Stone v. Life Partners Holdings, Inc. (26 F. Supp. 3d 575, 2014)

ORDER

ALIA MOSES, District Judge.

Before the Court is a consolidated securities class action lawsuit against Life Partners Holdings, Inc. (“Life Partners”), brought pursuant to section 10(b) of the Securities and Exchange Act of 1934 (“Exchange Act”) and SEC Rule 10b-5 promulgated thereunder, and section 20 of the Exchange Act. After the Plaintiffs filed their First Amended Complaint (ECF No. 42), the Defendants Life Partners Holdings, Inc., Brian D. Pardo, R. Scott Peden, and David M. Martin filed a Motion to Dismiss First Amended Complaint and Brief in Support Thereof (ECF No. 46). The Court held a hearing on the Defendants’ motion to dismiss to ensure that it is fully apprised of the factual and legal issues implicated therein. (ECF No. 69.) After carefully considering the arguments presented in the motion to dismiss, along with the Plaintiffs’ Opposition to Defendants’ Motion to Dismiss (ECF No. 50) and the Defendants’ Reply in Support of Defendants’ Motion to Dismiss First Amended Complaint (ECF No. 51), the Court hereby DENIES the Defendants’ motion for the following reasons.

I. GENERAL BACKGROUND

Life Partners, founded by Brian Pardo in 1991, is a Waco-based, publicly-traded company listed on the NASDAQ exchange. Through its subsidiary, Life Partners, Inc., Life Partners operates in the secondary life insurance market as a purchasing agent in transactions involving the sale of existing life insurance policies to unrelated investors.

Life Partners’ business model is as follows: (1) Life Partners identifies elderly and terminally ill individuals willing to sell their interests in their life insurance policies; (2) it performs a life expectancy analysis for each individual in possession of a policy that Life Partners intends to broker; and (3) it resells fractional interests in each policy to investors who buy the policy at a discounted purchase price. Immediately upon the purchase and transfer of the policy rights, Life Partners collects a brokerage fee; the exact amount of the brokerage fee, however, is built into the total cost of the policy and is thus unknown to the investor. The investor then holds the policy, paying the policy premiums as they come due from money es-crowed- at the time of purchase. The investor subsequently receives the payout of the life insurance benefit upon the death of the insured. The investor’s profit derives from the difference between the discounted purchase price of the policy and the death benefit paid, minus transaction costs and additional premiums paid. Because Life Partners only receives a commission for each policy brokered, its income is dependent upon the volume of purchases that it brokers, not on the levels of returns achieved by investors.

On February 10, 2012, three representative plaintiffs, on behalf of purchasers of Life Partners common stock between May 26, 2006 and June 17, 2011 (the “class period”), commenced this class action securities fraud lawsuit against Life Partners and three Life Partners directors and officers — Brian D. Pardo, R. Scott Peden, and David M. Martin (collectively, the “Defendants”) — for violations of federal securities laws. Brian Pardo, founder of Life Partners, has served as a corporate director, president, and CEO of the company since 1991; R. Scott Peden, who served as both the company’s vice president and general counsel from the time of its inception, has since served as the company’s secretary and general counsel; and David M. Martin began acting as the company’s CFO in Februafy of 2008.

At the core of the First Amended Complaint (“amended complaint”) is the Plaintiffs’ allegation that Life Partners’ business model was fraudulent and unsustainable and that, despite knowing this, the three individual Defendants misrepresented the financial condition of the company to its shareholders in public statements made in filings with the Securities and Exchange Commission (“SEC”), in press releases, and during public conference calls.

To support their contention that Life Partners was built on a fraudulent business model, the Plaintiffs allege that Life Partners, using one doctor with little actuarial experience, routinely underestimated the life expectancies of insured individuals. Its underestimated life expectancies then caused the company to overstate the value — or expected investment return rate— of the individual life insurance policies that it brokered to its investors. As a result, the entire company was built on the marketing and selling of what was, in effect, a sham product. Despite having knowledge of this fact, the Defendants held Life Partners out to be a sustainable and valuable company whose publicly-traded stocks were worth purchasing.

The Plaintiffs also assert that Life Partners engaged in a scheme to improperly recognize its company’s revenue in violation of generally accepted accounting principles (“GAAP”) and SEC regulations. This improperly recorded revenue was then reported in the company’s public filings with the SEC, thereby bolstering the appearance of the company’s value to external investors. As a direct and proximate result of the Defendants’ alleged misstatements, the Plaintiffs contend that they suffered damages in connection with their purchases of Life Partners common stock at an artificially-inflated price during the class period.

Finally, the Plaintiffs allege that the Defendants, by reason of their positions as officers and/or directors of Life Partners and their ownership of Life Partners stock, had the power and authority to cause Life Partners to engage in its wrongful conduct and are thus also liable as controlling persons pursuant to section 20(a) of the Exchange Act.

In lieu of an answer, the Defendants filed the present motion to dismiss the Plaintiffs’ claims contained within the amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that the Plaintiffs have failed to state a claim upon which relief can be 'granted. According to the Defendants, the Plaintiffs have failed to allege elements of a cause of action under section 10(b) of the Exchange Act with sufficient particularity. And because the Plaintiffs have failed to state a claim under section 10(b), the Plaintiffs necessarily cannot state a claim under section 20 of the Exchange Act.

II. GENERAL DISMISSAL STANDARD

“A pleading that states a claim for relief must contain ... a short and plain statement of the claim showing that the pleader is entitled to relief_” Fed.R.Civ.P. 8(a)(2). Federal Rule of Civil Procedure 12(b)(6) authorizes the dismissal of a complaint that “fail[s] to state a claim upon which relief can be granted.” Fed. R. 12(b)(6). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 663, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). “Determining whether a complaint states a plausible claim is context-specific, requiring the reviewing court to draw on its experience and common sense.” Iqbal, 556 U.S. at 663-64, 129 S.Ct. 1937.

