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Securities America, a subsidiary of Ameriprise Financial, has been sued by Ilene Grossbard of Sarasota, Florida, over allegations that the Omaha-based brokerage failed to warn her and other investors about what she says was a multibillion-dollar Ponzi scheme involving sales of notes in Medical Capital Holdings. According to the complaint, Grossbard bought two promissory notes from Securities America last year for $112,000. The notes were issued by Medical Provider Funding Corp. V, a subsidiary of Tustin, Calif.-based Medical Capital Holdings – the same company that the Securities and Exchange Commission (SEC) charged with securities fraud in July.

Since December 2003, Medical Capital Holdings has raised more than $2 billion from selling the notes to some 20,000 investors. The notes included those issued by Medical Provider Funding Corp. V, which as of March 2009 had more than $400 million in outstanding notes to 4,270 investors.

Grossbard’s lawsuit against Securities America alleges that it failed to detect, probe or make investors aware of the numerous red flags that pointed to the alleged Ponzi scheme at Medical Capital Holdings.

Grossbard is seeking class-action status in her lawsuit.

On Sept. 14, 2006, a National Association of Securities Dealers arbitration panel (now the Financial Industry Regulatory Authority) fined Securities America $2.5 million for failing to adequately supervise one of its brokers, David L. McFadden, who had been charged with securities fraud for allegedly luring long-term employees of Exxon Corporation into retiring prematurely with unreasonable and exaggerated promises of high returns from reinvested funds from their company retirement plans.

In addition to the fines, the arbitration panel ordered Securities America to pay $13.8 million in restitution to 32 former Exxon employees.

Tell us about your situation with Securities America by leaving a message in the Comment Box below or via the Contact Us form. We want to consult with you about possible legal options.

In SmartMoney’s May 2008 issue, James B. Stewart writes an insightful article regarding auction rate preferred shares (ARPS).  Mr. Stewart calls on Wall Street to “do the right thing” and redeem investors positions.

ARPS are shares in closed-end mutual funds that own various kinds of triple A-rated bonds.  These shares were sold as “cash equivalents” to investors concerned with liquidity and preservation of capital.  Brokers told investors that these investments offered little or no risk because rates were set at regualr auctions, often every seven days.  However, due to the ongoing credit crisis, these auctions began failing in February.

At that time, Goldman Sachs and Citigroup stopped bidding in these auctions.  Other Wall Street firms soon followed suit.  The result was an evaporation of liquidity.

Now thousands of investors in the $330 billion auction rate securities market are left holding investments that were sold as safe, cash equivalents.  Three months into this crisis and many auctions remain frozen.

Mr. Stewart asks that Wall Street step up and take care of its customers.  But to date, Wall Street has refused to do so.  Many firms have offered their valued clients loans to cover any liquidity concerns, but none are redeeming these shares at par.  As Mr. Stewart points out, there is somehting wrong with the way Wall Street has chosen to handle this issue.

Clearly brokerage firms did not appropriately represent these products.  Although historically ARPS have performed similar to money markets, they are not money markets.  There are risks with auction rate securities (as many investors have now become aware).  Wall Street knew these risks existed. 

Should these auctions remain frozen and Wall Street not step up and redeem investors’ shares, the only recourse for aggreived investors will be filing claims for their losses.  If past actions of Wall Street are any indication, it appears that many investors will have no choice but file claims to recover their funds.  Funds that were supposed to be safe and liquid.  

Quoting Mr. Stewart, leave it to Wall Street to “turn a plain-vanilla product into a nightmare for investors.”