Jim Nagengast, CEO of embattled Securities America, claims that The Bank of New York Mellon Corp. and Wells Fargo Bank NA are suing the broker/dealer in an attempt to reduce their liability in the sale of failed private placements in Medical Capital Holdings.

The story, first reported May 29 by Investment News, cites an email to the Securities America advisers in which Nagengast reportedly claims that a pending settlement in a class action filed against Securities America, if approved, would wipe out the banks’ claims against the firm.

The Bank of New York Mellon Corp. and Wells Fargo Bank filed separate lawsuits against Securities America last month. Both banks were formerly trustees for Medical Capital Holdings.

The Bank of New York complaint states that the broker/dealers that sold private placements in Medical Capital breached their obligation to MedCap investors by selling an unsuitable product and failing to disclose the risks of the notes.

Bank of New York Mellon has sued 13 broker/dealers; Wells Fargo has sued six firms, as well as Ameriprise Financial, which owns Securities America.

In September 2009, two months after the Securities and Exchange Commission (SEC) charged Medical Capital with fraud, a group of Medical Capital investors sued The Bank of New York Mellon Corp. and Wells Fargo Bank in a class action lawsuit. The plaintiffs in that class action claimed in an amended 2010 complaint that the two trustees signed off on requests by Medical Capital executives to take $325 million in fees — despite documents for the notes indicating that fees were not supposed to come from investor funds.

From 2003 to 2008, dozens of independent broker/dealers sold private placements in Medical Capital, raising $2.2 billion. By far, Securities America is the biggest seller of Medical Capital notes, selling about $700 million.

In total, investors have lost more than $1 billion in principal. Today, regulators and the Medical Capital bankruptcy trustees say Medical Capital operated as nothing more than a Ponzi scheme.

The private-placement game is changing, thanks in large part to ongoing legal cases over failed private placements – also known as Reg D offerings – in Provident Royalties and Medical Capital Holdings. Both companies were charged with fraud by the Securities and Exchange Commission (SEC) in 2009.

Major private-placement players like Securities America are feeling the ramifications of the issues involving Medical Capital and Provident Royalties – including a rash of lawsuits and arbitration claims filed by investors, as well as fraud charges issued by state securities regulators.

For some broker/dealers, the legal troubles stemming to Provident and Medical Capital, as well as to other failed private-placement offerings, have proven too much. Unable to sustain sufficient capital to fight their legal battles, many have gone out of business. Among the broker/dealers that have shuttered: Cullum & Burks Securities Inc., Securities Network, GunnAllen Financial, QA3 Financial Corp. and Jesup & Lamont Securities Corp., among others.

For the broker/dealers that do remain in the private-placement game, it’s likely they will see stricter oversight of the investments they market and sell to investors in the future. Just this week, the head of the Financial Industry Regulatory Authority (FINRA) publicly called upon broker/dealers that sell private placements to engage in a more vigorous due diligence process, “pushing and pulling” for information about the products.

“We want to recognize where there’s limited disclosure and appears to be a speculative investment, you need to push to try to get more information,” said Richard Ketchum, chairman and chief executive of FINRA, at the regulator’s annual meeting in Washington

“It’s not good enough to go to a canned information session. You need to push and pull,” he said of the due diligence process for broker/dealers touting risking private-placement deals.

Following a lengthy legal battle with various state regulators over failed private placements issued by Medical Capital Holdings, broker/dealer Securities America has agreed to make whole 63 Massachusetts clients who bought $5 million worth of the investments.

According to Massachusetts Secretary of State William Galvin, Securities America will pay $2.8 million to clients within 10 days.

The settlement, however, is contingent on several factors. As reported May 24 by Investment News, Securities America could be liable for up to another $2.2 million if a class action settlement currently being heard before a federal judge in Dallas falls through.

In addition, Securities America may have to pay more if the receiver for Medical Capital fails to pay 10% back to investors.

In the end, Massachusetts investors will recover 100% of the $5 million in principal they lost in Medical Capital. In July 2009, the Securities and Exchange Commission (SEC) charged the company with fraud.

Dozens of independent broker/dealers – the largest of which was Securities America -sold private placements in Medical Capital. From 2003 to 2008, Securities America sold about $700 million of the notes to investors. About half was lost in the alleged fraud.

In 2010, the Massachusetts Securities Division charged Securities America with fraud and accused the company of failing to disclose to investors that the Medical Capital notes it was selling were high-risk investments.

