Category Archives: SEC Investigation

Arbitration claims involving Medical Capital Holdings are expected to escalate in the coming months, as investors take certain broker/dealers to task over allegations of misrepresentation and omission of material facts in connection to sales of Medical Capital Notes.

On Sept. 18, 2009, a class action lawsuit – Case No. 09-CV-1084 – was filed in the United States District Court for the Central District of California on behalf of investors who purchased securities issued by Medical Provider Financial Corp. III, Medical Provider Financial Corp. IV, Medical Provider Funding Corp. V and/or Medical Provider Funding Corp. VI. In the lawsuit, broker/dealer Cullum & Burks Securities, as well as other broker/dealers, is named as a defendant. Among the allegations cited in the complaint are violations of Sections 12(a)(1) and 12(a)(2) of the Securities Act of 1933.

Specifically, the defendants are accused of failing to exert due diligence and properly investigate certain securities issued by Medical Capital. In July, the Securities and Exchange Commission (SEC) filed fraud charges against Medical Capital Holdings and related Medical Capital entities. In the SEC’s complaint, Medical Capital is accused of defrauding investors by misappropriating about $18.5 million of investor funds and by misrepresenting to investors that no prior offerings had defaulted on or been late in making payments to investors of principal and/or interest.

According to the SEC, Medical Capital raised more than $2.2 billion through offerings of notes in Medical Provider Funding Corp. VI and earlier offerings made by five other wholly owned special-purpose corporations (SPCs) named Medical Provider Funding Corp. I, II, III, IV and V. Today, all five SPCs are in default to investors after failing to make interest and principal payments.

The brokerage firms that marketed and sold Medical Capital Notes are alleged to have made untrue statements about the investments, including their risks. In addition, many of the broker/dealers failed to make “reasonable and diligent” inquiries regarding information about Medical Capital and its offerings. As it turns out, the information was seriously flawed. And investors are now paying dearly for this breach of fiduciary duty.

If you have suffered losses in Medical Capital Notes and wish to discuss filing an individual arbitration claim with the Financial Industry Regulatory Authority (FINRA) or have questions about your Medical Capital investments, please contact us by leaving a message in the Comment Box below or on the Contact Us form.

Medical Capital Holdings, based in Tustin, California, is a medical receivables financing company that purchases accounts receivable from healthcare providers at a discount and then collects the debts owed on the accounts. Since 2003, the company has raised more than $2 billion from investors via offerings of notes issued by five Special Purpose Corporations (SPCs). Today, all five SPCs are in default to investors after failing to make interest and principal payments on almost $1 billion worth of Med Cap Notes.

In July, the Securities and Exchange Commission (SEC) filed securities fraud charges against Medical Capital. One month later, on Aug. 3, Thomas Seaman was appointed as the permanent receiver of Medical Capital. On Oct. 9, in a third report regarding Medical Capital’s financial status, Seaman concluded that of the $625 million of medical accounts receivable on the SPCs’ collective books, $80 million is verifiable. The remaining accounts – totaling $542 million – no longer exist.

For investors holding Medical Capital Notes, the news undoubtedly translates into substantial financial losses.

A class action lawsuit is now pending against Medical Capital. Filed Sept. 11 on behalf of investors in the five Special Purpose Corporations, the lawsuit alleges that the trustees of the SPCs repeatedly breached their fiduciary duty to investors. In addition, the class action states that while the trustees were paid “substantial fees” to represent the interests of MCH investors, they failed to uncover investments in areas other than accounts receivable from medical providers. Among other things, the lawsuit alleges that investments were made in a 118-foot yacht, mobile phones and movie ventures.

Medical Capital investors should consider carefully whether they wish to remain in the class action or file an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA) to recover their investment losses. Among the facts to consider:

• Investors with significant losses are unlikely ever to be made
  whole in a class action.
• Class actions can sometimes take years before a resolution is reached. The FINRA arbitration process typically is completed in a much shorter period of time, often 15 months.
• Class action members are bound by the results of the class action decision.
• Many investors may have viable claims based on the
  unsuitability of their investments. Because a suitability claim is dependent on an
  individual’s circumstances, this claim cannot be prosecuted on a
  classwide basis.

