Securities America has once again caught the attention of securities regulators over risky sales in Medical Capital Holdings. This time, Montana’s State Securities Commission is suing Securities America.

In January, Massachusetts Secretary of State William Galvin filed the first lawsuit against Securities America, accusing the broker/dealer of failing to reveal key information about failed private placements in Medical Capital.

According to the Montana lawsuit, Securities America and several of its top executives, including new chief executive James Nagengast, allegedly “withheld material information regarding heightened risks” from its representatives and their clients regarding notes issued by Medical Capital Holdings.

Securities America brokers sold $698 million worth of the notes from 2003 to 2008 and “concealed these risks” from its brokers and their clients, the Montana lawsuit contends.

In total, Medical Capital sold $2.2 billion of notes through dozens of independent broker-dealers, a number of which have failed or shut down. Securities America is the broker/dealer that sold the largest amount of Medical Capital notes.

Securities America is facing a number of lawsuits and arbitration claims from disgruntled investors who lost hundreds of thousands of dollars in their Medical Capital investments.

If you have a story to tell involving Securities America and/or Medical Capital Notes, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.

Embattled broker/dealer Securities America has a new leader at the helm: Jim Nagengast. One of his first assignments as the new CEO: Dealing with the problems that Securities America brokers created when they unloaded Medical Capital private placements on investors from 2003 to 2008.

In January, Massachusetts Secretary of State William Galvin filed a lawsuit against Securities America, accusing the firm of misleading investors who bought the investments. According to the complaint, 400 Securities America representatives and advisers sold almost $700 million private placements issued by Medical Capital Holdings.

In July 2009, the Securities and Exchange Commission filed fraud charges against Medical Capital.

The Massachusetts lawsuit alleges that Securities America failed to tell investors key information about the private placements and, specifically, the financial condition of Medical Capital itself. In total, Medical Capital issued $2.2. billion in notes; about half are in default. Many broker/dealers sold the notes, but Securities America, which has more than 1,900 representatives and advisers, is the largest broker/dealer to have sold them.

As reported July 26 by Investment News, an administrative hearing at the Massachusetts Securities Division is set for Aug. 30. According to the story, Nagengast believes Securities America performed its due diligence in selling Medical Capital notes to investors.

There may be evidence to the contrary, however. The Massachusetts lawsuit cites several e-mails from Nagengast in 2005 stating that the firm should stop selling the product until it received audited financials from Medical Capital.

According to the complaint, Nagengast wrote the following in one e-mail:

“We simply have to tell [Medical Capital] that if they don’t have financials by [a specified] date, we will stop distributing the product on that date. Then they can decide if it’s worth spending $50,000 to have [the audit] done. If they won’t spend the money, that should give us concern.”

If you have a story to tell involving Securities America and/or Medical Capital Notes, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.

Private-placement sales in Provident Royalties LLC have come back to haunt many once-successful broker/dealers. The Securities and Exchange Commission (SEC) charged Provident with civil fraud last summer, accusing the company and various top executives of operating a $485 million Ponzi scheme allegedly involving phony oil and gas securities.

Fifty broker/dealers that sold private placements in Provident are now being sued by Provident’s trustee, Milo H. Segner Jr. At the same time, hundreds of investors have filed arbitration claims with the Financial Industry Regulatory Authority (FINRA).

As reported July 11 by Investment News, many broker/dealers facing Provident-related lawsuits appear to have dangerously low net-capital positions - a fact that could put them in peril if they eventually pay out large legal claims over soured Provident deals.

“Broker-dealers facing millions of dollars in lawsuits could be in a world of hurt,” said Carrie Wisniewski, president of B/D Compliance Associates, in the Investment News article. “It’s a big problem,” she said.

One of the broker/dealers named in the trustee’s June 21 lawsuit is Capital Financial Services. It had only $390,000 in excess net capital at the end of 2009. The firm also has at least nine pending arbitration claims against its president, Brian Boppre, totaling $10.8 million in damages.

Next Financial Group also is a big seller of Provident private placements. It had $3.1 million in excess net capital at the end of last year, including $1.1 million reserved to pay contingent legal liabilities, according to Investment News.

Violation of the SEC’s net-capital requirement can signal the end of a broker/dealer. The Provident case - and the resulting legal claims it produced - has pushed many broker/dealers to the breaking point. Okoboji Financial Services, the fifth-largest seller of the Provident private placements, said in May it was closing up shop. Okoboji reportedly had excess net capital of $32,048 at the end of 2009, but made no provisions for legal liabilities.

GunnAllen Financial got caught up in a similar situation. A leading seller of investment deals in Provident Royalties, the broker/dealer closed in March when its available capital fell below the amount needed to adhere to industry rules. At least 10 other firms that sold private placements in Provident Royalties, as well as in Medical Capital Holdings, have shuttered recently because of net-capital issues.