Massachusetts regulators also charged Securities America of using sales tactics that ignored warnings of their own analysts. In addition, the regulator claimed that the broker/dealer touted the Med Cap notes to unsophisticated investors.

In the wake of investor lawsuits over private placements in Medical Capital Holdings and Provident Royalties LLC, the Securities and Exchange Commission (SEC) is considering changes to its offering rules to make it easier to purchase non-public company shares. In addition, the SEC also is looking into whether it should revisit the current ban on public marketing of non-registered offerings as part of an overall review of securities-offering regulation.

As it is, private placements, also known as Regulation D offerings, are exempt from SEC registration. In the past year, the deals have come under increased scrutiny from regulators – with much of the attention generated by failed deals in Medical Capital Holdings and Provident Royalties. In 2009, the SEC charged both entities with fraud.

As reported May 10 by Investment News, in addition to possible changes in the ban on soliciting investors for non-registered offerings, the SEC is examining various restrictions on communications in initial public offerings, the thresholds that trigger public reporting and other regulatory questions that new capital-raising strategies create.

The SEC’s review comes on the heels of a proposal by the Financial Industry Regulatory Authority (FINRA) for a 15% cap on commissions and fees for private placements, as well as more disclosures about offering proceeds.

According to SEC Chairman Mary Schapiro, about 22% of the SEC’s enforcement cases in 2010 year involved investor fraud from securities offerings.

Plagued by legal woes involving private-placements sales in Medical Capital Holdings and Provident Royalties, Securities America may soon have a new owner. As reported April 25 by Investment News, parent company Ameriprise Financial is looking to sell the troubled independent broker/dealer.

“In reporting its first quarter financial results this afternoon, Ameriprise management said it was looking to shed Securities America – the 17th largest independent broker-dealer in the industry according to Investment News data, which it acquired in 1998. Ameriprise indicated the potential sale of the firm would not have an impact on its $150 million settlement with investors suing the firm over private placements that have gone bust,” the article said.

In recent months, sales of private placements have been under the microscope by the Financial Industry Regulatory Authority (FINRA). Evidence of the new scrutiny became apparent in early April, when FINRA imposed fines and disciplinary actions against a number of firms that sold investments in Medical Capital Holdings and Provident Royalties.

FINRA’s disciplinary actions focused on the failure of broker/dealers to investigate the private placements being sold by their firms. Both Medical Capital and Provident Royalties were charged with fraud by the Securities and Exchange Commission (SEC) in July 2009.

Private placements are high-commission products, oftentimes producing hefty fees and commission for broker/dealers of up to 8%.

Broker/dealers involved in sales of private placements have been put on notice by the Financial Industry Regulatory Authority (FINRA). In the future, the regulator says it will be stepping up its oversight of private-placement deals.

Evidence of the new scrutiny became apparent last week, when FINRA imposed fines and disciplinary actions against a number of firms that sold investments in Medical Capital Holdings and Provident Royalties.

As reported April 10 by Investment News, FINRA’s recent actions focused on the failure of broker/dealers to investigate the private placements being sold by their firms. Both Medical Capital and Provident Royalties were charged with fraud by the Securities and Exchange Commission (SEC) in July 2009.

Private placements are high-commission products, yielding broker/dealers fees of 7% or 8%.

“Senior officials at these firms failed to fulfill their responsibilities to customers by not conducting reasonable investigations of these unrelated offerings, especially in light of multiple red flags suggesting liquidity concerns, missed interest payments and defaults,” said Brad Bennett, executive vice president and chief of enforcement for FINRA.

“FINRA will continue to look closely at sales of both affiliated and unaffiliated private placements to determine whether the selling firms fulfilled their responsibility to customers. Broker-dealers and the executives should have looked at the private-placement offerings much more closely,” Bennett said.

A deal may in the works between Securities America and investors who lost hundreds of millions of dollars from soured private-placement deals in Medical Capital Holdings and Provident Royalties. The story was first reported by Investment News on March 28.

Financial problems related to investor lawsuits in the private placements have been a growing source of concern for the broker/dealer. Now, it appears a settlement offer could be on the table.

Details of the offer have not been revealed.

Securities America sold about $400 million in private placements in Medical Capital Holdings. In July 2009, the Securities and Exchange Commission (SEC) charged the company with fraud, accusing it of essentially running a Ponzi scheme. That same month, the SEC also charged Provident Royalties with fraud.