If you are a Medical Capital investor and wish to discuss filing an individual arbitration claim with FINRA or have questions about your investment losses in Medical Capital notes, please contact us by leaving a message in the Comment Box below or via the Contact Us form.

Taking much-needed steps to strengthen investor protections, the House Financial Services Committee has begun the first of several congressional hearings on reforming the securities industry. Initial discussions concern the Investor Protection Act of 2009, with the focus on hedge fund registrations, the creation of an agency to oversee the insurance industry and a law to protect consumer investors. As part of the proposed legislation, the Securities and Exchange Commission (SEC) would be allowed to make fiduciary duty the standard for any broker/dealer or investment adviser who dispenses investment advice about securities.

“Over the years, full-service brokers have been allowed to portray themselves to the public as ‘financial advisers’… all without having to act in their clients’ best interests, which is the true hallmark of an advisory relationship,” said Barbara Roper, director of investor protection for the Consumer Federation of America, in a July 25 article appearing in the Salt Lake Tribune.

Currently, brokers/dealers are held to a suitability standard. They are required to make recommendations deemed generally “suitable” for an investor. Investment advisers, on the other hand, are subject to an overarching fiduciary duty under the Investment Advisers Act of 1940. As fiduciaries, they have a duty to act in the best interests of their clients and to make full and fair disclosure to clients regarding conflicts of interest. Broker/dealers do not.

The distinctions, albeit subtle, mean broker/dealers are, among things, free to receive higher commission and fees for recommending certain investments or financial products to clients, despite the fact another product may be a better option. At the same time, many broker/dealers market themselves as “advisers,” creating further confusion for investors.

According to a 2008 study commissioned by the SEC and conducted by the RAND Corporation, the majority of investors do not understand the distinctions between investment advisers and broker/dealers – even when those distinctions are explained to them.

On Oct. 8, during a second House Financial Services Committee hearing, the following question was posed to lawmakers: Which is the higher standard, fiduciary or suitability?

The six witnesses, each of whom represented a broad spectrum of the financial services industry, replied: The fiduciary standard.

If the past year of the Bernie Madoff debacle, the crisis on Wall Street and repeated charges levied by the SEC on several broker/dealers and financial advisers for allegedly operating “mini-Madoff” Ponzi schemes and other investment scams has taught us anything, it’s that advisers, financial planners and broker/dealers who dispense investment advice must be held accountable for their words and actions. A first step toward making this happen is imposing a fiduciary duty standard for all financial professionals.

The bottom line: Allowing investment advisers and broker/dealers to operate under different statutory and regulatory frameworks not only creates confusion in an already complex industry but ultimately renders a disservice to investors. Adoption and enforcement of a strict, universal fiduciary standard of care to broker/dealers, as well as investment advisers is a step in the right direction to restoring investor confidence in the financial services industry.

Tell us about your investment losses. Leave a message in the area below or on the the Contact Us form. We want to counsel you on your legal options.

Last year, the Montana State Auditor’s Office took a rather unusual approach to educate investors about the dangers of investment fraud. It teamed up with the AARP to produce Fraud Under the Big Sky, an hour-long documentary highlighting two major cases of securities fraud in Montana, including one that involved stockbroker Thomas J. O’Neill and Piper Jaffray & Co.

The O’Neill/Piper Jaffray case reveals how O’Neill “churned” the accounts of his clients, making an excessive number – more than 6,000 – of unauthorized trades in order to generate huge commissions for himself. Many of O’Neill’s clients were elderly. Evidence later showed that one of the victims was a 92-year-old man, who had seven speculative trades made in his account while in a coma. A final trade was conducted hours after he had died. O’Neill pleaded guilty in U.S. District Court in January 2005 to wire and securities fraud for activities from 1997 to 2001. In April 2005, he was sentenced to two years in prison for defrauding clients.

This year, in February 2009, O’Neill filed a lawsuit in a Butte district court against his former employer, accusing Piper Jaffray of destroying hand-written records while he worked for the firm that could have been used to help in his defense. The complaint also alleges that the records provide evidence that O’Neill had followed Piper Jaffray’s business plan and that the firm also reviewed and approved all of O’Neill’s transactions.

O’Neill’s complaint further accuses Piper Jaffray of knowing its business plan was fraudulent yet allowing him to continue implementing it.

