Category Archives: Medical Capital Holdings

Earlier this week, a federal judge rejected an attempt by Wells Fargo & Co. to throw out a class action lawsuit brought by investors who say the bank failed in its role as a trustee for debt issued by Medical Capital Holdings. The decision by Judge David Carter of the U.S. District Court for the Central District of California clears the way for a possible trial against Wells Fargo and its involvement with Medical Capital.

As reported April 3 by Reuters, investors allege that Wells Fargo was supposed to disburse money so that Medical Capital could offer financing to medical care providers by purchasing their outstanding receivables. Instead, investors contend Wells Fargo failed to stop Medical Capital from diverting investors’ money to such items as non-medical projects and excessive administrative fees.

In July 2009, Medical Capital, a medical-receivables company, collapsed after the Securities and Exchange Commission (SEC) charged it with fraud. At that time, Medical Capital had issued close to $2.2 billion in private-placement notes.  A court-appointed receiver later found that investors lost between $839 million and $1.08 billion through Med Cap’s use of a “Ponzi-like scheme” to extract excess fees from investors.

Joseph Lampariello, Medical Capital’s former president, pleaded guilty last year to criminal wire fraud related to the alleged scheme. He has yet to be sentenced.

In February, the Bank of New York Mellon, another Medical Capital trustee, agreed to pay $114 million to investors.

The cases are all in the U.S. District Court, Central District of California. The master case is Medical Capital Securities Litigation, No. 10-ml-02145. The Wells Fargo cases are Masonek et al v. Wells Fargo Bank et al, No. 09-1048; Bain et al v. Wells Fargo Bank et al, No. 10-0548; and Abbate et al v. Wells Fargo Bank et al, No. 10-06561.

Independent broker/dealers continue to face a wave of legal and regulatory issues in 2013, with many expected to shutter their businesses.

As reported Jan. 20 by Investment News, the problems facing smaller B-Ds with 150 registered representatives or fewer include higher compliance costs, record low interest rates for money market accounts, competitive commission rates from large or discount broker-dealers and a tax increase that will cut available discretionary funds that investors can put to work in the stock market.

Small B-Ds make up the majority of firms registered with the Financial Industry Regulatory Authority (FINRA).  In the first 11 months of 2012, pressures on the industry reduced the number of FINRA-registered firms to 4,319 – down 97 firms from the prior year and a 14% decline since the end of 2007.

Regulatory and compliance issues are a key factor contributing to the reduction in smaller B-Ds. In a move to improve investor protections, the Securities and Exchange Commission (SEC) approved FINRA Rule 4524 in 2012, which mandated that broker/dealers file additional financial or operational schedules or reports as FINRA deemed necessary.

Many B-Ds to close up shop in the past few years have done so because of deals involving failed private placements, such as those connected to Provident Royalties LLC and Medical Capital Holdings LLC. The SEC charged both of those firms with fraud in July 2099, which in turn spurred a rash of investor lawsuits and arbitration claims. As a result, many broker/dealers were unable to contend with the litigation costs and subsequently shut down.

One of the key players connected to the Medical Capital Holdings fraud may be heading to jail, following a private-placement scam that resulted in almost $1 billion in losses for investors.

On Monday, Joseph J. Lampariello, former president of Medical Capital, pleaded guilty to wire fraud. He now faces up to 21 years in federal prison and a $49 million restitution order when he is sentenced on Jan. 14. Lampariello also pleaded guilty to failing to file a federal tax form.

So far, Lampariello is the only Medical Capital executive who has been criminally charged.

As reported May 7 by the Orange County Register, Assistant U.S. Attorney Jennifer Waier is not saying whether the investigation is continuing or whether Lampariello is cooperating with the government.

Medical Capital Holdings was charged with fraud by the Securities and Exchange Commission (SEC) in July 2009. From 2003 to 2009, the company raised almost $2 billion from investors under the guise it was using the money to buy discounted medical receivables. In reality, Medical Capital operated similar to a Ponzi scheme, with various MedCap entities buying fake receivables, often from older MedCap funds. The scam generated profits on the older funds’ books, along with commissions for MedCap execs, including Lampariello.

When the SEC entered the picture, more than $1 billion had been stolen from thousands of investors across the country.

Sales of private placements have caused the undoing of another broker/dealer. On April 13, after losing an arbitration claim in March for $1.5 million, Cambridge Legacy Securities LLC filed its withdrawal request with the Financial Industry Regulatory Authority (FINRA). Several days later, the B-D proceeded to seek bankruptcy protection.