A Rule 12(b)(6) motion to dismiss “is viewed with disfavor and is rarely granted.” Kaiser Alum. & Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir.1982) (quotation omitted). Therefore, the complaint must be liberally construed in the plaintiffs favor, all reasonable inferences must be drawn in favor of the plaintiffs claims, and the factual allegations of the complaint must be taken as true. See Campbell v. Wells Fargo Bank, 781 F.2d 440, 442 (5th Cir.1986). Notwithstanding, “on a motion to dismiss, courts ‘are not bound to accept as true a legal conclusion couched as a factual allegation.’ ” Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (quoting Papasan v. Attain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986)). Instead, “[flactual allegations must be enough to raise a right to relief above the speculative level.” Id. That is, there must be “a ‘showing,’ rather than a blanket assertion, of entitlement to relief.” Id. at 555 n. 3, 127 S.Ct. 1955 (citing Fed.R.Civ.P. 8(a)(2)). “[W]here the well-pleaded facts do' not permit the court to infer more than a mere possibility of misconduct, the complaint has alleged—but-it has not ‘shown’—‘that the pleader is entitled to relief.’ ” Iqbal, 556 U.S. at 679,129 S.Ct. 1937 (alteration omitted) (quoting Fed.R.Civ.P. 8(a)(2)).

In ruling on a Rule 12(b)(6) motion to dismiss, “courts must consider the complaint in its entirety,” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), and generally should not go beyond the pleadings, limiting their inquiry to the facts stated in the complaint. See Fed. R.Civ.P. 12(d); Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1017 (5th Cir.1996). However, to evaluate a Rule 12(b)(6) motion to dismiss, a court may also consider: (1) any attachment to the pleadings, Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498 (5th Cir.2000); (2) documents incorporated into the complaint by reference, Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 338 (5th Cir.2008); (3) documents that a defendant attaches to its motion to dismiss if those documents are referred to in the plaintiffs complaint and are central to the plaintiffs claim, see Scanlan v. Tex. A & M Univ., 343 F.3d 533, 536 (5th Cir.2003); (4) matters of public record, Cinel v. Connick, 15 F.3d 1338, 1343 n. 6 (5th Cir.1994); and (5) information subject to judicial notice. Dorsey, 540 F.3d at 338; see also Tellabs, 551 U.S. at 322, 127 S.Ct. 2499 (stating that when ruling on Rule 12(b)(6) motions to dismiss, in addition to the complaint, courts ordinarily examine “documents incorporated into the complaint by reference, and matters of which a court may take judicial notice”).

In addition, because “[sjection 10(b) claims sound in fraud,” a plaintiff must plead the Rule 10b-5 elements with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. Coates v. Heartland Wireless Commc’ns, Inc., 26 F.Supp.2d 910, 914 (N.D.Tex.1998) (citing Shushany v. Allwaste, Inc., 992 F.2d 517, 520-21 (5th Cir.1993)). Rule 9(b) requires a plaintiff to “state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b).

III. DISCUSSION

A. Section 10(b) Claims

In their motion to dismiss, the Defendants first argue that the Plaintiffs have failed to plead a claim under section 10(b) with sufficient particularity. In order to plead a cause of action under section 10(b) of the Exchange Act and Rule 10b-5, a plaintiff must allege, in connection with the purchase or sale of securities, “ ‘(1) a misstatement or an omission (2) of material fact (3) made with scienter (4) on which plaintiff relied (5) that proximately caused [the plaintiffs’] injury.’ ” Nathenson v. Zonagen Inc., 267 F.3d 400, 407 (5th Cir.2001) (alterations in original) (quoting Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061, 1067 (5th Cir.1994)); see also Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005) (giving the elements for making out a section 10(b) claim).

The Private Securities Litigation Reform Act (PSLRA), which incorporates Rule 9(b) requirements for pleading a claim under Rule 10b-5, also requires a plaintiff to: “(1) specify each statement alleged to have been misleading ... (2) identify the speaker; (3) state when and where the statement was made; (4) plead with particularity the contents of the false representations; (5) plead with particularity what the person making the misrepresentation obtained thereby; and (6) explain the reason or reasons why the statement is misleading, ie., why the statement is fraudulent.” ABC Arbitrage Plaintiff's Group v. Tchuruk, 291 F.3d 336, 350 (5th Cir.2002) (interpreting 15 U.S.C. § 78u-4(b)). In other words, for each misleading statement, the Plaintiff must allege the “who, what, when, where, and how.” Id. at 350. Where the- complaint fails to specify the foregoing, the district court must dismiss the complaint. 15 U.S.C. § 78u-4(b)(3).

1. Allegations of Material False and Misleading Statements and Omissions

The first issue the Defendants raise with the amended complaint is whether the Plaintiffs have adequately alleged that the Defendants made material false and misleading statements and omissions. The amended complaint alleges that during the class period, Life Partners and its directors made numerous discrete communications — in particular, press releases, conference calls, and filings with the SEC — each containing several material misrepresentations and omissions. These misrepresentations and omissions purportedly artificially inflated the price of Life Partners stock on the open market, and are one of two types: that (1) Life Partners misrepresented the integrity of its business model, and (2) Life Partners misrepresented its revenue recognition system.

In demonstrating that the Defendants were relying on an unsustainable business model, the Plaintiffs allege that the Defendants utilized the services of a single doctor with little actuarial experience who routinely underestimated the life expectancies of insured individuals. The underestimated life expectancies calculated by the doctor caused the company to Overstate the value — or expected investment return rate — of the individual life insurance policies that it brokered to its investors.

The Plaintiffs also allege that the Defendants made material misrepresentations about Life Partners’ revenue recognition policy. GAAP regulations require a company to report earnings only once they are both “realized or realizable” and “earned,” and they further require a company to recognize an impairment loss if the carrying amount is not recoverable and exceeds its fair value. The Plaintiffs, however, allege that despite the Defendants’ representations in SEC forms that Life Partners followed these regulations, they actually improperly recognized revenue at an earlier period of time and failed to properly calculate impairments, thus distorting Life Partners’ actual revenues.