Based in Minneapolis, Piper Jaffray’s origins date back to 1895. Over the years, the company evolved into one of the most powerful brokerage and investment firms in the United States. At the same time, however, Piper Jaffray also acquired a slew of investor complaints, regulatory sanctions and allegations of securities fraud, unauthorized trading and misuse of research for financial gain. On the latter allegation, Piper Jaffray reached a settlement in 2003 with the Securities and Exchange Commission (SEC), NASD, NYSE, NASAA, and the New York Attorney General and agreed to pay a $32.5 million fine.

Tell us about your situation with Piper Jaffray by leaving a message in the Comment Box below or via the Contact Us form. We want to counsel you on your legal options.

The list of brokerage firms facing arbitration claims from investors who suffered losses from investments in

The basis of the lawsuits against concerns breach of fiduciary duty, with claimants alleging that brokerages like Based in Tustin, California, Medical Capital purchases accounts receivables of medical providers and then packages them as private investments. Over a six-year period, the firm raised $2.2 billion from 20,000 investors.

In addition, the SEC says Medical Capital made a number of multimillion-dollar investments that had nothing to do with its core business of medical receivables. Among those investments:

• $20 million for “The Perfect Game,” a film about a group of Mexican youths who became the first non-U.S. team to win the Little League World Series in 1957;

• $7 million in a company that marketed a mobile phone application, which consisted of a live video feed of a hamster in a cage; and

• An unspecified amount for a 118-foot yacht called The Home Stretch.

If you have questions about your Medical Capital investments, please contact us. If Securities America, QA3 Financial Corp. or another brokerage has sold you Medical Capital notes, tell us your story by leaving a message in the Comment Box below or on the Contact Us form. We want to advise you on your legal options.

Investors who suffered losses because of financial ties to Medical Capital Holdings have taken a lead from a recently filed fraud lawsuit by the Securities and Exchange Commission (SEC) and are moving forth with legal claims of their own. In addition to suing Medical Capital, investors are initiating legal action against the brokerage firms that sold them Medical Capital investments and filing arbitration claims with the Financial Industry Regulatory Authority (FINRA) on charges of alleged breach of fiduciary duties and misrepresentation, as well as other allegations.

The SEC’s lawsuit against Tustin, California-based Medical Capital, which makes its profits by buying and then collecting on unpaid medical bills, alleges that the company stole some $18 million from investors and failed to disclose that several of its funds had entered into default.

At the same time the SEC filed its fraud charges against Medical Capital, FINRA issued a notice to an undisclosed number of broker-dealers for information about their sales practices regarding client investments in Medical Capital.

Currently, Medical Capital Holdings is under a court-appointed receiver, Thomas Seaman, along with its subsidiaries and affiliates: Medical Capital Corp. and Medical Provider Funding VI. The company’s assets, the assets of its affiliates and two executives – CEO Sidney Field and Joseph Lampariello, president and chief operating officer – also have been permanently frozen. Both men are named in the SEC’s July 16 lawsuit.

Tell us about your situation with Medical Capital by leaving a message in the Comment Box below or Contact Us form. We want to consult you on your legal options.

Bernie Madoff and his $65 billion scam have singlehandedly made Ponzi schemes a near-daily front-page news story. Now it’s Provident Royalties LLC making news. Provident, along with its three founders – Paul Melbye, Brendan Coughlin and Henry Harrison – was charged by the Securities and Exchange Commission (SEC) in July for allegedly bilking thousands of oil and natural gas investors in a $485 million Ponzi scheme. Broker-dealer Provident Asset Management LLC and the 21 entities that offered and sold the securities to investors also were named in the lawsuit.

According to the complaint, Dallas-based Provident raised nearly half a billion dollars from more than 7,000 investors by promising high returns and misrepresenting how the funds would actually be used. The alleged fraud reportedly went undetected by regulators for three years – from September 2006 until January 2009. In typical Ponzi-like fashion, a portion of investors’ funds is said to have been used to pay earlier Provident investors.

“Investors were told that 86% of their funds would be placed in oil and gas investments. That representation was false,” the SEC’s complaint said.

For more information about the SEC’s action against Provident, you can read Litigation Release No. 21118. Dennis L. Roossien, Jr., has been named as the court-appointed receiver in the case. For the latest information about the receivership, visit the Receiver’s Web site.

