Embattled broker/dealer Securities America is crying foul as it faces Massachusetts securities regulators over claims of misleading investors who bought $7.2 million in Medical Capital private placements. The legal showdown began in earnest last week, when Securities America appeared at an administrative hearing to answer allegations brought in early 2010 that the broker/dealer failed to disclose potential red flags to both advisers and clients about Medical Capital.
Medical Capital is a Tustin, California, lender that issued private placements to purchase medical receivables. Securities America was one of Medical Capital’s biggest distributors, selling an estimated $700 million of the private placements from 2003 to 2008.
Meanwhile, investors reportedly lost more than $1 billion with their purchases of Medical Capital notes.
In July 2009, the Securities and Exchange Commission (SEC) charged Medical Capital and its two top executives with securities fraud. After raising $2.2 billion in capital, the firm is now in receivership. Regulators have since discovered that Medical Capital’s assets included not only medical receivables and loans but also a 118-foot yacht and a $20 million stake in the movie, “Perfect Game.”
As reported Oct. 4 by Investment News, the Securities America case is the first major legal battle involving an independent broker/dealer that sold private placements, or Regulation D offerings.
According to the lawsuit brought by Massachusetts regulators, Securities America deceived investors by allegedly representing MedCap notes as safe, secure and guaranteed, and never revealing the true nature of risk that the investments presented.
In addition, the lawsuit alleges that a due-diligence analyst at Securities America had serious concerns about Medical Capital, including the lack of audited financials for the series of private placement offerings. In 2005, Jim Nagengast, who was then Securities America’s president and current its chief executive officer, wrote in an e-mail that he, too, had issues about the lack of audited financials.
“Massachusetts investors were sold unsuitable, fraudulent notes by fraudulent means,” said Richard Khalife, an attorney for the Massachusetts Securities Division, in the Investment News article. “Unlawful conduct can’t go unpunished.”
Massachusetts isn’t the only regulator suing Securities America over sales of Medical Capital notes. In August, Montana regulators also sued Securities America, alleging that the firm and executives “withheld material information regarding heightened risks” from its representatives and their clients regarding notes issued by Medical Capital Holdings.
More than 40 other independent broker/dealers sold private placements in Medical Capital.
Maddox Hargett & Caruso P.C. continues to file arbitration claims with the Financial Industry Regulatory Authority (FINRA) on behalf of investors who suffered investment losses in Medical Capital. If you purchased Medical Capital Notes from a broker/dealer and wish to discuss your potential rights for recovery, contact us.