Earlier this month, a federal judge denied a proposed $21 million settlement between Securities America and the plaintiffs in the case. If the settlement had occurred, investors would likely have received only pennies on the dollar.

And while Securities America may not have enough capital to pay plaintiffs 100 cents on the dollar, its parent company, Ameriprise, does.

As reported in the Investment News article, Securities America has reportedly informed its 1,800 brokers of the proposed settlement.

Late last Friday, Securities America received news that a federal judge would not be approving the broker/dealer’s request for a $21 million class action settlement. The case involves soured private-placement deals in Medical Capital Holdings and Provident Royalties.

As reported March 19 by Investment News, the decision has been closely watched by hundreds of investors who are suing the firm for financial losses they incurred in Med Cap and Provident. If the settlement had been approved, investors would have been forced to drop their arbitration claims and join the class action lawsuit.

And in doing so, investors would have likely received only pennies on the dollars for their losses.

In July 2009, the Securities and Exchange Commission (SEC) charged both Medical Capital and Provident Royalties with fraud. Two state securities regulators – Montana and Massachusetts – also are suing Securities America.

During the class-action hearing, Judge W. Royal Furgeson Jr. centered in on the relationship between Securities America and its parent company, Ameriprise Financial Inc. Among other things, Furgeson noted that Ameriprise benefited from “positive revenue growth” at Securities America while it insulated itself from the potential liability of Securities America brokers who sold the private placements to investors.

Private-placement deals pushed by Securities America in Medical Capital Holdings and Provident Royalties have left investors stranded on a financial limb. Now, they have a new worry – and that is whether to resolve their complaints through arbitration or roll their claims into two existing class-action lawsuits again Securities America.

Ewald Groetsch is one of those investors facing such a dilemma. As reported March 4 by the New York Times, Groetsch lost $500,000 after investing in Medical Capital Holdings which, like Provident Royalties, was charged with fraud by the Securities and Exchange Commission (SEC) in 2009.

According to the New York Times story, Groetsch – who suffers from dementia – became lonely after his wife died in 2003 and struck up a relationship with a broker from Securities America. Groetsch eventually put the majority of his portfolio into a risky security – i.e. Medical Capital.

As for the Securities America broker, he portrayed the investment as “safe and secure.” That wasn’t the case, however, and Groetsch ultimately lost his entire investment.

Groetsch has since filed an arbitration claim with the Financial Industry Regulatory Authority (FINRA).

The lawyers in the class-action case involving Medical Capital and Provident Royalties contend that investors’ arbitration claims could threaten the financial position of Securities America and its ability to pay for a proposed settlement. The plaintiffs’ lawyers disagree, stating that such reasoning is misleading.

Earlier this year, arbitration proved successful for at least one investor who sued Securities America. In January, FINRA awarded Josephine Wayman nearly $1.2 million for her claim against the broker/dealer.

Workman Securities, a big seller of private placements in Medical Capital Holdings and Provident Royalties, has reached an agreement with the Financial Industry Regulatory Authority (FINRA) to settle issues over the deals. The broker/dealer will pay $700,000 for partial restitution to more than a dozen clients with legal claims against Workman for sales of the risky investments involving Med Cap and Provident.

Both Medical Capital and Provident Royalties were charged with fraud by the Securities and Exchange Commission (SEC) in the summer of 2009.

As reported Feb. 14 by Investment News, Workman’s insurance carrier, Catlin Specialty Insurance Co., has paid $2.3 million to various clients who’ve sued the firm.

Workman Securities is one of many broker/dealers that sold investors on risky private-placement deals involving Medical Capital and Provident Royalties. Workman reps sold just over $9 million of private placements in Provident, according to U.S. bankruptcy court filings.

According to FINRA’s Broker Check Web site, Workman allegedly was lacking in the supervision and due diligence department at the time it sold the private placements.

“The firm failed to have reasonable grounds to believe that a private placement offered by an entity pursuant to Regulation D was suitable for any customer after the firm received red flags that the entity had financial issues and was not timely making interest payments,” the site alleges.

Broker Check goes on to say: “[Workman] failed to enforce a supervisory system reasonably designed to achieve compliance with applicable securities laws and regulation and Finra rules in connection with the sale of the private placement offered by the entity pursuant to Regulation D. The firm failed to conduct adequate due diligence of the private placement offered by the entity pursuant to Regulation D.”

If you have a story to tell involving Medical Capital Holdings or Provident Royalties, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.