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UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS AUSTIN DIVISION _____________________________________________  SECURITIES AND EXCHANGE COMMISSION, : : Plaintiff, : Civil Action No. 1:12-CV-33 JRN v. : : LIFE PARTNERS HOLDINGS, INC., BRIAN D. : PARDO, R. SCOTT PEDEN, AND : DAVID M. MARTIN, : : Defendants. : : AMENDED RESPONSE TO BRIAN D. PARDO’S MOTION TO DISMISS

Dated this 2nd day of April 2012

Respectfully submitted, /s/ Toby M. Galloway Jason C. Rodgers Texas Bar No. 24005540 Toby M. Galloway Texas Bar No. 00790733 Michael D. King Texas Bar No. 24032634 Attorneys for Plaintiff SECURITIES AND EXCHANGE COMMISSION 801 Cherry Street, 19th Floor Fort Worth, TX 76102 Phone: (817) 978-3821 Fax: (817) 978-2700

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TABLE OF CONTENTS Page TABLE OF CONTENTS.............................................................................................................. i TABLE OF AUTHORITIES ................................................................................................... ii-iii I. II. III. INTRODUCTION AND SUMMARY OF ARGUMENT ...............................................1 ADOPTION OF ARGUMENTS ......................................................................................2 ARGUMENT AND AUTHORITIES ...............................................................................2 A. B. The Complaint Amply Alleges Misrepresentations Made With Scienter. ...........2 Pardo’s Materiality Arguments Fail......................................................................4 1. 2. 3. C. Materiality is Uniquely a Fact Question ...................................................4 Chronic Underestimation of LEs is Material ............................................5 Other Misstatements are Also Material ....................................................6

Pardo’s Insider Trading Arguments Lack Merit ...................................................7 1. 2. 3. The Inside Information was Material ........................................................7 Pardo’s Failure-to-Cash-Out Argument Fails ...........................................7 LPHI’s Reports to the Texas Department of Insurance Do Not Help Pardo .........................................................................................................8

D. IV.

Sarbanes-Oxley Section 304 Applies to This Case.............................................10

REQUEST FOR RELIEF ...............................................................................................10

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TABLE OF AUTHORITIES FEDERAL CASES Aaron v. SEC, 446 U.S. 680 (1980) .............................................................................................................2 In re Apple Computer Securities Litig., 886 F.2d 1109 (9th Cir. Cal. Sep. 25, 1989) .........................................................................9 Basic, Inc. v. Levinson, 485 U.S. 224 (1988) .............................................................................................................4 Dorsey v. Portfolio Equities, Inc., 540 F.3d 333 (5th Cir. 2008) ................................................................................................2 Helwig v. Vencor, 251 F.3d, 540 (6th Cir. 2001) ...............................................................................................6 Melder v. Morris, 27 F.3d 1097 (5th Cir. 1994) ................................................................................................2 In re Microstrategy, Inc. Sec. Litig., 115 F.Supp.2d 620 (E.D. Va. 2000) ....................................................................................7 Kelly v. Legacy Benefits Corp., 2012 WL 952122 (N.Y. Sup. Mar. 12, 2012) ......................................................................5 SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963) .............................................................................................................8 SEC v. Conway, 698 F.Supp.2d 771 (E.D. Mich. 2010) .................................................................................6 SEC v. Kelly, 663 F.Supp.2d 276 (S.D.N.Y. 2009)..................................................................................10 SEC v. Kornman, 391 F.2d 477 (N.D. Tex. 2005) ............................................................................................4 SEC v. Mozilo, 2010 WL 3656068 (C.D. Cal. Sept. 16, 2010) ................................................................8, 9 SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980) ................................................................................................6

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SEC v. Mutual Benefits Corp., 408 F.3d 737 (11th Cir. 2005) ..............................................................................................5 Weiner v. Quaker Oats Co., 129 F.3d 310 (3d Cir. 1997).................................................................................................5 In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994) ................................................................................................7

