## Facts

- Life Partners, Inc. (LPI), a Texas company led by Brian D. Pardo, arranged viatical settlements by purchasing life insurance policies from terminally ill insureds and selling fractional interests to investors.
- LPI’s pre-purchase work included locating insureds and policies, obtaining medical records and life-expectancy estimates, negotiating pricing, finding investors, and preparing transaction documents.
- After closing, LPI performed limited administrative functions such as handling premiums, monitoring the insured’s status, and transmitting death-benefit proceeds.
- The SEC brought a civil enforcement action alleging LPI sold unregistered securities, acted as an unregistered broker-dealer, and made material misstatements or omissions in connection with the offerings.
- The district court granted and expanded preliminary injunctions restraining further sales, finding a strong likelihood that the interests were “investment contracts” and that the SEC had shown a strong prima facie case of securities-law violations.
- LPI and Pardo appealed the preliminary-injunction orders.

## Issues

1. Whether fractional interests in life insurance policies sold through viatical settlements are “investment contracts” under the *Howey* test and therefore “securities.”
2. Whether the SEC was entitled to preliminary injunctive relief premised on alleged sales of unregistered securities and unregistered broker-dealer activity.
3. Whether LPI’s role—considering pre-purchase services and post-purchase activities—satisfied *Howey*’s requirement that expected profits be derived predominantly from the efforts of others.

## Decision

- The D.C. Circuit reversed the district court’s determination that LPI’s viatical interests were securities under *Howey*.
- The court held the interests failed *Howey*’s third prong because investor profits did not arise predominantly from LPI’s managerial or entrepreneurial efforts.
- The court emphasized that pre-purchase services, standing alone, cannot satisfy the “efforts of others” requirement, and that ministerial post-purchase tasks receive substantially less weight than entrepreneurial activity.
- The panel concluded that, after purchase, there was no meaningful ongoing enterprise managed by LPI; the return depended primarily on an external contingency—the insured’s death.
- The preliminary injunction was vacated to the extent it rested on treating the viatical interests as securities.

## Legal Principles

- An “investment contract” under *Howey* requires an expectation of profits derived predominantly from the managerial or entrepreneurial efforts of others.
- Pre-purchase promotional and transactional efforts may be relevant but are insufficient by themselves to establish that profits are derived predominantly from others’ efforts.
- Post-purchase ministerial or mechanical services generally do not constitute the type of entrepreneurial or managerial efforts required to satisfy *Howey*’s third prong.
- Where the primary determinant of profit is an external event not controlled by the promoter (here, the timing of the insured’s death), the “efforts of others” element is not met absent meaningful ongoing managerial activity by the promoter.

## Conclusion

The D.C. Circuit held that LPI’s viatical-settlement fractional interests were not “investment contracts” because investors’ gains depended mainly on the insured’s mortality rather than LPI’s continuing managerial efforts, limiting federal securities-law coverage for this product on those facts.


SEC v. Life Partners, Inc., 87 F.3d 536 (D.C. Cir. 1996)