If you are a retail or institutional investor and sustained investment losses related to Provident Royalties, contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

At least 12 broker/dealers that sold private placements issued by Provident Royalties LLC are now either out of business or no longer sanctioned by the Financial Industry Regulatory Authority (FINRA). As reported June 30 by Investment News, the 12 firms in question sold $56.7 million of Provident offerings.

In July 2009, the Securities and Exchange Commission filed a lawsuit against Provident Royalties, charging the company and its founders with fraud. From 2006 to 2009, Provident sold $485 million of private placements through a number of broker/dealers throughout the country.

Those same broker/dealers are now facing a slew of arbitration claims and lawsuits from investors who lost millions of dollars on the Provident deals, as well as on other private-placement offerings, including those from Medical Capital Holdings.

Last month, the trustee in the Provident case, Milo H. Segner Jr., filed a complaint against 49 broker/dealers, alleging they “failed miserably in upholding their fiduciary obligations” when selling a series of Provident Royalties private placements. In total, the lawsuit lists 61 firms that sold investment offerings in Provident.

Investment News provided a list of broker/dealers with problems connected to sales of Provident private placements. Among the broker/dealers on the list:

• AFA Financial Group LLC - AFA sold $2.5 million of Provident private placements; in April, the broker/dealer said it was closing its business due to overwhelming legal and insurance costs.

• Barron Moore Inc. - The Financial Industry Regulatory Authority (FINRA) expelled Barron Moore in June 2008 over penny stock sales. The company sold $205,000 in Provident private placements.

• Community Bankers Securities LLC - Community Bankers ceased its affiliation with FINRA in December 2009. It sold $2.8 million in Provident private placements.

• Empire Financial Group Inc. - FINRA expelled Empire in March 2009 for failing to pay unknown fines and/or costs. Empire sold $2.8 million in Provident placements.

• Empire Securities Corp. - FINRA suspended Empire Securities in May 2010 for failing to pay arbitration fees. Empire Securities sold $205,000 in Provident private placements.

• ePlanning Securities Inc. - The company withdrew from FINRA in February 2009. It sold $3.8 million in Provident placements.

• GunnAllen Financial Inc. - GunnAllen was shut down in March 2010 when it failed to meet FINRA’s net-capital requirements. It sold $22.3 million in Provident private placements.

• Jesup & Lamont Securities Corp. - The broker/dealer closed its doors in June 2010 after failing to meet FINRA’s net-capital requirements. It sold $100,000 in Provident private placements.

• Main Street Securities LLC - The firm withdrew its registration from FINRA in November 2009. It sold $205,000 in Provident private placements to investors.

• Okoboji Financial Services - In May 2010, Okoboji filed forms with both FINRA and the SEC to withdraw its registration as a broker/dealer. Okoboji sold $21.9 million in Provident private placements.

• Private Asset Group Inc. - FINRA suspended Private Asset Group in May 2010 for failing to pay arbitration fees of $2 million.

• Provident Asset Management - On March 18, FINRA expelled Dallas-based Provident Asset Management for marketing a series of fraudulent private placements offered by its affiliate, Provident Royalties, in a massive Ponzi scheme. Provident Asset sold $50,000 in Provident private placements.

Weighed down by sales in Medical Capital Holdings and other failed private placement deals, more broker/dealers are closing their doors. At least nine B-Ds have gone out of business this year.

In 2005, 5,111 broker-dealers were registered with the Financial Industry Regulatory Authority (FINRA); today, the number of firms has declined by 8.2% to 4,693.

A number of reasons are behind the recent broker/dealer closures, including the current economy, as well as regulatory pressure from FINRA and the Securities and Exchange Commission (SEC). For many of the recently shuttered brokerages, however, their fate has been sealed by sales in Medical Capital Holdings.

In July 2009, the SEC charged Medical Capital with fraud in connection to the sale of private placements. In total, the Tustin, California, lender raised $2.2 billion in investor money and sold private placements known as Medical Capital notes through dozens of broker/dealers. More than half of investors’ money is now gone.

Chicago Investment Group, a broker/dealer with approximately 90 brokers and $200 million in client assets, is the latest broker/dealer set to close its doors. As reported June 29 by Investment News, the company revealed last week it did not have enough capital on hand to meet industry rules to remain open for business.

GunnAllen Financial. Cullum & Burks Securities. Okoboji Financial Services. Jesup & Lamont Securities. All are independent broker/dealers that have either faced net-capital violations or been shut down by regulators after their capital levels were deemed too inadequate to continue doing business.

Jesup & Lamont Securities is one of the latest broker/dealers facing a capital crunch. On June 18, FINRA ordered the company and its 300 reps to cease business operations other than liquidating transactions. According to a June 27 Investment News article, the problem may stem to pressure from the SEC regarding sales of $11 million in private shares of Jesup & Lamont’s stock.

