Texas Supreme Court Rules Life Settlements Are Securities Subject to Texas Securities Act

The Texas Supreme Court has ruled that fractionalized life settlement interests are securities required to be registered under the Texas Securities Act, overturning its 2004 decision in Griffitts v. Life Partners where the high court reached a contrary result.

Fractionalized life settlement interests provide investors with a percentage share of the death benefits in life insurance policies. The insured individual is paid a cash amount during his or her life, which is a discounted amount from the actual death benefit under the policy, and then transfers ownership of the policy to another entity. That entity then sells fractional shares in the policy to investors. When the insured individual dies, investors receive a percentage of the full death benefits.

In Life Partners, Inc., et al. v. Michael Arnold, et al., the question before the Texas Supreme Court was whether fractionalized life settlement interests could be considered investment contracts under the Texas Securities Act and established federal law. The court concluded that they are:

“…we conclude that an “investment contract” for purposes of the Texas Securities Act means (1) a contract, transaction, or scheme through which a person pays money (2) to participate in a common venture or enterprise (3) with the expectation of receiving profits,(4) under circumstances in which the failure or success of the enterprise, and thus the person’s realization of the expected profits, is at least predominately due to the entrepreneurial or managerial, rather than merely ministerial or clerical, efforts of others, regardless of whether those efforts are made before or after the transaction. Applying this definition to the undisputed material facts, we conclude that Life Partners’ life settlement agreements are “investment contracts” and thus “securities” under the Texas Securities Act.”

The Court also found there should be no distinction between pre- and post-sale efforts by the promoter, finding that Life Partners provided post-sale services that were essential to the profitability of the life settlement interest investments.

In addition, the state’s high court ruled that its decision should be applied retroactively to further “the operation and enforcement of the Securities Act.”

Life Partners is currently in Chapter 11 bankruptcy, and the trustee has suspended payments of death benefits to investors in light of this Texas Supreme Court decision.

The Cogdell Law Firm is a boutique law firm focusing on large, complex business and criminal financial-related litigation, including white collar criminal defense, securities fraud, health care fraud investigation, criminal appeals and state criminal defense. When results matter most, contact Dan Cogdell at (713) 426-2244 or dan@cogdell-law.com.