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SEC v. LIFE PTNRS.

November 24, 1997

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
LIFE PARTNERS, INC., et al., Defendants.



The opinion of the court was delivered by: LAMBERTH

 This matter comes before the court on defendants' Renewed Motion to Dismiss and Suggestion that Subject Matter Jurisdiction is Absent and plaintiff's Motion Seeking Leave to Amend Complaint and in Opposition to Defendants' Renewed Motion to Dismiss. Upon consideration of the submissions of the parties and the relevant law, plaintiff's Motion Seeking Leave to Amend Complaint is denied and summary judgment is entered for defendants, dismissing this case.

 I. Background

 In the instant case, the SEC filed a motion for a preliminary injunction and other provisional relief alleging that the interests marketed by LPI were securities. The SEC contended that LPI violated the Securities Act of 1933 ("1933 Act") and the Securities Exchange Act of 1934 ("1934 Act") by marketing and selling the fractional interests in the viatical settlements without first complying with the various requirements of these acts, in particular the registration provisions.

 In its August 1995 opinion, this court concluded that viatical settlements were securities under the 1933 Act and held that LPI violated §§ 5(a) and (c) of the 1933 Act and § 15(a) of the 1934 Act by failing to comply with the requirements of these acts. SEC v. Life Partners, Inc., 898 F. Supp. 14 (D.D.C. 1995). LPI was ordered to bring its operations into compliance with these laws but nonetheless, was permitted to continue to engage in the sale of viatical settlements. In the same opinion, this court also determined that the SEC made out a prima facie case that LPI had materially misstated and omitted certain facts in the sale of these securities in violation of the anti-fraud provisions of § 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder, and preliminarily enjoined LPI from continuing to commit securities fraud. In a separate order, this court denied LPI's motion for a partial stay of the order accompanying the August 1995 opinion pending appeal. LPI was also directed to file a report with the court detailing the steps the company had undertaken to comply with the federal securities laws within 20 days.

 In January 1996, this court concluded that LPI had not adequately complied with the court's prior directives and preliminarily enjoined LPI from offering or selling unregistered fractional interests in viatical settlements. With the court's approval, the parties stipulated that the injunction would be stayed with respect to transactions then in progress, and that LPI would not seek any broader stay pending the resolution of the matter by the Court of Appeals. Finally, in March 1996, this court granted the Emergency Motion for Supplemental Provisional Relief filed by the SEC. The SEC filed this motion in reaction to an affidavit by Brian Pardo, then-President of LPI, asserting that LPI had complied with the court's prior rulings and advising the court that LPI planned to resume the sale of viatical settlements.

 LPI appealed the opinions and orders issued by this court to the Court of Appeals for the D.C. Circuit. SEC v. Life Partners, Inc., 318 U.S. App. D.C. 320, 87 F.3d 536 (D.C. Cir. 1996). The Court of Appeals reversed this court's holding that viatical settlements were properly characterized as securities under the 1933 Act. This determination was controlled by the Court's interpretation of the Supreme Court's decision in SEC v. W.J. Howey Co., 328 U.S. 293, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946). In Howey, the Supreme Court stated that an investment contract is a security subject to the 1933 Act if investors purchase with (1) an expectation of profits arising from (2) a common enterprise that (3) depends upon the efforts of others. 328 U.S. at 298-99. While both this court and the Court of Appeals agreed that the viatical settlements satisfied the first two factors set forth in Howey, the Court of Appeals concluded that the requirements of the final prong--profits being derived predominantly from "the efforts of others"--were not present with respect to the interests in the viatical settlements marketed by LPI. The Court of Appeals examined both the pre- and post-purchase services offered by LPI, but found no evidence that LPI engaged in any significant non-ministerial, post-purchase services for investors. The Court of Appeals also determined that the ministerial functions performed by LPI did not have a material impact upon the profits of the investors. Rather, the Court of Appeals indicated that the length of the insured's life was of overwhelming importance to the value of the viatical settlement marketed by LPI.

 Presently, the SEC has filed a motion to amend its original complaint in light of new facts that the Commission has allegedly uncovered pertaining to the post-purchase services offered by LPI. The SEC contends that these new facts reveal that the investment contracts offered by LPI are indeed securities and thereby subject to the requirements of the 1933 and 1934 Acts. For the reasons stated below, this court concludes that the SEC has failed to present new facts demonstrating that the viatical settlements distributed by LPI are securities consistent with the prior interpretation of Howey by the Court of Appeals in this case. Thus, amendment of the SEC's initial complaint is not warranted and must be denied as futile. Furthermore, because the SEC has failed to present any genuine issue of material fact with respect to this or any other issue before the court, LPI is entitled to summary judgment in this case.

 II. Analysis

 A. SEC's Motion to Amend the Initial Complaint

 Rule 15(a) of the Federal Rules of Civil Procedure states in relevant part that "a party may amend the party's pleading only by leave of court or by written consent of the adverse party . . . and leave shall be freely given when justice so requires." Fed. R. Civ. P. 15(a). In Foman v. Davis, 371 U.S. 178, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962), the Supreme Court defined the term "when justice so requires" and explained that "in the absence of any apparent or declared reason--such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party . . . futility of amendment, etc.--the leave sought should, as the rules require, be 'freely given.'" Id. at 182. Accordingly, "within these bounds, a district court has discretion to grant or deny leave to amend under Rule 15(a)." Atchinson v. District of Columbia, 315 U.S. App. D.C. 318, 73 F.3d 418, 426 (D.C. Cir. 1996). See also Foman, 371 U.S. at 182 ("The grant or denial of an opportunity to amend is within the discretion of the District Court, but outright refusal to grant the leave without any justifying reason . . . is not an exercise of discretion."); Firestone v. Firestone, 316 U.S. App. D.C. 152, 76 F.3d 1205, 1208 (D.C. Cir. 1996) (indicating that the granting or denial of leave to amend is committed to the district court's discretion).

 As the Supreme Court stated in Foman, a motion to amend a complaint should be denied when such an amendment would be futile. "It has been repeatedly held that an amended complaint is 'futile' if the complaint as amended would not survive a motion to dismiss." Monroe v. Williams, 705 F. Supp. 621, 623 (D.D.C. 1988) (citing Massarsky v. General Motors Corp., 706 F.2d 111, 125 (3d Cir. 1983)). See also Graves v. United States, 961 F. Supp. 314, 317 (D.D.C. 1997) ("A motion to amend the Complaint should be denied as 'futile' if the complaint as amended could not withstand a motion to dismiss.").

 In the instant case, the SEC has alleged that new facts have come to light that support the allegation that the viatical settlements marketed by LPI are securities. In its motion, the SEC states that "in March 1997, [the SEC] learned of new developments that belie the factual predicate on which the Court of Appeals decision is based and show that the investments offered and sold by the defendants 'must be managed on a continuing basis.'" Brief in Supp. of SEC's Mot. to Amend Comp. at 5. The new facts alleged by the SEC deal primarily with the post-transaction services undertaken by LPI. Specifically, the SEC contends that a portion of the purchase money paid by investors for their fractional interests in a given policy is held in a trust account for the payment of premiums for a specified period of time. The transaction documents offered by LPI in conjunction with the sale of the interests to investors apparently fail to provide for situations in which the money held in trust for premium payments is exhausted before the insured has died. According to the SEC, ...


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