Lack of Scientific Consensus or Peer Review Do Not Preclude Actuarial Expert Methodology As Unreliable, Fifth Circuit Says


Actuarial Expert

Court: United States Court of Appeals for the Fifth Circuit
Jurisdiction:  Federal
Case Name: SEC v. Life Partners Holdings, Inc.
Citation: 854 F.3d 765

Facts

The Securities and Exchange Commission (SEC) brought this enforcement action against defendant Life Partners Holdings, Inc. (LPHI) and two of its senior officers alleging the officers violated reporting and anti-fraud provisions of the federal securities laws.

The appellants challenged the jury’s verdict that LPHI violated the reporting requirements of section 13(a) and that the officers aided and abetted this violation. They also contended that the district court abused its discretion in denying their motion to exclude the testimony of the SEC’s actuarial expert witness.

The Actuarial Expert Analysis

The actuarial expert had 30 years of specialized experience in the life settlement industry. Using data from LPHI, the expert conducted different analyses and concluded that LPHI’s LEs were materially and systematically short. The expert conducted an A/E (actual-to-expected) analysis and calculated an A/E performance ratio of 13% for the life settlements. The expert testified that in 30 years as an actuary, he had never seen an A/E performance ratio this low.  Furthermore, the actuarial expert indicated that his analysis followed the Actuarial Standards Board (ASB).

The Appellants’ Response

The appellants challenged the district court’s admission of the actuarial expert’s testimony, arguing that it was both unreliable and irrelevant. The appellants challenged the reliability of an expert’s opinion on the grounds that:

  1. His opinion, particularly his A/E analysis, was not based on recognized methodologies that “had been tested, subjected to peer review and publication, or generally accepted by the life settlement provider industry.”
  2. His analyses relied on data from both viatical and life settlements, thereby “skewing the results in ‘favor’ of the viatical policies that went long,” and preventing him from offering a reliable evaluation of life-settlement LEs alone.

Held

The court found that the district court did not abuse its discretion in finding the expert’s opinion sufficiently reliable to be admitted.

As to the recognition of his methodology, it was determined that lack of scientific consensus or peer review does not necessarily render expert testimony unreliable. The actuarial expert’s report explained his different analyses in detail and relied on ASB standards. The court agreed with the SEC on these points:

  1. The SEC’s theory of the case at trial was that LPHI misrepresented the known fact that its LEs were short as an unmaterialized contingent risk.
  2. The expert’s opinion was probative of the SEC’s allegations that the LEs were materially short, which was at the heart of this case.

Thus, the court found no abuse of discretion in the district court’s determination that the expert actuary’s opinion was relevant.

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