of underestimated life expectancies by Dr. Donald Cassidy to LPI and LPI’s use in the facilitation of life settlement transactions in which plaintiffs acquired interests in life insurance policies. Plaintiffs seek economic and exemplary damages, disgorgement and/or fee forfeiture, attorneys’ fees and costs, and post and pre-judgment interest. On August 9, 2013, the Court entered a scheduling order setting a bellwether trial consisting of ten plaintiffs, five selected by plaintiffs and five selected by defendants, with the remaining plaintiffs trying their claims in groups of 16 approximately 90 days after the conclusion of each trial. The parties are currently engaged in discovery and the bellwether trial is set for September 29, 2014.

On November 8, 2011, a putative class action suit was filed, styled Marilyn Steuben, on behalf of herself and all other California citizens similarly situated v. Life Partners, Inc., Superior Court of the State of California for the County of Los Angeles Court, Case No. BC472953. This suit asserts claims of fiduciary duty, breach of contract, and violations of California’s Unfair Competition law based upon the alleged overpayment of premiums to the insurance company, that is, the alleged failure to engage in “premium optimization. On December 3, 2012, the plaintiffs filed their motion to intervene in the Turnbow case whereby the plaintiffs sought to join the putative Turnbow class and subclass and to create a new subclass asserting claims for damages related to the defendants’ alleged overpayment of premiums. The Federal District Judge in the Turnbow case denied the plaintiffs’ motion to intervene on February 5, 2013 and Turnbow was voluntarily dismissed in December 2013. On January 29, 2014, the parties filed a joint status report with the court, and on February 5, 2014, the court stayed the case pending resolution of the Willingham suit, which is now set for trial in September 29, 2014. Another joint status update is due June 5, 2014.

On August 16, 2012, a verified petition and application for temporary restraining order, temporary and permanent injunction, appointment of receiver and other relief was filed in the 201^st Judicial District Court of Travis County, Texas, styled The State of Texas v. Life Partners Holdings, Inc., Life Partners, Inc., Brian Pardo, and R. Scott Peden, Defendants, and Advance Trust & Life Escrow Services, L.T.A., Purchase Escrow Services, LLC, Pardo Family Holdings, Ltd., Dr. Donald T. Cassidy, and American Stock Transfer & Trust Company, Relief Defendants. The suit sought a temporary restraining order preventing us and LPI from doing business and appointment of receiver based generally on allegations that the life settlements facilitated by us are securities under Texas law and that we made various misrepresentations in the sale of the life settlements, including misrepresentations about the life expectancies of the insureds. At the conclusion of the evidentiary hearing held September 24 and 25, 2012, the Court ruled that the life settlement transactions that we facilitate are not securities under Texas law. On January 8, 2013, the Court issued a final judgment dismissing all of the plaintiff’s claims with prejudice. The Attorney General appealed the ruling to the Third Court of Appeals, Austin, Texas. On February 25, 2014, the Third Court of Appeals issued a ruling that adopted the ruling by the Fifth Court of Appeals in the Arnold case and held that our transactions are securities under Texas law. On March 24, 2014, we appealed this decision to the Texas Supreme Court and have asked that the Supreme Court consolidate our appeal of this decision with our appeal of the decision in the Arnold case. As in the Arnold case, we have asked that, if the prior decision is allowed to stand, the Court of Appeal’s decision be given prospective effect only, rather than retroactive effect, which could allow plaintiffs, as well as other purchasers of life settlements though LPI, to seek rescission of their purchases. Briefing for review before the Texas Supreme Court is ongoing. If the prior decision is upheld, it could result in a material adverse effect on our operations and require substantial changes in our business model.

On March 31, 2014, a complaint was filed in the United States District Court for the Southern District of Florida, styled John Woelfel, et al. v. Life Partners, Inc., Life Partners Holdings, Inc., Brian D. Pardo, R. Scott Peden, and Pardo Family Holdings, Ltd. This suit asserts claims of breach of fiduciary duty, negligence, common law fraud, civil conspiracy, constructive trust, fraudulent transfer, unjust enrichment, and violations of the Federal securities laws. Except for the claims under the Federal securities laws, this suit is virtually identical to the MDL Proceedings. All of plaintiff’s claims are based upon the alleged failure to engage in “premium optimization” and the alleged provision of underestimated life expectancies by Dr. Donald Cassidy to LPI and LPI’s use in the facilitation of life settlement transactions in which plaintiff acquired interests in life insurance policies. With respect to the Federal securities laws claims, plaintiff asserts that the life settlements purchased by plaintiff through LPI are securities that were required to be registered under the Federal securities laws. Plaintiff seeks economic and exemplary damages, disgorgement and/or fee forfeiture, rescission, attorneys’ fees and costs, and post and pre-judgment interest. On April 23, 2014, defendants filed a motion to dismiss on the grounds that the complaint fails to satisfy the pleading requirements under the Federal Rules of Civil Procedure. On May 9, 2014, plaintiffs filed an amended complaint attempting to address some of the issues raised in the motion to dismiss and adding new plaintiffs, thereby mooting the motion. Defendants intend to file an amended motion to dismiss as a result. No trial date has been set, and a scheduling conference is set for June 3, 2014.

Management believes, and we have been so advised by counsel handling the respective proceedings, that we have meritorious defenses in all pending litigation to which we or our directors or officers are a party, as well as valid bases for appeal of potential adverse rulings that may be rendered against us. We intend to defend all such proceedings vigorously and, to the extent available, will pursue all valid counterclaims. Notwithstanding this fact, as with all litigation, the defense of such proceedings is subject to inherent uncertainties, and the actual costs will depend upon numerous factors, many of which are as yet unknown and unascertainable. Likewise, the outcome of any litigation is necessarily uncertain. We may be forced to continue to expend considerable funds in connection with attorneys’ fees, costs, and litigation-related expenses associated with the defense of these proceedings, and management’s time and attention will also be taxed during the pendency of these proceedings. We may enter into settlement discussions in particular proceedings if we believe it is in the best interests of our shareholders to do so.

We are subject to other legal proceedings in the ordinary course of business. When we determine that an unfavorable outcome is probable, and the amount of the loss can be reasonably estimated, we reserve for such losses. Except as discussed above: (i) management has not concluded that it is probable that a loss has been incurred in any of our pending litigation; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome of any pending litigation; and (iii) accordingly, management has not provided any amounts in the Consolidated Financial Statements for unfavorable outcomes, if any.