The Defendants do not dispute the materiality of any misrepresentations of their revenue recognition policy. Rather, they argue that the Plaintiffs have failed to adequately allege that they made any representations that would qualify as misstatements or omissions of material fact under section 10(b) with regards to its business model. According to the Defendants, any statements cited by the Plaintiffs were either truthful, not material, or protected by the PSLRA’s safe harbor provision.

After carefully reviewing the amended complaint, the Court finds the allegations adequate to survive a motion to dismiss. A misstatement or omission is “of material fact” if there is “ ‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’ ” Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)(quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)). “Materiality is not judged in the abstract, but in light of the surrounding circumstances.” Rosenzweig v. Azurix Corp., 382 F.3d 854, 866 (5th Cir.2003) (quotation omitted). “Accordingly, the disclosure required by the securities laws is measured not by literal truth, but by the ability of the statements to accurately inform rather than mislead prospective buyers.” Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 248 (5th Cir.2009).

As background into its business model, Life Partners identified potential investment opportunities in life insurance policies. For each life insurance policy, Life Partners performed an in-house life expectancy (or “LE”) analysis of the insured individual policyholder. According to the Plaintiffs, the life expectancy of the insured is the most important factor in calculating the expected internal rate of return (“IRR”) of an investment in an existing life insurance policy, with the IRR being the annual interest rate achieved by an investor. Essentially, the IRR is a function of the timing and amount of cash returned on an investment relative to the purchase price of the investment. If the LE of the insured is calculated correctly, the insured will pass away at the predicted moment and the investor will receive his expected return on the investment. However, if the predicted LE is shorter than the actual lifespan of the insured— i.e., if the death of the insured occurs at a later than expected date- — the investor will receive less than his expected return.

The Plaintiffs describe in detail Life Partners’ departure from the industry standard in calculating its life expectancy estimates. Prior to 1999, Life Partners employed one doctor, Dr. Jack Kelly, to assess the LE of insured individuals for every policy the company intended to broker. As a co-founder and part owner of Life Partners, Dr. Kelly had an inherent financial interest in the corporation. After Dr. Kelly’s unexpected death in 1999, Brian Pardo immediately hired Dr. Kelly’s former officemate, Dr. Donald T. Cassidy, to replace Dr. Kelly in rendering Life Partners’ life expectancy estimates. According to the Plaintiffs, Pardo met Dr. Cassidy for the first time at Dr. Kelly’s funeral, and he never investigated whether Dr. Cassidy had the requisite actuarial experience to act as a life expectancy underwriter. Pardo simply instructed Dr. Cassidy to “review Kelly’s life expectancy assessments to determine ‘how they were doing it.’ ” (Am. Compl., ECF No. 42 at 20, para. 58.)

Shortly following the funeral, Life Partners began sending Dr. Cassidy policies for which Life Partners sought LE calculations, paying Dr. Cassidy $500 for each policy that the company decided to purchase for resale using the life expectancy estimates provided by him. Beginning in February 18, 2008, Life Partners began to pay Dr. Cassidy an additional $15,000 per month as a retainer fee. The Plaintiffs further allege that Dr. Cassidy was the only source of Life Partners’ life expectancy calculations, and that at the time he was hired by Life Partners, he had no previous experience rendering LEs, nor any actuarial or professional training on the generation of life expectancy estimates. Furthermore, he had never taken any courses nor received professional training in the area of performing life expectancy calculations, and he allegedly never researched the methodology used by life settlement underwriters in the industry.

Despite this, Dr. Cassidy initially provided 50-80 life expectancy estimates in a work week, dedicating three days per week to the process. Accordingly, he spent approximately 17-27 minutes to perform a complete evaluation of an insured’s medical history and to calculate an estimated life expectancy. By November of 2008, Dr. Cassidy stated that he took, on average, only 7-14 minutes to perform each life expectancy estimate. Essentially, Life Partners employed a single, wholly unqualified person to quickly perform the most crucial role in a high volume, multimillion dollar business.

In addition, the Plaintiffs allege that Dr. Cassidy used a flawed methodology in rendering Life Partners’ LEs. According to two letters written by Dr. Cassidy to Life Partners in March 2002 and May 2009, Dr. Cassidy relied on a census table published by the U.S. Department of Health and Human Services (“HHS”) to help him generate his life expectancy estimates, as opposed to the Valuation Basic Table (“VBT”), which is the standard method used in the industry. Whereas the HHS table provides average life expectancy estimates for the population at large, the VBT table provides average life expectancy estimates for insured individuals only, who on average have longer life expectancies than the general population. Additionally, Dr. Cassidy used outdated mortality tables and failed to take into consideration significant changes in medical technology in generating his LEs, which practice deviated significantly from the industry standard.

Despite Dr. Cassidy’s reliance on the HHS table, Peden misrepresented to an investor in October of 2008 that Life Partners’ LEs were based on the 2008 VBT table as opposed to the HHS table. In November of 2008, Peden made this same misrepresentation to the company’s network of independent buyers’ agents who helped to broker the policies.

In assessing the accuracy of Dr. Cassi-dy’s LEs, the Plaintiffs allege that for all policies Life Partners brokered between 2000 and 2005, the average calculated LE was 3.8 years, and for all policies the company brokered between 2000 and 2010, the average LE was 4.6 years. Yet from the universe of policies from which Dr. Cassi-dy’s success rate is measurable, 88% of the policies exceeded the LE in 2006 and 2007, 89% of the policies exceeded the LE in 2008, 90% exceeded the LE in 2009, and 91% did so in 2010. The Plaintiffs assert that had Dr. Cassidy employed sound actuarial practices in line with the industry standard, the average LE for policies brokered between 2000 and 2005 should have been at least 11.8 years, and the average LE for policies brokered between 2000 and 2010 should have been 13.6 years.

