Securities America: Medical Capital Holdings: Medicap Fraud

The Securities America and MedCap saga began in August of 2009 when the Securities and Exchange Commission filed an action against MedCap and various affiliates in the action styled:

SECURITIES AND EXCHANGE COMMISSION V. MEDICAL CAPITAL HOLDINGS, INC.; MEDICAL CAPITAL CORPORATION; MEDICAL PROVIDER FUNDING CORPORATION VI; SIDNEY M. FIELD; and JOSEPH J. LAMPARIELLO, Civil Action No. SA CV09-818 DOC(RNBx) (C.D. Cal.)

According to an SEC Litigation Release, the Securities and Exchange Commission, on August 3, 2009, obtained an emergency court order halting a $77 million offering fraud perpetrated by defendants Medical Capital Holdings, Inc. ("MCHI"), Medical Capital Corporation ("MCC"), Medical Provider Funding Corporation VI ("MP VI"), Sidney M. Field, and Joseph J. Lampariello. The SEC's complaint, filed in federal court in Orange County, California, alleged that the defendants defrauded 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.

MCHI is a medical receivables financing company that operates through MCC, its wholly-owned subsidiary, to administer several Special Purpose Corporations ("SPCs"), including MP VI. Field and Lampariello are directors of MCHI, MCC, and MP VI, with Field also serving as the defendant entities' CEO and Lampariello serving as their president and COO. Field, 63, resides in Villa Park, California, and Lampariello, 55, resides in Huntington Station, New York and Newport Beach, California.

The SEC's complaint alleges that, since 2003, MCHI, MCC, Field, and Lampariello have raised over $2.2 billion through offerings of notes in MP VI and five other similarly structured SPCs. As of March 31, 2009, MP VI and its affiliated SPCs had over $1.2 billion in notes outstanding, and since August 2008, five of the SPCs have been in default or late in paying principal and/or interest on $992.5 million in notes.

As alleged in the SEC's complaint, the defendants defrauded investors by misappropriating approximately $18.5 million of the $76.9 million raised through the sale of MP VI notes to pay administrative fees to MCC. The complaint alleges that these fee payments were contrary to representations in MP VI's original offering documents, which stated that administrative fees would not be paid out of proceeds from the sale of notes. The complaint also alleges that these fee payments were contrary to representations in MP VI's May 27, 2009 supplemental offering documents that less than $4 million had been used for purposes other than purchasing accounts receivables.

In addition, the SEC's complaint alleged that the defendants defrauded investors by misrepresenting in MP VI's offering documents that none of the SPCs affiliated with MP VI had defaulted on or been late in making payments of principal and/or interest to their respective investors. In fact, two MP VI-affiliated SPCs began defaulting on interest and/or principal payments in the same month that MP VI began its offering, and recently two other MP VI-affiliated SPCs have defaulted or been late in making interest payments.

The Honorable David O. Carter, U.S. District Judge for the Central District of California, granted the SEC's request for emergency relief, including an order temporarily enjoining all defendants from future violations of the anti-fraud provisions and freezing the assets of and appointing a temporary receiver over MCHI, MCC, and MP VI. The SEC also seeks preliminary and permanent injunctions, disgorgement, and civil penalties against all defendants. A preliminary injunction was subsequently entered by the court and a receiver was appointed.

As the Securities America and MedCap story has unfold, it appears that, according to the Commonwealth of Massachusetts administrative complaint that was filed against Securities America, from 2003 to 2009, MedCap issued over 1.7 billion dollars in MedCap notes. Securities America acted as one of the placement agents in connection with the sale of 37% of the total MedCap notes that were issued by the company.

The administrative complaint highlights the fact that Securities America did not disclose all material risk associated with the offerings to investors. Even more egregious is the fact that Securities America purposely withheld material risk information from investors. Here are a few examples:

  • Year after year, the due diligence analyst, retained by Securities America, to conduct a review of various MedCap offerings, specifically requested and at many times pleaded that investors be informed of certain heightened risks. According to the complaint, the "Division in its deposition of the Respondent's Chairman of the Due Diligence Committee and Head of Sales, Thomas Cross asked why certain information, recommended to be given to investors by the due diligence analyst, was not provided to Investors. Mr. Cross responded that giving such information to investors, specifically the due diligence analyst reports, would be a bad thing".
  • Documents provided to investors stated that "...the undersigned placement agent [Respondent] has reasonable grounds to believe that an investment in the notes of the company is suitable for the subscriber..." and that "...the undersigned placement agent has informed the subscriber of ...all pertinent facts relating to an investment in the notes...". This was an untrue statement.
  • From 2005 until 2007, the material risks raised in the due diligence analyst reports increased dramatically. In the "Conclusions & Recommendations" section, the due diligence analyst ever year from 2005 until 2007 raised the same issues as he did in 2003 and 2004. Additionally, beginning in 2005 the due diligence analyst also raised a number of added material risks associated with the MedCap notes. To review a copy of the administrative complaint, click on this link.

While arbitration awards do not usually contain any specific findings other than determining liability and specifying damages, a initial arbitration award involving the Securities America - MedCap debacle was recently made public. For a more complete discussion concerning this award, click on this link.

If the currently available information concerning Securities America turns out to be anywhere close to accurate and you have invested through Securities America to purchase MedCap notes, you now have another important decision to make concerning the financial circumstances under which you retain counsel. Depending upon the amount of your claim, it might make more sense for you to retain an attorney on an hourly or flat fee basis rather than to pay a percentage of the award, especially if your loss was your financial nest egg. At least give yourself the choice.

If you desire any further information concerning Securities America - MedCap, please go to my blog. This would relate to not only individuals that invested though Securities America but other broker/dealers.

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