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Plaintiff Securities and Exchange Commission respectfully requests that the Court deny Brian D. Pardo’s motion to dismiss under Rules 12(b)(6) and 9(b). I. INTRODUCTION AND SUMMARY OF ARGUMENT Plaintiff’s complaint describes a multi-year scheme by Pardo and others in connection with their roles at Life Partners Holdings, Inc. (“LPHI”). The scheme included highly misleading disclosures designed to conceal the chronic underestimation of life expectancies (“LEs”) on which LPHI relied to broker life settlements and artificially inflate its profit margins. It also featured premature revenue recognition, using accounting tricks such as backdating contracts to push revenue into earlier quarters. The scheme also concealed the unsustainability of LPHI’s revenues and net income, were LPHI to use realistic LE assumptions. And it involved egregious insider trading of $11.5 million in LPHI stock by Pardo, a securities fraud recidivist. The complaint alleges Pardo’s misconduct with great specificity. Accordingly, Pardo’s request to dismiss the complaint for lack of specificity lacks merit. Equally defective is Pardo’s argument that the misconduct and misstatements, including LPHI’s restatement of financial results, are immaterial. As evidenced by, among other things, LPHI’s decision to discuss the LE issue in it public filings with the Commission, reasonable investors would want to know that LPHI and Pardo were chronically underestimating LEs in order to manufacture revenue. Reasonable investors would also want to know that LPHI’s premature recognition of revenues misstated net income by percentages as much as 29% for fiscal year 2008 and 78% for the third quarter of 2011 alone.

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Finally, Section 304 of the Sarbanes-Oxley Act of 2002, codified at 15 U.S.C. § 7243, applies to this case. Section 304 requires reimbursement of bonuses and stock profits when a company must restate its financials due to material noncompliance with Generally Accepted Accounting Principles (“GAAP”) resulting from misconduct. As set forth above, LPHI’s restatement involved highly material noncompliance with GAAP. Indeed, public companies are not required to restate unless there is something material to restate. Moreover, Pardo himself signed LPHI’s restated financials, thereby conceding materiality. And the complaint alleges that the restatement arose from misconduct by, among others, Pardo himself, including lying to LPHI auditor and backdating sales and closing documentation to conceal LPHI’s improper revenuerecognition practices. Accordingly, Pardo’s request to dismiss the Section 304 claim fails. II. ADOPTION OF ARGUMENTS The Commission adopts and incorporates by reference the arguments applicable to Pardo made by the SEC in its responses to the motions to dismiss filed by Pardo’s codefendants. III. ARGUMENT AND AUTHORITIES A. The Complaint Amply Alleges Misrepresentations Made With Scienter.1

Pardo’s assertion that the Complaint fails to allege scienter with particularity fails. Rule 9(b)’s plain language provides that state of mind “may be alleged generally.” FED. R. CIV. P. 9(B). This relaxes the particularity requirements for pleading conditions of the mind. Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 339 (5th Cir. 2008) (citing Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir. 1994)). Under the relaxed standard, a plaintiff need only allege specific facts to support an inference of fraud. Id.
                                                            