The Plaintiffs also allege that Life Partners charged brokerage fees that, at more than 14% of a policy’s face value, were much higher than the market average, which was generally the “ ‘lesser of 6% of a policy’s face value or 30% of the gross sales price.’ ” (Ám. Compl., EOF No. 42 at 2, para. 5.) Life Partners never communicated the percentage that its fee constituted — its fee being the difference between the price paid to the seller of the policy and the price paid by the purchaser — to its investors, who were never told how much a seller received for his or her policy. According to the Plaintiffs, Life Partners’ method of routinely underestimating LEs allowed the company to remain competitive in the secondary market for life insurance policies despite its greater-than-average fees. Due to the lower-than-average LE that Life Partners calculated for each policyholder, each policy appeared to offer a higher rate of return than it actually carried. Accordingly, each investor unknowingly paid more than market rate for a policy, thereby allowing the company to take a fee of 14% or more of a policy’s face value.

For years, Life Partners’ business practices went relatively unnoticed. And from before the start of the class period in 2006 to early 2009, stock prices rose to record levels from $2.19 a share to $22.50 per share. Eventually, however, beginning in early 2009, various news sources began to scrutinize Life Partners’ business model, conjecturing that Dr. Cassidy’s life expectancy estimates were largely underestimated. The Defendants attempted to control damage via their own press releases, assuring the public that Life Partners remained a viable business. Stock prices eventually began to slide, howevér.

In addition, the SEC began to investigate Life Partners, issuing several Wells Notices to the company in 2011 notifying it of suspected malfeasance in connection to both its underestimation of life expectancy estimates and its unorthodox accounting practices. Also, in June of 2011, Life Partners disclosed that Ernst and Young, the company’s independent auditor, had resigned after informing Life Partners that its internal revenue recognition policies were riot in accordance with accounting principles, and that a restatement of previously reported financial statements was in order. Ernst and Young accordingly disclaimed its approval of the company’s 2010 financial statements, and refused to sign off on its 2011 ones. On June 17, 2011, the company’s former outside auditor, Eide Bailly, echoed Ernst and Young’s sentiments and also withdrew and disclaimed its previous clean audit opinion of the company’s 2009 financial statements. With the close of the class' period on Friday, June 17, 2011, the company’s stock prices had slipped significantly. By the next open trading day on Monday, June 20, 2011, Life Partners stock was valued at just $3.82 a share.

After reviewing the Plaintiffs’ complaint, the Court finds these allegations more than adequate to meet the particularity requirement of Rule 10(b). It is certainly material to a potential investor in Life Partners’ stock to know that Life Partners employed one doctor who hastily reviewed a large quantity of life insurance policies using non-industry standards, and who, in the process, routinely underestimated the LE estimates he generated.

In addition, the Plaintiffs list numerous examples of specific material misrepresentations and omissions about the sustainability of Life Partners’ business model, detailing the requisite “who, what, when, where, and why” for each example. These examples come from SEC filings, press releases, public conference calls, and comments made to purchasers of the insurance policies. The statements indicate that Life Partners misrepresented that it used both in-house and outside experts, including medical doctors and published actuarial data, “to foster the integrity of [its] pricing systems,” rather than a single unqualified doctor. The statements also indicate that Life Partners withheld information about the accuracy of Dr. Cassidy’s LEs and the diminished rates of returns for investors. Rather, they misled the public into believing that Life Partners was built upon a sustainable business model that would continue to grow indefinitely and could withstand any economy.

First, the Plaintiffs point to Life Partners’ annual 10-KSB and 10-K forms filed with the SEC on May 26, 2006, May 26, 2007, May 15, 2008, May 29, 2009, and May 12, 2010, which reported Life Partners’ financial results for the respective fiscal year. According to the Plaintiffs, Life Partners made the following misleading statement on each of these same forms filed between 2006 and 2010:

Our Purchasers Depend on Our Ability to Predict Life Expectancies and Set Appropriate Price[s]; If Our Investment Returns Are Not Competitive We May Lose Purchasers; We Must Purchase In Large Numbers

If we underestimate the average life expectancies, our purchasers will not realize the returns they seek, demand will fall, and purchasers will invest their funds elsewhere. In addition, amounts escrowed for premiums may be insufficient to keep the policy in force. If we overestimate the average life expectancies, the settlement prices we offer via-tors and life settlors will fall below market levels, supply will decrease, and viators and' life settlers [sic] will opt for other alternatives. Our ability to accurately predict life expectancies is affected by a number of factors, including:

The accuracy of our life expectancy estimations, which must sufficiently account for factors including an insured’s age, medical condition, life habits (such as smoking), and geographic location;

Our ability to anticipate and adjust for trends, such as advances in medical treatments, that affect life expectancy data; and

Our ability to balance competing interests when pricing settlements, such as the amounts paid to viators or life set-tlors, the acquisition costs paid by purchasers, and the compensation paid to ourselves and our referral networks.

To foster the integrity of our pricing systems, we use both in-house and outside experts, including medical doctors and published actuarial data. We cannot assure you that, despite our experience in settlement pricing, we will not err by underestimating or overestimate ing average life expectancies or miscalculating reserve amounts for future premiums. If we do so, we could lose purchasers or viators and life settlors, and those losses could have a material adverse effect on our business, financial condition, and results of operations.

(Am. Compl., ECF No. 42 at paras. 92, 105, 124, 166, and 193) (bold emphasis and bullet points removed; italic emphasis added.) The Plaintiffs assert that these statements were misleading because Life Partners employed only one medical doctor, Dr. Cassidy, to perform all of its life expectancy calculations. Dr. Cassidy’s life expectancies were materially flawed because they were not based on industry standards and systematically underestimated the life expectancies of policy sellers.

The Plaintiffs also point to the MD & A Section of its annual 10-K and 10-KSB forms, which omits that the company’s business model was built on the generation of artificially low life expectancy estimates, which was reasonably likely to result in a “materially unfavorable impact on the Company’s net revenue from continuing operations.” (Am. Compl., ECF No. 42 at 32, para. 91; see also paras. 104, 125, 165, and 192.)