As reported April 24 by Investment News, a three-member FINRA arbitration panel had previously awarded investor Marvin Blum $445,000 in compensatory damages, $900,000 in punitive damages, $150,000 in attorneys’ fees and $12,000 in costs, as well as interest.

Blum, who was more than 70 years of age at the time he purchased the investments, was sold nine different private placements over 13 months totaling $500,000, according to the Investment News story.

Cambridge Legacy Securities is owned by The Cambridge Legacy Group. According to FINRA’s Broker Check Web site, the company’s chief executive, O. Ben Carroll, is the subject of an investigation by FINRA for failing “to have reasonable grounds to believe that the private placements offered by Cambridge Petroleum Group and Cambridge Legacy Group pursuant to [Regulation D] were suitable for any customer.”

In 2010, FINRA fined Carroll $25,000, as well as suspended his privilege to act as a principal for three months. He no longer is registered with FINRA.

Cambridge Legacy Securities also is no longer in business. However, an affiliated RIA, Cambridge Legacy Advisors, is, according to the Investment News story.

Failed private-placements deals have forced a number of broker/dealers to shutter their businesses over the past year. Much of the demise stems from sales involving private placements issued by Medical Capital Holdings; preferred stock investments sponsored by Provident Royalties LLC; and tenant-in-common exchanges that were manufactured by DBSI, Inc.

In July 2009, the Securities and Exchange Commission (SEC) charged both Medical Capital and Provident Royalties with fraud. On Nov. 8, 2010, DBSI filed for bankruptcy. Since then, many investors have filed arbitration claims with FINRA against the various broker/dealers that sold them the failed products.

The words “due diligence” and “suitability” have taken on a whole new meaning following Greg Smith’s very public condemnation of his former employer, Goldman Sachs. Smith, an executive at Goldman, lambasted his firm via an Op-ed in the New York Times last week. Among other things, Smith called the environment at Goldman “toxic” and that the interests of clients are now “sidelined in the way the firm operates and thinks about making money.”

Smith’s characterization of Goldman may hit a nerve with investors and brokers alike. For investors, the diatribe against Goldman could very well spur them to rethink the quality of investment service and advice they’re receiving. Meanwhile, brokers may be prompted to re-examine and reaffirm the due diligence duties they owe to clients.

No investment is without risk. But financial professionals and their brokerage firms are bound by certain duties to clients – and that includes making investment recommendations based on a client’s suitability, as well fully and accurately explaining an investment.

In the past year, countless examples have come to light in which these duties have fallen by the wayside. Medical Capital Holdings, Provident Royalties, MAT/ASTA, Lehman Brothers principal-protected notes, Behringer Harvard REIT. While each of these cases and the financial products they represent may be different, a common theme ultimately prevails: In one way or another, investors found themselves on the losing end of their investment because the concept of “client-first” was all but forgotten by the brokers and firms they trusted.

The collapse of Medical Capital Holdings has led to numerous lawsuits and arbitration complaints by investors against the brokerages that failed to perform their due diligence before selling them private-placement investments in the troubled company. Now, for what is believed to be a first, an individual has been criminally charged with securities fraud for his role in selling Med Cap notes.

Nine counts of securities fraud were filed Feb. 23 by the Weld County District Attorney’s Office against John Brady Guyette. According to the Weld County complaint, the former Colorado stockbroker sold $1.3 million of Medical Capital investments to investors between August and December 2008. During that time, Medical Capital was showing signs trouble and had already missed several payments to investors in certain note offerings.

As reported Feb. 27 by Investment News, the focus of the complaint against Guyette concerns allegations that he sold Medical Capital notes to investors after the company failed to make payments to investors.

One of those investors is Lucille Linde, 92, who lost her life savings in Medical Capital investments. She began investing in Medical Capital and with Guyette in 2005. Three years later, in August 2008, she invested $300,000 in Medical Capital VI, says the Investment News article.

“Linde reported that prior to writing the checks on Aug. 15, 2008, [she] had been told by a fellow MedCap investor, Borge Villemsun, that MedCap had been late in making principal and interest payments to [him],” the complaint reads. “Linde reported confronting [Mr. Guyette] with this information. Linde reported that [Mr. Guyette] assured [her] that Villemsun had been paid and that the MedCap VI investment was guaranteed safe.

“Linde was not aware that when [she] wrote the checks on Aug. 15, 2008, MedCap II had failed to make principal and/or interest payments due to MedCap II investors. [Mr. Guyette] failed to disclose this information to Linde.”