Sidney M. Field, CEO of Medical Capital Holdings and who along with Medical Capital was sued last month by the Securities and Exchange Commission (SEC) for allegedly cheating investors out of millions of dollars in securities notes, faced similar fraud charges in the early 1990s. At the time, Field was the founder, past president and chairman of FGS, a large insurance broker.

According to an Aug. 24 story in the Orange County Register, Field supervised agents who allegedly employed a deceptive practice known as “sliming” to sell automobile insurance policies. In essence, the agents would alter accident records of questionable drivers, falsify information about car values and commute mileage so that an applicant could qualify for insurance coverage.

FGS also allegedly duped customers into paying interest rates of 21% to 40% when they financed their premiums, according to Aug. 24 story in The Register.

In August 1990, the Department of Insurance sued Field for civil racketeering and ultimately revoked his license. Field was sued again three years later – this time for fraud. He paid $100,000 to settle that lawsuit.

Investors in Medical Capital Holdings never knew about Field’s previous disciplinary actions with regulators, according to The Register story. If such information had been at their disposal, they never would have put their money and trust in Field or Medical Capital Holdings.

“If I would have known, forget about it,” said Jim Palladino. Palladino, who invested $160,000 in Medical Capital, says his broker told him that Medical Capital “was as solid as a rock.”

In February, Palladino stopped receiving checks from his Medical Capital notes. In August, he was forced to put his home up for sale and look for part-time work at the age of 73.

Another investor, Carol Marini, 64, placed her life savings of $145,000 with Medical Capital. Marini, a former school teacher, says she has lost everything.

If you have questions about your Medical Capital investments please contact us. Tell us about your situation by leaving a message in the Comment Box below or Contact Us form. We want to consult you on your options.

Financial investment advisors and stockbrokers could face new rules and regulations in the future under draft legislation sent to Capitol Hill by the U.S. Treasury. The legislation is designed to strengthen investor protections and includes such provisions as establishing consistent standards for anyone who gives investment advice about securities, improving the timing and quality of disclosures, and requiring accountability from securities professionals. The legislation also would establish a permanent Investor Advisory Committee to keep the voice of investors present at the Securities and Exchange Commission (SEC).

To view the draft legislation in its entirety, go to treas.gov/press/releases/tg205.htm

The controversy surrounding leveraged exchange traded funds (ETFs) shows no sign of letting up, and on Sept. 1, the Financial Industry Regulatory Authority (FINRA) announced plans to raise margin requirements for leveraged ETFs beginning Dec 1. FINRA’s Regulatory Notice 09-53 states that the “inherent volatility” of leveraged ETFs is one of the reasons for the new requirements.

The change in regulations comes on the heels of a lawsuit filed by a group of investors in August against ProShares and one of its leveraged inverse ETFs. The investors allege that ProShares misrepresented the UltraShort Financials ProShares Fund and that they were never informed shares in the fund should not be held for more than one single trading day.

Leveraged ETFs are considered a subset of traditional ETFs and attempt to generate multiples (i.e. 200%, 300% or greater) of the performance of the underlying index or benchmark they track. Some leveraged ETFs are “inverse” funds, which means they try to deliver the opposite of the performance of the index or benchmark they track. Leveraged ETFs can include among their holdings high-risk derivative instruments such as options, futures or swaps.

The complexity and potential risks associated with leveraged ETFs have garnered both the media spotlight and the attention of regulators who contend many retail investors do not fully understand how the products work. Both FINRA and the Securities and Exchange Commission (SEC) recently issued warnings highlighting the risks for investors in leveraged ETFs, particularly those who invest for the long term. In response, some brokerage firms announced new sales limits on client investments in leveraged ETFs, while others halted sales altogether.

In July, Massachusetts’ Secretary of State William Galvin launched an inquiry into how three leveraged ETF providers – Rydex, ProShares and Direxion – marketed and sold leveraged ETFs, as well as what they were telling brokers who sold the funds to clients. Detractors of leveraged ETFs, including FINRA and the Securities and Exchange Commission (SEC), contend retail investors may not fully understand the complexity of ETFs nor realize the products must be monitored on a daily or near daily basis.

Three years ago, there were no leveraged ETFs in existence. Today, there are more than 140 leveraged ETFs with about $30 billion in assets.