Pardo says that the SEC’s allegations read like “simple negligence.” (Pardo Br. at 1, 3). He omits, however, that simple negligence suffices to establish liability under Securities Act Sections 17(a)(2) and (3). Aaron v. SEC, 446 U.S. 680, 701-02 (1980). Thus, even if his arguments regarding scienter had any merit – which they do not – the Section 17(a)(2) and (3) claims would survive dismissal. SEC v. Life Partners Holding, Inc., et al. Amended Response to Pardo’s Motion to Dismiss 2
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Here, the complaint alleges that Pardo, a securities law recidivist, directly participated in a scheme to: (i) dupe shareholders into believing that LPHI’s revenues and profit margins were sustainable by concealing that LPHI had chronically underestimated the LEs it used to broker transactions (E.g., Cplt. ¶ 56, 61-63); (ii) misstate LPHI investors’ return on investment (“ROI”)(Cplt. ¶¶ 61-63); (iii) use accounting tricks such as backdating contracts to push revenue into earlier quarters and conceal from the auditor the failure to follow either GAAP or the company’s own revenue-recognition policy (Cplt. ¶¶ 65, 96-107); and (iv) profit from inflated revenues and profit margins by engaging in insider trading of $11.5 million in LPHI stock by Pardo (Cplt. ¶¶ 23, 138-143). As to each of these allegations, the complaint details Pardo’s role in the misconduct and facts demonstrating that he intended to deceive shareholders. These matters are fully discussed in response to the motion to dismiss filed by LPHI and Peden. Because Plaintiff has adopted those arguments, it will confine the discussion here to responding to the claim that it has failed to plead Pardo’s misstatements of ROI with specificity. On that point, Pardo misrepresented in an October 2007 conference call with analysts that a “12 to 14 %” ROI was “somewhat on the conservative side of what we think [the investors] are actually going to get.” (Cplt. ¶ 61). In October 2008, he misrepresented that if clients were “expecting [11-12%] returns, they will not be disappointed.” (Id). The problem with these statements, as specifically pled in the complaint, is that Pardo omitted that the stated returns ignored active policies where the insureds had already outlived their LEs. (Id. at ¶ 63). Furthermore, even if every insured who had outlived the LE died on the dates of Pardo’s misstatements – a best-case scenario for Pardo – the returns would be nowhere near the double digits touted by Pardo. (Id. at ¶¶ 11, 63). And the longer they lived, the worse the returns would

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be.2 Indeed, as alleged in the complaint, had LPHI used appropriately developed LEs, the average projected ROI for policies on which Cassidy rendered the LE would be approximately 0.4% -- a far cry from the 11-14% touted by Pardo. (Cplt. ¶ 48). Thus, Pardo’s statements regarding ROI were unfounded. In fact, a parade of red flags alerted him that his statements were false and misleading:    the audit committee’s concerns regarding LEs in 2003 (Cplt. ¶¶ 49-50); the consultant’s similar concerns in 2006 (Cplt. ¶ 53); internal tracking showing in 2006 that of the life settlements for which the accuracy of LEs were measurable, 88% of the insureds were outliving their LEs (Cplt. ¶ 54); and  the 2007 enforcement action by the Colorado Securities Commission based in part on the “high frequency rate” at which insureds were outliving their LEs. (Cplt. ¶ 55). B. Pardo’s Materiality Arguments Fail 1. Materiality is Uniquely a Fact Question

Information is material if there is a “substantial likelihood that the disclosure of the misstated or 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, 23132 (1988). Thus, “materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information.” Id. at 240. The question of materiality cannot be decided on a motion to dismiss unless the facts are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of its importance.” SEC v. Kornman, 391 F.2d 477, 485, n. 2 (N.D. Tex. 2005).
                                                             2    LPHI and Peden contend that it is not possible to calculate ROI on active policies. (LPHI and Peden Br. at
17). But one can easily calculate that the returns could not possibly reach double digits if those policies were included. And that is precisely the type of common-sense information desired by investors.

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2.