In addition to its annual 10-K filings, Life Partners submitted a quarterly 10-QSB or 10-Q statement with the SEC in July, October, and January for the fiscal years ending in 2006 through 2011. The Plaintiffs allege that, with respect to several of the 10-QSB and 10-Q forms — in particular, those filed in October 2007, January 2008, July 2008, October 2008, July 2009, October 2009, January 2010, July 2010, October 2010, and January 2011 — the “financial information” contained therein, i.e., the company’s reported revenue, “was materially false and misleading when made because, among other things, the reported financial , earnings ... were generated through the use of a flawed and unsustainable business model that was only possible in the short term through the use of false LE estimates.” (Am. Compl., ECF No. 42 at para. 114; see also id. at paras. 117, 131, 136, 174, 179, 183, 197, 204, and 206.)

The May 26, 2006 and May 26, 2007 10-KSB forms were signed by Pardo and Peden in their capacities as president and secretary, respectively. (Am. Compl., ECF No. 42 at 32, para. 90.) The May 15, 2008, May 29, 2009, and May 12, 2010 annual 10-K forms were signed by Brian Pardo, David Martin, and R. Scott Peden. Additionally, Brian Pardo signed a certification included in the May 2006 and 2007 10-KSBs pursuant to the Sarbanes-Oxley Act of 2002 (“SOX”), in which he averred that the annual report “does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report,” and that the financial statements “fairly presented] in all material respects the financial condition, results of operations and cash flows of [Life Partners] as of, and for, the periods presented in this annual report.” (Am. Compl., ECF No. 42 at 34, para. 93; at 42, para. 106.) Also included with the 2008-2010 10-K filings were SOX certifications signed by Brian Pardo and David Martin, the Chief Financial Officer, which were substantially similar to those contained in the 2006 and 2007 Form 10-Ks.

The Plaintiffs further allege that the Defendants made several press releases and conference calls containing materially false or misleading information or omissions. For example, on March 8, 2007, Defendant Pardo issued a press release over the Business Wire announcing that Life Partners had begun to trade publicly on March 12, 2007 on the NASDAQ Global Market, and further stating that the company was committed to “sustainable growth in the future.”. (Am. Compl., ECF No. 42 at 38, para 100.) On June 4, 2007, Life Partners issued a public statement over Business Wire in which it reported its expected financial earnings from the first fiscal quarter. It further proclaimed:

Brian Pardo, Chief Executive Officer, said, “We believe our outstanding performance this quarter is a direct result of the substantial and continuing growth in the life settlement market. Each day, more and more wealthy seniors are realizing they pan turn their unwanted life insurance into cash. This increasing market awareness had made the life settlement market one of the fastest growing segments of the financial services sector. We’re very proud to be known as ‘The Architect of Life Settlements.’ ”

(Id. at 44, para. 108.) On June 14, 2007, Life Partners issued a second public statement over Business Wire conveying its actual earnings from the first fiscal quarter, and containing further comments from Brian Pardo:

Brian Pardo, Chief Executive Officer, said, “As these results clearly demonstrate, we believe our outstanding performance this quarter is a direct result of the continuing growth in the life settlement market coupled with our unique ability to provide excellent service within a very reasonable cost structure. Our proprietary software and processes benefit not only our clients and shareholders, but the thousands of wealthy seniors that are realizing the financial option we provide by turning their unwanted life insurance into cash. This increasing market awareness has made the life settlement market one of the fastest growing segments of the financial services sector and our expertise and operational efficiency has made Life Partners one of the fastest growing companies within that sector.”

(Id. at 45, para. 110) (emphasis added.) On September 26, 2007, Life Partners similarly published its revenues in Business Wire, making the same statement that its “financial results clearly show incredible growth in the life settlement market as well as [Life Partners’] unique ability to provide excellent service within this market at a very reasonable cost structure.” (Id. at 47, para. 113.)

On January 14, 2008, Life Partners again issued a press release in Business Wire relating its financial earnings and offering the following assurance:

Brian Pardo, Chief Executive Officer, said, “This has been our strongest quarter ever and we are very pleased with the continuing and substantial growth in revenues and net income. Because we serve investors in the alternative investment market and our business plan does not rely on debt, we expect Life Partners to remain insulated from the current credit trouble of other financial service companies and we believe that investors will find our company to be one of the few bright spots within the financial sector.”

(Am. Compl., ECF No. 42 at 49-50, para. 116) (emphasis added.) On May 21, 2008, following a dividend announcement, Life Partners released the following statement to Business Wire:

We are delighted to announce this increase in our quarterly dividend, which we feel is reflective of the growth in our company’s earnings. During a year when many financial sector companies have cut their dividends, we are exceptionally proud to be able to increase our dividend and continue to build the wealth of our shareholders.

(Id. at 54, para. 126) (emphasis omitted.) On June 16, 2008, Life Partners issued a press release on Business Wire stating the following:

Because of our continued growth within the growing life settlement industry, this has been the best quarter in the history of our company. Our business model deals exclusively with real assets with inherent value and does not rely on credit to provide diversification from the financial markets. That formula has become extremely attractive to investors and we expect that interest to continue. We expect our strong financial performance to underscore the substantial value of our company when compared to other stocks in the financial services sector.

{Id. at 55, para. 129) (emphasis added.) On September 19, 2008, Life Partners issued a press release stating that “for the past two quarters, [Life Partners] has experienced record earnings and its stock continues to be a green in a sea of red.” {Id. at 58, para. 135) (emphasis omitted.) On November 20, 2008, Life Partners issued the following over Business Wire:

We are proud that [Life Partners] has demonstrated its sustainable growth ability, even in these turbulent financial times. We continue to bring value to our clients who are seeking asset-based investments that are not correlated to the financial markets. Our dividend policy reflects our growth trend and our commitment to bringing value to our shareholders.

(Am. Compl., EOF No. 42 at 62, para. 140) (emphasis added.) On December 5, 2008, Life Partners publicly announced that it had been flagged with a “buy” rating, and qualified this announcement with the following statements:

Life settlements generate high returns that are neither economically sensitive nor correlated to other financial markets or commodity markets.

Given strong market growth, increasing market share and exceptional financial performance, we believe [Life Partners] to be meaningfully undervalued and expect it to outperform the market averages over the next 12-18 months.

{Id. at 63, para. 142) (emphasis added.)