Jesup & Lamont is not alone. As reported in the Investment News story, a number of broker/dealers are dealing with capital requirement issues these days as a result of the market downturn of 2008 and early 2009. Broker/dealers also share something else in common: Many are facing legal liabilities from private-placements deals that have gone bust. Two of the most prominent cases involve Medical Capital Holdings and Provident Royalties LLC.

Last summer, the Securities and Exchange Commission (SEC) brought a fraud lawsuit against Provident Royalties and its related business entities. In the complaint, the SEC charged Provident with selling fraudulent private-placement offerings from September 2006 through January 2009. According to SEC documents, Provident raised $495 million from at least 7,700 investors throughout the country.

That same summer the SEC also initiated a fraud lawsuit against Medical Capital Holdings. In its fraud complaint, the SEC alleges that Medical Capital had more than $543 million in phony receivables on its books and had lost more than $315 million on various loans. Meanwhile, the company reportedly collected $323 million in fees for managing the money-losing loans.

The SEC also accuses Medical Capital of running a Ponzi scheme operation. According to the SEC complaint, Medical Capital was selling receivables at a markup among the various funds it controlled and then using money from newer investors to pay investors in the older funds.

A recent Medical Capital win by an investor over soured private placement deals is an encouraging sign for other investors with similar losses. The $400,000 award, which was issued May 10 and reported June 1 by Investment News, appears to be the first successful claim against a broker/dealer for selling Medical Capital investments.

The investor in the case was Marilyn Hazell, who filed her complaint against broker/dealer Peak Securities of Largo, Florida. In the complaint, Hazell cited breach of contract, breach of fiduciary duty, negligence and fraud.

Private placements in Medical Capital are at the center of a July 2009 fraud complaint by the Securities and Exchange Commission (SEC). In its complaint, the SEC charged Medical Capital Holdings with fraud in the sale of $77 million in notes. According to the SEC, Medical Capital told investors that any funds raised from its private placement deals would be invested in medical receivables. Instead, the SEC alleges that the company took $25 million in administrative fees for one fund, Medical Provider VI.

Federal prosecutors also have opened a criminal investigation of Medical Capital’s officers: Sidney M. Field and Joey Lampariello. In late May, U.S. District Judge David O. Carter agreed to let them tap more than $100,000 in previously frozen assets so they could hire criminal defense attorneys.

As reported in the June 1 Investment News article, Medical Provider Funding VI is the last in a series of offerings that raised $2.2 billion from investors. About $1 billion in investors’ money has reportedly been wiped out.

Since then, many investors have filed arbitration claims against the broker/dealers that sold them Medical Capital notes.

Peak Securities lost its registration with FINRA in November.

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.

Medical Capital fraud is on the minds of many investors. The shuttered lender, based in Tustin, California, has left thousands of investors in financial straits, with many still asking how it happened and why regulators didn’t do a better job of scrutinizing sales of private placements.

Private placements are stocks, bonds or other instruments that a corporation issues to investors outside of the public markets. Because the issuing companies don’t have to register private placements with the Securities and Exchange Commission (SEC), these investments are considered riskier than traditional securities.

Medical Capital Holdings operated its business by providing funds to financially troubled hospitals and health-care facilities. Once it secured the unpaid bills, or receivables, of those companies, interests in the receivables were sold to investors in the form of private placement securities called Medical Capital Notes.

From 2003 to 2009, through a group of special-purpose subsidiaries, Medical Capital Holdings issued more than $2.2 billion of Medical Capital Notes to some 20,000 investors across the country. By the time the Securities and Exchange Commission (SEC) sued Medical Capital for fraud in July 2009, Medical Capital had more than $543 million in phony receivables on its books and had lost $316 million on various loans. Meanwhile, the company had collected $323 million in fees for managing money-losing loans.

The SEC also uncovered the makings of a massive Ponzi scheme at Medical Capital. The scam ultimately would be called one of largest alleged Ponzi schemes in the history of Orange County, California. According to the SEC, Medical Capital was selling receivables at a markup among the funds it controlled and using money from newer investors to pay investors in the older funds.

In addition, the SEC says Medical Capital spent $4.5 million on a 118-foot yacht called the Home Stretch and another $18.1 million on unreleased movie about a Mexican Little League team.

In March 2010, federal prosecutors launched a criminal investigation into two key executives at Medical Capital: CEO Sidney M. Field and President Joseph J. “Joey” Lampariello. Interestingly, Field had previous run-ins with regulators. In the early 1990s, he was essentially ousted from the auto insurance industry after California insurance regulators sued him for fraud and revoked his license.