Chronic Underestimation of LEs is Material

LEs are perhaps the most important factor in pricing life settlements. Indeed, “it is of paramount importance that an accurate determination be made of the insured’s expected date of death.” SEC v. Mutual Benefits Corp., 408 F.3d 737, 738 (11th Cir. 2005). “If the insured lives longer than expected, the purchaser of the policy will realize a reduced return, or may lose money on the investment.” Id. “In other words, the expected return is largely if not entirely a function of the viator’s life expectancy.” Kelly v. Legacy Benefits Corp., 2012 WL 952122, *1 (N.Y. Sup. Mar. 12, 2012) (slip op.). Reasonable investors would certainly want to know about LPHI’s chronic underestimation of LEs because of vital importance of these LEs to LPHI’s business model. (Cplt. ¶¶ 45-48). Pardo concedes this by including in LPHI’s risk disclosures in its SEC filings that “if” the company underestimates LEs, purchasers will not realize their expected returns. (Cplt. ¶ 56 and accompanying table). But Pardo misdescribes underestimation of LEs as a contingent event rather than an existing reality. (Cplt. ¶ 56) (quoting, e.g., 2006 Form 10-K (“We cannot assure you that, despite our experience in settlement pricing, we will not err by underestimating or overestimating average life expectancies[.]) (emphasis added). In other words, Pardo implies that it was not their business practice to underestimate LEs, but that they were trying to render LEs accurately. As the complaint alleges, he knew better. (Cplt. ¶¶ 5-7). Thus, contrary to Pardo’s contention, the LEs were not mere predictions or other soft information such as predictions, asset valuations, and unknowables. Rather, Pardo made sure that the LEs were chronically underestimated. The entire business depended on it. Further, even if LEs constituted soft information, the information is nonetheless material where Pardo had no basis for the information disclosed. See Weiner v. Quaker Oats Co., 129
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F.3d 310, 320 (3d Cir. 1997) (“Statements of ‘soft information’ from high-ranking corporate officials can be actionable as securities fraud if they are made without reasonable basis.”). Since Pardo knew of the chronic underestimation of LEs, his statements had no reasonable basis. Pardo was not required to disclose soft information, assuming for the sake of argument only that LEs meet that definition. But since he chose to disclose LEs, he could not provide misleading disclosures. “Silence, absent a duty to disclose, is not misleading under Rule 10b-5.” Levinson, 485 U.S. at 239 n. 17. Yet, “even absent a duty to speak, a party who discloses material facts in connection with securities transactions ‘assume[s] a duty to speak fully and truthfully on those subjects.’ ” Helwig v. Vencor, 251 F.3d, 540, 561 (6th Cir. 2001) (en banc) (quotation omitted). With “soft information,” a defendant “may choose silence or speech” based on the then-known facts, “but he cannot choose half-truths.” Id. at 564; see also SEC v. Conway, 698 F.Supp.2d 771, 827-28 n. 36 (E.D. Mich. 2010) ( same). Finally, regardless whether LEs are deemed soft or hard information, Item 303 of Regulation S-K required Pardo to disclose the known trend of underestimated LEs. See 17 C.F.R. § 229.303(a), Instruction 3. This regulatory obligation further proves materiality. 3. Other Misstatements are Also Material

Nor is Pardo free to focus solely on LEs and ignore the various other material misstatements alleged in the complaint. For instance, the complaint specifically alleges an accounting scheme that resulted in highly material misstatement of net income, a key barometer of financial health. The complaint alleges overstatements of net income by percentages as high as 29% for fiscal year 2008 and a staggering 78% for the third quarter of 2011 alone. (Cplt. ¶ 137). The misstatements in other years and quarters are also material. See, e.g., SEC v. Murphy,

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626 F.2d 633, 653 (9th Cir. 1980) (information about a company’s financial health is generally material).3 C. Pardo’s Insider Trading Arguments Lack Merit 1. The Inside Information was Material

Pardo’s contention that the information on which he traded was immaterial fails for the reasons set forth above. Specifically, the chronic underestimation of LEs, overstatements of net income, and misstatements of ROI are all material. Thus, Pardo traded on material information. 2. Pardo’s Failure-to-Cash-Out Argument Fails

Nor can Pardo escape liability simply because he did not sell all of his shares at peak prices. (Pardo Br. at 9.) Insider-trading defendants need not “‘cash out’ fully by divesting themselves of their stake in the Company.” In re Microstrategy, Inc. Sec. Litig., 115 F.Supp. 2d 620, 647 (E.D. Va. 2000). “An insider may not always trade all his shares in the company for which he possesses the inside information; the trader may hold on to a portion of his shares to hedge against the unforeseen or to obscure the insider trading from the SEC.” In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1427 (9th Cir. 1994). Pardo may have tried to hedge against the unforeseen or fly under the SEC’s radar, especially given his past brushes with the SEC. Moreover, even though Pardo did not cash out fully, his sales of LPHI stock were hardly innocent. Indeed, Pardo made suspicious and opportunistically timed trades. In calendar year 2007 – when the Colorado Securities Commission sued Life Partners, Pardo and Peden for the “high frequency rate” at which insureds were outliving their LEs – Pardo sold over $7.7 million