On February 11, 2009, Life Partners released a public statement in response to negative press questioning the integrity of Life Partners’ business model, viz., “[Life Partners] falls short of the standard of accountability and transparency required of mid-cap Nasdaq companies. From an actuarial perspective, we’d say the odds are this one is terminal.” {See Am. Compl., ECF No. 42 at 68, para. 150 (quoting the Citron Research report).) Life Partners’ public response stated that the réport “contained inaccurate assumptions, misinformation and erroneous facts about [the] company.” {Id. at 69, para. 151.) It further assured its investors, writing,

We are confident that our business growth will remain strong throughout the remainder of this fiscal year and beyond. We vehemently disagree with the conclusions reached by the author of the report and believe strongly that our business model will continue to demonstrate the sustainable growth we have exhibited over the last 18 years.

We urge all shareholders to focus on our exceptionally strong business fundamentals and welcome the opportunity to address any issues or legitimate concerns our shareholders may have.

{Id.) (emphasis added.)

On June 16, 2009, Life Partners issued • another press release commenting on the financial results from its most recent quarter. Brian Pardo stated the following:

We are continuing to see growth within the life settlement industry and, as a leader in this industry, we are continuing to grow as well. As the financial markets remain turbulent, we expect the interest in life settlements to continue. This is because the gains from life settlements come from the inherent value in these policies and not from market appreciation. Smart investors realize that life settlements are not susceptible to market fluctuations and are using them to diversify their portfolios from financial market risk.

(Am. Compl., ECF No. 42 at 79, para. 173) (emphasis added.) On July 27, 2009, Life Partners issued the following press release:

Our board has made it clear that we want [Life Partners] shareholders to share in our success. Because of our unique business model, our shareholders can own a growth stock that also pays a healthy dividend. There aren’t many opportunities like that in today’s market.

(Id. at 83, para. 176.) On September 16, 2009, Brian Pardo publicly stated the following:

As recent news reports and these numbers show, we continue to see substantial growth in the life settlement industry and in Life Partners specifically. By concentrating on bringing value to all parties in our life settlement transactions, we ultimately bring value to our shareholders. Our focus on bringing value is what made us the number one fastest-growing small public compa-' ny in America according to Fortune Small Business magazine.

(Id. at 83, para. 178) (emphasis added.) On December 17, 2009, Life Partners released a public statement, containing the following assurances from Brian Pardo:

Life Partners has enjoyed continued growth in the life settlement industry because of our superior business model, our industry leadership and our commitment to providing service and value to our clients. As the only publicly traded life settlement provider, our experience and transparency is important to individual accredited investors, institutional investors and lawmakers who want to know more about how our industry works. We will continue to provide the leadership and innovation which has made us such an outstanding company.

(Id. at 85-86, para. 181) (emphasis added.) Additionally, the company issued the following press release on January 25, 2010:

Our business is successful because of our commitment to bringing value to our clients. Likewise, we bring value to our shareholders by sharing our success through our consistent history of dividend payments.

(Id. at 88, para. 185.) On April 26, 2010, the company stated the following regarding its announced revenues:

The announcement reflects our company’s continuing commitment to share our success with our shareholders. We intend to continue to grow the company while, at the same time, reward our shareholders with a very competitive dividend.

(Id. at 90, para. 188.)

In response to a Wall Street Journal article questioning the accuracy of Life Partners’ life expectancy estimates, Brian Pardo publicly issued the following statement on December 21, 2010:

[E]ach life settlement transaction is structured with the goal of achieving the purchaser’s target return and at a minimum, a positive return even if the insured outlives their LE prediction.

(Am. Compl., ECF No. 42 at 104-05, para. 210) (emphasis added.)

In addition to the numerous press releases made by Life Partners, the company’s officers held public conference calls during the class period, during which several misleading statements were made with respect to the health of the company. On October 17, 2008, Scott Peden and Brian Pardo held a public conference call. During this call, Brian Pardo made the following statement:

And because of the nature of Life Partners product and the lack of debt as Life Partners is a company, we had, innately, put a level of armor around the Company to protect ourselves and our shareholders.

(Am. Compl., ECF No. 42 at 61, para. 137.) On January 13, 2009, Scott Peden and Brian Pardo engaged in a public conference call, during which the following exchange ensued:

Scott Peden: Now let’s turn a little bit to recent events. The Bernie Madoff scheme has had a lot of people scared. It’s talked about almost every day. Can you explain a little bit how the safeguards in our life settlement transactions prevent the same kind of thing happening with Life Partners? Because I know a lot of people are worried.

Brian Pardo: And so our job is to find policies, source policies that are qualified, underwrite them, make sure that they meet the underwriting and the investment criteria that the clients are looking for and that we know they are looking for to produce the kinds of returns that we are wanting, double-digit returns, and in a reasonable time-frame' — four, five, six years.

(ECF No. 42 at 66-67, para. 147) (emphasis added.)

These cited examples are materially misleading. In all, there is a substantial likelihood that the disclosure of information about Dr. Cassidy’s experience, methodology, and underestimated LEs would have been viewed by a reasonable investor as having significantly altered the total mix of information made available.

The Defendants, however, point the Court to Hopson v. MetroPCS Communiations, Inc., No. 3:09-CV-2392-G, 2011. WL 1119727 (N.D.Tex. Mar. 25, 2011), to argue that (1) they were not required to supply any information about Dr. Cassidy, and (2) any representations about Life Partners’ financial growth was accurate. In Hopson, the plaintiff alleged that a company’s public statement that it was “actually accelerating its growth” during “very difficult times” was false because the defendants knew that the company was suffering from the recessionary economy. Hopson, 2011 WL 1119727, at *20. The court first noted that the plaintiff completely failed to allege that the statement was false at the time it was made, and commented that “the plaintiff does not dispute that [the company] experienced increases in subscriber growth during the class period; instead, he alleges that the defendants’ representations did not reflect the likely effects that the recessionary economy would have on the company’s business.” Id. The court then held that the allegation was conclusory where the plaintiff failed “to allege with particularity ‘how’ the company was suffering from the recessionary economy, or any basis for inferring that the defendants knew or should have known such was the case yet failed to disclose that fact.” Id.