Adrian Cross invested more than $1 million of her “nest egg” money in private placement securities issued by Medical Capital and another company, Provident Asset LLC. As reported in a March 27, 2010, article in the Wall Street Journal, the former schoolteacher made the investment on the recommendation of the broker/dealer she trusted: Securities America. When Medical Capital and Provident Royalties collapsed in 2009, Cross’s investment was wiped out.

“I felt gutted like a fish,” Cross said in the Wall Street Journal article. “He had pushed it as a safe alternative to stocks.”

Cross isn’t alone. Hundreds of other Medical Capital investors express similar sentiments. Many have filed arbitration claims with the Financial Industry Regulatory Authority (FINRA), accusing their broker/dealer of misrepresenting private placements in companies like Medical Capital as safe and secure.

In January, Massachusetts Secretary of State William Galvin brought the first state enforcement case against Securities America over sales practices regarding Medical Capital. Among the charges, Galvin alleges that Securities America representatives failed to disclose certain risks to customers, many of whom were retirees.

The case is awaiting a hearing.

Maddox Hargett & Caruso P.C. continues to file arbitration claims with 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 today.

Investor complaints regarding private placements - including those linked to Medical Capital Holdings - have prompted several state and federal investigations into the private placement sales practices of broker/dealers across the country. In many instances, the investigations have revealed a significant lack of regulatory compliance.

In response, the Financial Industry Regulatory Authority (FINRA) has published new guidance for FINRA-registered firms about their obligations when it comes to customer suitability, disclosures and other requirements for selling private placements to customers. Specifically, FINRA Regulatory Notice 10-22 reinforces and details a broker/dealer’s obligation to conduct a reasonable investigation of an issuer and the securities that are recommended in its offerings.

The Notice also highlights private placement red flags and supervisory requirements, and suggests practices to help ensure that firms adequately investigate the private placements that they recommend.

Private placements under Regulation D are usually sold to “accredited” investors and a limited number of non-accredited investors. While accredited investors must meet certain income or asset tests, the Notice emphasizes that a broker/dealer’s suitability obligations require it to conduct a reasonable investigation whenever it makes a recommendation in a private placement under Regulation D.

“An increase in investor complaints regarding private placements, as well as SEC actions halting sales of certain private placement offerings, led FINRA to launch a nationwide initiative that involves active examinations and investigations of broker-dealers engaged in retail sales of private placement interests,” said FINRA Chairman and CEO Rick Ketchum, in a statement.

“That initiative has uncovered misconduct, including fraud and sales practice abuses. While several enforcement actions have been taken and additional investigations are underway, FINRA is taking this opportunity to remind firms of their substantial duties when engaging in the sale of private placement offerings,” he said.

FINRA has brought three enforcement actions in recent months involving private placement offering violations. The actions include a complaint charging McGinn, Smith & Co. and its president with securities fraud in the sales of tens of millions of dollars in unregistered securities; the expulsion of Dallas-based Provident Asset Management for marketing a series of fraudulent private placement offered by an affiliate in a massive Ponzi scheme; and fines totaling $750,000 against Pacific Cornerstone Capital and its former CEO for failing to include complete information in private placement offering documents and marketing material, as well as for advertising violations and supervisory failures.

News involving Medical Capital fraud recovery has been on the minds of thousands of investors following a July 2009 lawsuit filed by the Securities and Exchange Commission (SEC) that accuses the Tustin-based company of securities fraud. In the lawsuit, the SEC alleges that Medical Capital misappropriated about $18.5 million of investor funds and misrepresented certain financial facts about the investments, otherwise known as Medical Capital Notes.

In March 2010, federal prosecutors launched a criminal investigation into two executives with ties to Medical Capital Holdings: Medical Capital CEO Sidney M. Field and President Joseph J. “Joey” Lampariello. Both Field and Lampariello were sued by the SEC in August 2009 for securities fraud.

A number of broker/dealers that sold Medical Capital investments also are facing regulatory scrutiny and lawsuits. At the top of the list is Securities America, which was sued in January 2010 by the Commonwealth of Massachusetts. According to the complaint, a number of Securities America reps allegedly misled investors about investments in Medical Capital and failed to disclose the risks associated with the investments.

The Massachusetts lawsuit further alleges that between 2003 and 2008, a group of Securities America executives repeatedly failed to heed the warning of an outside due-diligence analyst regarding the risks of the Medical Capital investments.

One Securities America rep facing legal troubles is William Glubiak, who’s been named in a $7.7 million complaint from about 24 households of investors who purchased investments in Medical Capital Holdings.

Another leading Securities America adviser involved in litigation connected to Medical Capital is Paula Dorion-Gray. In November 2009, Dorion-Gray was cited in a $254,000 complaint.

As for Securities America, it vigorously disputes the allegations of the Massachusetts Securities Division and contends that Massachusetts regulators don’t understand the workings of private placements and Regulation D offerings.

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 today.