                                                            
3

Pardo’s misrepresentations regarding investors’ ROI were also material. 7

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of LPHI stock. (Cplt. ¶¶ 9, 55 and 139).4 In fiscal year 2008, when LPHI overstated its net income by fully 29%, Pardo sold $6,770,207 of LPHI stock. (Cplt. ¶¶ 137, 139). Likewise, in October 2007 – the month that Pardo misrepresented that 12-14 percent was on the “conservative side” of what investors would receive from their investment – Pardo sold over $650,000 of LPHI stock. (Cplt. ¶ 61). Finally, in October and November 2008 – when Pardo misrepresented that investors expecting an 11-12 percent return would not be disappointed and in which Peden misrepresented that Cassidy used the VBT table to generate LEs – Pardo sold over $1.6 million of LPHI stock. (Cplt. ¶¶ 12, 43-44, 61, and 128). 3. LPHI’s Reports to the Texas Department of Insurance Do Not Help Pardo

Pardo contends that shareholders bore the burden of discerning from the bits of confusing information provided by LPHI to the Texas Department of Insurance (“TDI”) that Defendants were intentionally and chronically underestimating LEs. Pardo has it exactly backwards. Reasonable investors are not obliged to piece together from confusing, vague and incomplete information that LPHI was manipulating LEs. See, e.g., SEC v. Mozilo, 2010 WL 3656068, at *10 (C.D. Cal. Sept. 16, 2010) (shareholders are not required to “’connect the dots’ in a company’s various SEC filings”). Rather, the burden rests squarely on public companies and their officers to disclose, fully and fairly, material facts. See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963) (a fundamental purpose of the federal securities laws is to substitute a philosophy of disclosure of material facts for a philosophy of caveat emptor). Moreover, even if shareholders could somehow “connect the dots” and conclude that Defendants systematically underestimated LEs, they could not discern from the TDI data that
                                                            
The Commission respectfully requests that the Court take judicial notice that the Colorado Securities Commission filed its enforcement action on May 30, 2007. SEC v. Life Partners Holding, Inc., et al. Amended Response to Pardo’s Motion to Dismiss 8
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approximately 91% of the insureds who were expected to die in the timeframe provided by Cassidy have failed to do so, or that the average return on investment was nowhere near the “conservative” returns touted by Pardo. And the TDI information tells shareholders nothing about Defendants’ revenue recognition practices, the impairment of policies on Life Partners’ books or Pardo’s insider trading of $11.5 million in LPHI stock. Furthermore, even if they could connect all those dots, “omissions by corporate insiders are not rendered immaterial by the fact that the omitted facts are otherwise available to the public.” Mozilo, 2010 WL 3656068, *9 (quoting In re Apple Computer Secs. Litig., 886 F.2d 1109, 1114 (9th Cir.1989)). This is especially true given that Defendants misled shareholders to believe that any variance in the rates insured outlived LEs was due to normal statistical “error” from an otherwise sound and “experienced” underwriting methodology. (Cplt. ¶ 56) (quoting 2006 Form 10-K) (“We cannot assure you that, despite our experience in settlement pricing, we will not err by underestimating or overestimating average life expectancies[.]) (emphasis added); Mozilo, 2010 WL 3656068, *9 (“[E]ven if that information is part of the ‘total mix,’ the information must be transmitted ‘with a high degree of intensity and credibility sufficient to effectively counterbalance any misleading impression created by the insiders’ one-sided representations.’”) (quoting In re Apple Computer Secs. Litig., 886 F.2d at 1116)). Here, a disclosure “sufficient to counterbalance” Pardo’s other misleading statements would require a high degree of “intensity and credibility.” For instance, Pardo could have flatly admitted that LPHI was systematically and materially underestimating LEs in order to manufacture revenue. But he made no such disclosure, or anything close to it. Therefore, the TDI reports cannot save him from insider-trading liability.

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D.