In addressing Hopson, the Defendants argue that the Plaintiffs have similarly failed to show how the “unsustainable business model” caused Life Partners’ financial statements to be false and misleading, and by failing to do so, the Plaintiffs have not satisfied the “who, what, when, where, and how” particularity requirements of the PSLRA. In other words, where Life Partners’ financial statements accurately disclose the company’s historical earnings, the company’s failure to disclose facts about conditions that could affect the company’s future earnings does not constitute a material misrepresentation.

In response, the Plaintiffs argue that the Defendants’ failure to disclose the fact of Life Partners’ unsustainable business model in its financial statements indeed constitutes an omission of material fact. In making this argument, the Plaintiffs cite to Lormand v. U.S. Unwired, Inc., 565 F.3d 228 (5th Cir.2009), and Rubinstein v. Collins, 20 F.3d 160 (5th Cir.1994). In Rubinstein, the court held that “under rule 10b-5, a duty to speak the full truth arises when a defendant undertakes a duty to say anything. Although such a defendant is under no duty to disclose every fact or assumption underlying a prediction, he must disclose material, firm-specific adverse facts that affect the validity or plausibility of that prediction.” Rubinstein, 20 F.3d at 170 (quotations and citations omitted). Furthermore, “[t]he omission of a known risk, its probability of materialization, and its anticipated magnitude, are usually material to any disclosure discussing the prospective result from a future course of action.” Lormand, 565 F.3d at 248. Applying these rules, the Plaintiffs argue that “making inaccurate, incomplete or misleading disclosures regarding [Life Partners’] financial results and the reasons attributed for the results, gave rise to an affirmative duty to disclose the full truth.” (Pl.’s Opp., ECF No. 50 at 24.)

The Court finds that Lormand and Rubinstein are ultimately determinative of the issue. It 'is true that, similar to Hop-son, there was nothing technically inaccurate in the financial information reported in the 10-K and 10-Q forms. Indeed, the Defendants accurately reported the revenues the company had realized, even if the revenue was realized on account of falsely advertising the strength of Life Partners’ own product. The Plaintiffs, however, allege that these financial statements did much more than simply give an account of the company’s earnings — these reports also contained statements concerning the viability, or future sustainability, of Life Partners due to the integrity of the single product that it sold.

Again, the Fifth Circuit instructs the Court that under Rule 10b-5 “ ‘a duty to speak the full truth arises when a defendant undertakes a duty to say anything.’ ” Rubinstein, 20 F.3d at 170 (quoting First Virginia Bankshares v. Benson, 559 F.2d 1307, 1317 (5th Cir.1977)). Moreover, context is “instrumental in determining whether a statement is ‘misleading.’ ” Isquith ex rel. Isquith v. Middle S. Utils., Inc., 847 F.2d 186, 202 (5th Cir.1988). The overall value of a single-product company is integrally linked to the value of the product it peddles. See, e.g., Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir.2001) (finding, in the context of scienter, that where a corporation had stated that its value depended on the value of the single product it sold, the CEO knew or should have known key information concerning the product at issue). Accordingly, any reasonable, prudent investor would take into consideration information about the actuarial practices used in calculating the value of the single investment product that it sold. In other words, such information is material to an investor.

And indeed, Life Partners itself recognized and publicly admitted the importance of selling a quality product — i.e., life insurance policies for insured individuals who had a minimal predicted number of years left to live. For example, in its 10-K forms, the company juxtaposed the following display of risk consciousness — “If we underestimate the average life expectancies, our purchasers will not realize the returns they seek, demand will fall, and purchasers will invest their funds elsewhere” — with the following offer of assurance — “To foster the integrity of our pricing systems, we use both in-house and outside experts, including medical doctors and published actuarial data.” It farther stated that the accuracy of its calculations turned on its “ability to anticipate and adjust for trends, such as advances in medical treatments, that affect life expectancy data.” But where the Defendants knowingly used only one doctor to calculate all of the life expectancies, and this doctor both relied on non-industry standard actuarial tables and outdated tables that failed to take into account medical advances, these statements were actively intended to instill false confidence in the very stock purchasers being deceived.

Furthermore, like the above statements contained in the SEC filings, the company’s press releases and public conference calls were also materially misleading in the context and manner iii which they were given. Given the allegations that Life Partners was aware that it marketed an overvalued product, the multiple public statements made to bolster the apparent value and stability of the company were entirely misleading. Especially concerning is that in 2009, Pardo still held out to the public that its life insurance policies generated double-digit returns within a four to six year time frame. To blatantly offer assurances of the company’s virtuous methods in the face of public criticism in order to gain and maintain investment in a company that one knows is in danger is more than misleading — this constitutes direct lying.

Additionally, Life Partners made several attempts to capitalize on the recessionary economy and the ancillary falling value of many publicly-traded companies in order to bolster the apparent worth of the company. While the fact may be technically true that Life Partners was distinguishable from other companies affected by the financial crisis because it did not engage in a debt market, these statements are nevertheless misleading within their greater context — that Life Partners was built on an unstable product. Ultimately, because the Court finds it to be disingenuous to claim to have a company that, due to its unique business model, is more viable than those around it, when the company has knowledge that this same business model' is an inherently unsustainable one for different reasons, it deems the above statements to be materially false and misleading for the purposes of stating section 10(b) and Rule 10b-5 claims.

Still, the Defendants insist the above statements are not pleaded with sufficient particularity because the Plaintiffs have failed to plead how each statement is misleading, what the person making the misrepresentation obtained thereby, and the reason why the statement was fraudulent. The Court finds no merit to this argument, as it finds that the Plaintiffs have more than adequately offered the reason why the statement was fraudulent where the company marketed a product that the speakers knew to be overvalued and where the Defendants actively profited as managers of and shareholders in the company.