The Securities and Exchange Commission (SEC) filed fraud charges against Tustin-based Medical Capital Holdings in 2009, freezing its assets and appointing a receiver to oversee its financial books. A number of independent broker/dealers subsequently came under fire from regulators for failing to disclose key information about Medical Capital to investors.

Securities America was the independent broker/dealer subsidiary of Ameriprise. It was one of the broker/dealers of Medical Capital Investments, selling some $700 million of the private placements. In August 2011, the B-D was acquired by Ladenburg Thalmann Financial Services Inc. for a reported $150 million in cash.

Clients of CapWest Securities received a vindication of sorts today when an arbitration panel of the Financial Industry Regulatory Authority (FINRA) ordered the broker/dealer to pay $9.1 million in damages and legal fees stemming from sales of failed private investments in Medical Capital Holdings and Provident Royalties LLC.

The problem is that CapWest closed last year, so the likelihood of investors receiving any substantial financial recovery from the award is slim.

Both Medical Capital and Provident Royalties were charged with fraud by the Securities and Exchange Commission (SEC) in 2009.  Investors across the country lost millions of dollars from investments in private placements from the entities.

The $9.1 million award is believed to be one of the single largest arbitration awards based on sales of failed private placements, according to a Jan. 19 article by Investment News.

Private placements have been a ongoing source of controversy – not to mention financial losses for investors – this year, with regulators filing fraud charges against issuers like Medical Capital Holdings and Provident Royalties.

Now a well known forensic accountant says that the broker/dealers behind the doomed private-placement deals failed miserably in their due-diligence responsibilities to investors.

As reported Nov. 25 by Investment News, Gordon Yale, a certified public account and principal of Yale & Co., contends that broker/dealers’ due diligence showed incredible “sloppiness” when touting private placements in Medical Capital and Provident. According to Yale, the actions by the broker/dealers exhibited the “same recklessness with which major investment banks conducted their mortgage-backed-securities business, but it was done by middle- or lower-tier firms and [with] a different set of products.”

Over the past year, regulators have issued several fines and sanctions against various broker/dealers that sold private placements in Medical Capital Holdings, Provident Royalties, and DBSI tenant-in-common exchanges. In September, the Financial Industry Regulatory Authority (FINRA) imposed a $10,000 fine and a six-month suspension against Brian Boppre, former president of Capital Financial Services. Capital Financial was a top seller of both Medical Capital and Provident Royalties notes. Both companies were charged with fraud by the Securities and Exchange Commission in 2009.

Legal problems tied to private placements sales in Medical Capital Holdings and Provident Royalties have proved to be the undoing for yet another broker/dealer. Last week, CapWest Securities announced it had filed withdrawal papers with the Financial Industry Regulatory Authority (FINRA).

As reported Sept. 4, by Investment News, CapWest’s profile status with both FINRA and the Securities and Exchange Commission (SEC) is no longer “active.” Instead, it’s listed as “termination requested.”

Representatives for CapWest sold $22 million in private placements issued by Provident Royalties and $30.6 million of Medical Capital notes. Both companies were charged with fraud by the SEC in 2009.

The closing of CapWest comes on the heels of several other broker/dealer closings over private placement deals gone bad, including GunnAllen Financial, Jesup & Lamont Securities Corp. and QA3 Financial Corp.

Earlier this year, CapWest lost a $587,000 FINRA arbitration claim to four clients who claimed negligence and misrepresentation in the sale of oil and gas ventures offered by Provident and Striker Petroleum LLC.

CapWest is owned by Capstone Financial Group.

Plagued by lawsuits and arbitration claims over sales in Medical Capital Holdings and Provident Royalties, broker/dealer Securities America has been sold to Ladenburg Thalmann Financial Services for at least $150 million in cash.

Ameriprise, the parent company of Securities America, revealed in April of its intention to sell the broker/dealer subsidiary.

In July 2009, the Securities and Exchange Commission (SEC) charged Medical Capital Holdings and Provident Royalties with fraud. Securities America was one of the largest sellers of the troubled private placements. Ultimately, clients of Securities America suffered an estimated $400 million in losses from the investments.

In April, Ameriprise offered a settlement of nearly $160 million to Securities America clients.

As reported Aug. 17 by Reuters, Miami-based Ladenburg – which owns other independent brokerages – agreed to make additional cash payments if Securities America meets certain targets in the next two years.

The purchase, which will be financed by another firm affiliated with Ladenburg Chairman Phillip Frost, is expected to be completed by December 2011.