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Medical Capital Fraud: Latest Update

Thomas Seaman, the court-appointed receiver in the Medical Capital fraud case, filed his sixth status report on Medical Capital Holdings on Jan. 11, 2010. Among the highlights revealed in the document: Investors are owed more than $1.7 billion and Medical Capital’s lending activities have been deemed unprofitable beginning with the creation of its first Medical Provider Financial Corporation, or MPFC 1. (MPFC 1 is one of several wholly owned special-purpose corporations that Medical Capital used to raise money from investors via offerings of notes.) 

Other interesting details found in Seaman’s latest report include the following:

  • Medical Capital requested and was paid administrative fees in excess of $323 million.
  • No MPFC ever generated enough profit to pay investors’ principal and interest.
  • Medical Capital transferred loans and other assets valued at just under $1 billion between eight money-raising MPFCs, which facilitated payments of earlier investors’ principal from new investors’ funds.

In July 2009, the Securities and Exchange Commission (SEC) shut down Tustin-based Medical Capital for allegedly defrauding investors out of at least $18.5 million. In an amended lawsuit filed in November 2009, however, the SEC alleges a much more systematic fraud against Medical Capital and its subsidiaries. 

The amended complaint accuses Medical Capital of “faking” receivables, which the SEC says were then sold to MPFC-VI. In turn, the fake receivables allowed Medical Capital to charge investors millions of dollars in unjustified fees. 

A Nov. 12 article in the Orange County Register describes how the process allegedly worked: 

“In August 2008, MP-VI bought receivables of NLV, Inc. from an older fund, Medical Provider-V, for $3.39 million in cash. In fact, NLV had been out of business for four years. The receivables were fake.

“In August and September 2008, MP-VI bought three batches of receivables for Trace Life Sciences, a Denton, Texas, radio medicine maker that Medical Capital had just seized. Two of the three batches of receivables were fake. 

“Medical Capital took the first 72 receivables from the first batch and created a fake second batch by adding the number 1045 to each line number to create a new line, the SEC alleged. It also upped the amount for each receivable by $100,000. It created the fake third batch by taking those same receivables and increasing the amount due on each receivable by $200,000.” 

The end result of Medical Capital’s alleged “accounting” was this: Trace Life Sciences generated more than $21 million in fake receivables in less than a month. The SEC alleged that MP-VI paid two earlier Medical Capital funds $9.7 million for the right to collect the fake bills.

Maddox Hargett & Caruso continue to file arbitration claims against various brokerage firms that sold investors Medical Capital Notes. If you suffered investment losses in Medical Capital Holdings, contact us today.


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