In a distinctly different argument, the Defendants also assert that several of the misrepresentations alleged in the amended complaint were not made in connection with the sale of Life Partners’ stock, but were made in connection with the sale of an actual life insurance policy to an investor. They argue that because at the time of bringing this suit the life insurance policies brokered by Life Partners did not constitute “securities” within the legal definition, any misrepresentation made to a buyer of the second-hand life insurance policy would not constitute a misrepresentation made “in connection with the sale of a security.” Accordingly, the Defendants advocate dismissing the suit altogether, arguing that the Plaintiffs have “bootstrapped” claims that properly belong to the purchasers of the life insurance policies bought from Life Partners to a lawsuit brought on behalf of purchasers of common stock in Life Partners as a corporation.

Even if some of the alleged false statements were made to policy investors, rather than stock investors, this fact would not save the Defendants from the present suit. Given the numerous statements described above that were actually made in connection with the sale of Life Partners’ common stock, which are registered securities, this Court finds that there exist sufficient misrepresentations made in connection with the sale of securities to survive a motion to dismiss.

Finally, the Defendants argue that the multiple statements made during press releases and conference calls are not actionable because they qualify for the safe harbor provision of section 21E of the PSLRA. 'Under section 21E, a “forward-looking” statement is exempted from being actionable if one of two prongs is satisfied: (1) it is either “identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement,” or it is “immaterial,” or (2) where the speaker is an individual, the “plaintiff fails to [allege] that the forward-looking statement ... was made with actual knowledge ... that the statement was false or misleading.” 15 U.S.C. §§ 77z — 2(c)(1), 78z — 5(c)(2); see also Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 371-72 (5th Cir.2004). Furthermore, where the statement is allegedly made by a business entity, in order for the statement to be actionable, the Plaintiffs must plead that the statement was “made by or with the approval of an executive officer of that entity, and “made or approved by such officer [who has] actual knowledge ... that the statement was false or misleading.” Id,

The Court does not find the statements to be exempted under the first prong of the test: that a statement is not actionable if it is either forward-looking and accompanied by meaningful cautionary language, or if it is immaterial. First, the Court first finds the statements to be material, as detailed in full above. Second, after evaluating these statements, the Court does not find many of them to be “forward-looking.” Rather, it finds them to be statements about the present strength of the company and of its product. For example, Life Partners stated that “each life settlement transaction is structured with the goal of achieving the purchaser’s target return and at a minimum, a positive return even if the insured outlives their LE prediction”; and that “[bjecause of [Life Partners’] unique business model, our shareholders can own a growth stock that also pays a healthy dividend. There aren’t many opportunities like that in today’s market.” (Am. Compl., ECF No. 42 at 104-05, para. 210; at 83, para. 176.) Such statements would not qualify for the protection of the safe harbor provision, which applies to forward-looking statements only.

Moreover, where many of the written statements do indeed reference the future health of the company and can therefore be considered “forward-looking,” the Court finds that these statements are not accompanied by meaningful cautionary language. The Defendants insist that the following statements include cautionary language: Life Partners “predicted record earnings”; Life Partners “expects to report first quarter earnings”; and the “[r]e-sults for the quarter are expected to show a 33% increase in earnings.” (Mot. to Dismiss, ECF No. 46 at 32) (alteration in original.) As the Fifth Circuit reiterated in Lormand, “Congress clearly intended that boilerplate cautionary language not constitute ‘meaningful cautionary’ language for the purpose of the safe harbor analysis.” Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 244 (2009). Rather, “[t]he requirement for ‘meaningful’ cautions calls for ‘substantive’ company-specific warnings based on a realistic description of the risks applicable to the particular circumstances, not merely a boilerplate litany of generally applicable risk factors.” Southland Sec. Corp., 365 F.3d at 372. Precisely what this Court finds to be materially misleading about the statements made in the press releases and conference calls is that they led investors in the company to believe that Life Partners brokered a safe product, and that it was therefore a stable company. Cautionary language that simply states that the company’s expected earnings were “predictive” or “expected” does nothing to counteract the implication that the company deals in an unreliable product. Insofar as the Defendants failed to discuss the risks associated with their particular method for calculating life expectancies, this Court finds these “predictive” statements to be boilerplate, as they lack any meaningful cautionary language that would “correct the false impression created by the [Defendants’] public statements.” Lormand, 565 F.3d at 247; see also Rubinstein v. Collins, 20 F.3d 160, 167 (5th Cir.1994) (“Under our precedent, cautionary language is not necessarily sufficient, in and of itself, to render predictive statements immaterial as a matter of law.”).

The Defendants also fail the second prong of the test. Under the second prong, the safe harbor provision does not extend to knowingly false forward-looking statements allegedly made by an individual defendant. Lormand, 565 F.3d at 244 (“The ‘safe harbor’ would apply only if ‘the plaintiff fails to [plead] that the forward-looking statement ... was made with actual knowledge ... that the statement was false or misleading.’ ” (quoting 15 U.S.C. § 78u-5(c)(l)(A)-(B) (alterations in original))). Because the Plaintiffs clearly plead that Mr. Pardo and Mr. Peden had actual knowledge that the statements were false or misleading, these alleged statements would not qualify for the protection of the safe harbor provision.

Furthermore, in the case of company press releases, i.e., statements allegedly made by a “business-entity,” the Plaintiffs adequately allege that several of the press releases were made by an executive officer of the company, namely, Brian Pardo. Finally, none of the oral statements made during the conference calls were accompanied by the appropriate cautionary language stating that “the actual results may differ materially from those projected in the forward-looking statement.” 15 U.S.C. §§ 77z-2(c)(2), 78u-5(e)(2).

Finally, the Defendants argue that the statements are mere “corporate puffery.” “Non-actionable puffery are statements ‘of the vague and optimistic type that cannot support a securities fraud action ... and contain no concrete factual or material misrepresentation.’ ” Kaltman v. Key Energy Servs., Inc., 447 F.Supp.2d 648, 659-60 (W.D.Tex.2006) (quoting Southland Securities Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 372 (5th Cir.2004)). Because, as detailed above, the Court finds the Defendants’ representations about the s