Sarbanes-Oxley Section 304 Applies to This Case

LPHI was required to restate its financials due to (1) material noncompliance with GAAP, and (2) misconduct. LPHI misstated its net income – a key indicator of financial soundness – by highly material amounts throughout the restatement period. Pardo cannot focus solely on revenues and ignore net income and all other measures of LPHI’s financial condition. Furthermore, under GAAP, “a restatement issues only when errors are material.” SEC v. Kelly, 663 F.Supp.2d 276, 284 (S.D.N.Y. 2009). Pardo’s argument that the restatement was due to something other than material noncompliance with GAAP therefore lacks merit. Equally misguided is Pardo’s trivialization of the restatement as resulting not from misconduct, but “mere changes in accounting methodology.” (Pardo Br. at 10). Pardo himself certified the restatement and its self-serving explanations. He cannot now use his own bare denials of misconduct to exculpate himself. (See Pardo Br. at 10, citing Pardo-certified LPHI Form 10-K as proof that the restatement was not due to misconduct). Indeed, the complaint alleges a multi-year fraudulent scheme orchestrated and carried out by Pardo. The complaint further alleges that the misconduct accompanying this scheme lay at the heart of the restatement. (Cplt. ¶¶ 64-137). The restatement resulted not from changes in accounting, but from accounting errors. (Cplt. ¶¶ 17, 68, 132, 135). The Court should decline Pardo’s invitation to draw the inferences in his favor. And the Court should reject Pardo’s selfserving denial of misconduct. IV. REQUEST FOR RELIEF For these reasons, the Commission respectfully requests that the Court deny Pardo’s motion to dismiss. Should the Court find a pleading deficiency, however, the Commission respectfully requests leave to amend its complaint.

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Dated this 2nd day of April 2012

Respectfully submitted, /s/ Toby M. Galloway Jason C. Rodgers Texas Bar No. 24005540 Toby M. Galloway Texas Bar No. 00790733 Michael D. King Texas Bar No. 24032634 Attorneys for Plaintiff SECURITIES AND EXCHANGE COMMISSION 801 Cherry Street, 19th Floor Fort Worth, TX 76102 Phone: (817) 978-3821 Fax: (817) 978-2700

CERTIFICATE OF SERVICE I hereby certify that on the 2nd day of April, 2012, I electronically filed the foregoing with the Clerk of the court using the CM/ECF system, which will send notification of such filing to the following: Jason Rodgers, Attorney for Securities and Exchange Commission Toby Galloway, Attorney for Securities and Exchange Commission Michael King, Attorney for Securities and Exchange Commission Elizabeth L. Yingling, Attorney for Defendants Life Partners Holdings, Inc. and R. Scott Peden J. Pete Laney, Attorney for Defendants Life Partner Holdings, Inc. and R. Scott Peden Laura J. O’Rourke, Attorney for Defendants Life Partner Holdings, Inc. and R. Scott Peden Will R. Daugherty, Attorney for Defendants Life Partner Holdings, Inc. and R. Scott Peden David W. Klaudt, Attorney for Defendant Brian D. Pardo Jason S. Lewis, Attorney for Defendant Brian D. Pardo Jeffrey M. Benton, Attorney for Defendant Brian D. Pardo Robert Allen Hawkins, Attorney for Defendant David M. Martin S. Cass Weiland, Attorney for Defendant David M. Martin and I hereby certify that there are no non-CM/ECF participants:

/s/ Toby M. Galloway Toby M. Galloway
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UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS AUSTIN DIVISION _____________________________________________ SECURITIES AND EXCHANGE COMMISSION, : : Plaintiff, : Civil Action No. 1:12-CV-33 JRN v. : : LIFE PARTNERS HOLDINGS, INC., BRIAN D. : PARDO, R. SCOTT PEDEN, AND : DAVID M. MARTIN, : : Defendants. : : ORDER DENYING DEFENDANT BRIAN D. PARDO'S MOTION TO DISMISS Having considered Brian D. Pardo’s Motion to Dismiss, memorandum in support, responses in opposition, and replies, the Court hereby DENIES Pardo’s Motion to Dismiss. Signed this __ day of ______________, 2012.

James R. Nowlin United States District Judge

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