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MEDICAL CAPITAL HOLDINGS | SECURITIES AMERICA STOCKBROKER MISCONDUCT

securities-americaPrivate securities, or private holdings, were used as instruments for two major fraud schemes in 2009. Under SEC rules, small businesses are permitted to raise assets by selling promissory notes to investors with a net-worth of $1 million or greater, and their offerings are not made public. Since the holdings are sold privately, they are exempt from rules designed to protect investors.

Many experts in the securities industry believe private securities guidelines, which were created in 1982, are badly in need of revision. Firms can market these holdings to couples with a combined annual income of $300,000, for example, if their remaining assets – including investments and real estate – totaled $700,000. Millionaires, which were a novelty in 20th century America, now provide a very large pool of investors from which firms can draw from.

By taking advantage of this loophole, Medical Capital Holdings Inc. was able to issue more than $2.2 billion of notes to over to an estimated 20,000 investors from 2003 to 2009. Medical Capital, or MedCap, raised these assets through five separate note offerings, conducted through what the SEC called “five special-purpose subsidiaries.” The first offering, through Medical Provider Financial Corporation I (“MP I”) began on December 2003. Their final offering, through “MPV”, had $401 million in outstanding notes in March 2009.

Even though the firm promised investments in medical receivables, court records would later indicate executives had different intentions. With investors’ money, Medical Capital contributed $20 million for “The Perfect Game,” a film about Mexican youths becoming the first non-US team to win the Mexican World Series, $7 million in a company that marketed a mobile phone-application consisting of a live video feed of a hamster in a cage, an unspecified amount for a 118-foot yacht, and mortgages on hospitals which have since ceased operation.

In July 2009 the SEC issued a complaint to halt the fifth – and final – offering of Medical Capital Notes, which raised an additional $76.9 million, after alleging fraud on behalf of the company and its subsidiaries. By that time, Medical Capital had defaulted on $992.5 million in investor notes after the first four private offerings, which Medical Capital failed to tell investors. A federal judge agreed to freeze the firm’s assets, and appointed a temporary receiver to facilitate investigators and former investors.

SEC investigators believe they may not yet determined the full extent of the fraud. An early report from the court-ordered receiver indicated Medical Capital had additionally conducted at least 300 transactions among its own accounts totaling $829 million.

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Massachusetts state regulators additionally charged Securities America Inc. in January 26, 2010, for improperly selling $697 in Medical Capital notes, more than any broker-dealer firm. According to Secretary of State William Galvin, “all material risks and information regarding [Medical Capital] Notes were not disclosed to customers.” Securities America brokers allegedly failed to disclose that Medical Capital was investing millions in areas outside their expertise, that investors’ money had been routinely misappropriated, as well as defaulted payments on all of Medical Capital’s previous offerings. Medical Capital had never once audited its company’s finances.

Former Medical Capital CEO Sidney M. Field, who had also been named in the SEC’s original complaint, was sued for racketeering in 1990 while he was a member of the auto-insurance industry. His license would be revoked, in addition to being indicated in a scheme to defraud bad drivers, and his firm subsequently went bankrupt. This information too was hidden from investors until after Medical Capital had defaulted.

Future arbitration claims and lawsuits are expected to be filed against firms and individual brokers responsible for selling and distributing Medical Capital Notes. To date, the following firms have been named in such complaints:
Cullum & Burks Securities, Inc., National Securities Corporation, CapWest Securities Inc., American Portfolios Financial Services Inc., and Next Financial Group Inc.

After Field and other Medical Capital executives failed at their last-ditch chance at bankruptcy in August 2009, a United States District Court judge appointed Thomas Seaman as permanent receiver over the now-defunct company. In addition to communicating with the SEC, investors, and law enforcement, the assets of Medical Capital have been frozen until they can be properly appropriated among victims of the fraud.

Brokers sell private securities, despite their inherent risks, because they offer extremely high commissions – averaging 7% to 10% – when sales are completed. By deceiving investors, some firms used these private placement securities to embezzle money while avoiding the same regulatory oversight as publicly traded securities. While FINRA and SEC have pledged to crack-down on sales of private securities, Medical Capital was named in a complaint six years after making their initial offering to investors. Regulators believe these investors, in many cases, lost much of their savings or retirement money.

HAVE YOU INVESTED YOUR MONEY WITH MEDICAL CAPITAL HOLDINGS | SECURITIES AMERICA?

Contact one of our attorneys to get a no-cost, no-obligation consultation.
By phone: Call us toll-free at 1 (888) 986-9010
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Medical Capital Holdings Disciplinary Timeline

  • September 2003 – Medical Capital begins raising approximately $554 million through “MP I” after issuing 3,821 promissory notes to investors
  • January 2004 – Over the course of two years, Medical Capital raised approximately $251 million through two offerings of “MP II”
  • November 2007 – Medical Capital raised an additional $401.8 million through the offering of “MP III.” In addition to outstanding notes, interest payments for these notes were delayed beginning in May 2009
  • July 2009 – SEC sues Medical Capital Holdings Inc. for fraud
  • July 2009 – FINRA plans industry-wide sweep to better regulate sales of private securities
  • August 2009 – SEC obtained emergency court order to halt an attempted fraudulent $77 million offering of “MP VI”, since Medical Capital had misrepresented defaulted payments on previous Medical Capital Notes
  • August 2009 – In response to a fraud enforcement action from the SEC, United States District Court Judge David O. Carter appointed Thomas Seaman as permanent receiver over Medical Capital’s frozen assets
  • January 2010 – Massachusetts’ top securities regulator brought the first-ever state enforcement case against Securities America Inc., a subsidiary of Ameriprise Financial Inc., after the firm had sold over $600 million in Medical Capital private placements to hundreds of investors

HAVE YOU INVESTED YOUR MONEY WITH MEDICAL CAPITAL HOLDINGS | SECURITIES AMERICA?

Contact one of our attorneys to get a no-cost, no-obligation consultation.
By phone: Call us toll-free at 1 (888) 986-9010
By email: Please fill out the form to the right

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