Stock Attorneys Blog

On Tuesday, the Commonwealth of Massachusetts filed a regulatory action against Securities America, Inc., accusing the brokerage firm of committing securities fraud on a massive scale. Specifically, Securities America sold approximately $697 million in promissory notes that were issued by entities wholly owned by Medical Capital Holdings, Inc. ("Medical Capital"). Unfortunately for Securities America's customers and other investors, the notes were part of an alleged Ponzi scheme, Medical Capital has defaulted on more than $1 billion of the notes that it issued. Securities America sold $358 million of those defaulted notes. The United States Securities and Exchange Commission ("SEC") sued Medical Capital several months ago, alleging that Medical Capital was a massive investment fraud, and Medical Capital now lies in an SEC receivership and is the subject of various injunctions and asset-freeze orders.

Similar to at least two nation-wide class-action lawsuits and dozens of FINRA securities arbitration claims that have been filed against Securities America, the Massachusetts complaint alleges that Securities America failed to conduct proper due diligence of Medical Capital or ignored red flags or which it was aware and made "material omissions and misleading statements" in the course of the sale of approximately $697 million of promissory notes to Medical Capital investors.

The Massachusetts complaint states "...all material risks and information regarding MC Notes were not disclosed to investors. These risks were known to [Securities America]. Year after year, the due diligence analyst, retained by [Securities America] to conduct a review of the various Medical Capital offerings, specifically requested and at many times pleaded that investors be informed of certain heightened risks."

Medical Capital claimed to provide financing to healthcare providers by purchasing the providers' accounts receivables and making loans to those providers. The accounts receivables then allegedly were packaged into notes and sold through private placements to investors. Approximately 20,000 investors purchased $2.2 billion in Medical Capital investments, including hundreds or thousands of Securities America customers. Securities America had approved the Medical Capital notes for sale by its brokers to Securities America customers.

Blum & Silver, LLP is a nationally recognized law firm with extensive experience representing investors throughout the United States and Latin America in investment fraud and stockbroker fraud cases involving stocks, bonds, options, private placements, Regulation D offerings, principal protected notes, structured products, and hedge funds. The law firm is currently represent numerous Medical Capital investors who have lost tens of millions of dollars. The firm's clients invested in Medical Capital notes with the expectation that their principal was safe, and they never were informed of the fraudulent nature of the investments. If you suffered Medical Capital investment losses, please contact Blum & Silver LLP for a free case evaluation.

The court-appointed receiver for the Medical Capital fraud filed his sixth status report on January 11, 2010. As with the receiver’s earlier reports, this report outlines the various fraudulent aspects of the Medical Capital entities. The report also reveals the unchanging fact that investors are unlikely to recover much money from the receivership. Specifically, the report discloses that Medical Capital investors are owed $1.7 billion, which is far greater than the assets available to pay the investors. The receiver’s report further states that Medical Capital’s lending activities were unprofitable beginning with the creation of its first notes, which purportedly were backed by medical receivables.

The report also reveals that Medical Capital was paid administrative fees of more than of $323 million. In other words, more than $323 million of investors’ money went straight into Medical Capital’s coffers. The receiver also reported that: (a) none of the Medical Capital entities ever generated enough profit to pay investors’ principal and interest, and (b) just under $1 billion in loans and assets were transferred among various Medical Capital entities in order to make payments to earlier investors using new investors’ funds. This is a classic example of a Ponzi scheme.

Between the use of new investors’ money to pay earlier investors, “faking” receivables, and fraudulently marking up the value of aged receivables, it appears that investors have lost more than $1 billion and that investors are highly unlikely to recover much of that loss from the receivership. Blum & Silver, LLP continues to file FINRA arbitration claims against the brokerage firms that sold Medical Capital notes to investors. Please contact Blum & Silver if you would like to discuss claims that you may have against the brokerage firm that sold Medical Capital investments to you.

According to the Financial Industry Regulatory Authority (FINRA), 7,137 arbitration cases were filed by investors last year, up 43 percent from 2008 and more than doubling the number of cases filed in 2007.

The volume of cases increased in every category, with the exception of online trading. The increased type of controversies include margin calls, churning, unauthorized trading, failure to supervise, negligence, omission of facts, breach of contract, breach of fiduciary duty, unsuitability and misrepresentation. The largest number of cases involved breach of fiduciary duty, as cases filed soared 48 percent to 4,206 last year. Misrepresentation and negligence claims were second and third on the list, cited in 3,408 (70% increase) and 3,405 (113% increase) cases, respectively.

Cases involving mutual funds and common stock were the most numerous, with the former being the subject of 1,556 claims last year, up 45% from 2008. Common stock claims increased by 77% from the previous year, up to 1,367 claims in 2009.

Although FINRA arbitration filings have vastly increased, it is noteworthy that the turnaround time for such cases in 2009 decreased by 12%. This means that investors are seeing resolutions to their cases at a faster rate.

According to a recent Associated Press (AP) analysis, more than 150 Ponzi schemes collapsed in 2009, compared with about 40 in 2008. In other words, nearly four times as many Ponzi schemes imploded in 2009 than in 2008. The AP’s analysis included criminal cases at all U.S. attorney’s offices and the FBI, as well as criminal and civil actions taken by state prosecutors and regulators at both the federal and state level.

In 2009, tens of thousands of investors lost more than $16.5 billion in these investment scams, including the life savings of many people.

The Securities and Exchange Commission describes a Ponzi Scheme as a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. Money from new investors is used to pay off earlier investors until the whole scheme collapses. Often there is no "investment" occurring — money is simply being shifted from one person to another, with the initiator of the investment scheme skimming money off the top.

The following statistics from the AP highlight the proliferation of such investment scams:

—The FBI opened more than 2,100 securities fraud investigations in 2009, up from 1,750 in 2008. The FBI also had 651 agents working in 2009 on high-yield investment fraud cases, which include Ponzis, compared with 429 last year.

—The SEC this year issued 82 percent more restraining orders against Ponzi schemes and other securities fraud cases this year than in 2008, and it opened about 6 percent more investigations. Ponzi scheme investigations now make up 21 percent of the SEC's enforcement workload, compared with 17 percent in 2008 and 9 percent in 2005.

—The Commodity Futures Trading Commission filed 31 civil actions in Ponzi cases this year, more than twice the 2008 amount.

Experts attribute the recession responsible for the collapse of so many of the Ponzi schemes, as well as heightened awareness and regulatory scrutiny that resulted from the infamous Madoff scandal.

Blum & Silver, LLP routinely represents investors in recovering Ponzi scheme losses, including investors who lost money in Medical Capital Holdings, Provident Royalties, DBSI and many other investments.

FINRA issued a regulatory notice this month to remind brokerage firms of their sales practice obligations relating to the sale of principal protected notes. The executive summary provides:

The retail market for principal-protected notes (PPNs) has grown in recent years, in part because they are often marketed as combining the relative safety of bonds with a potential for growth not available with traditional fixed income products. However, these products are not risk-free, and their terms and structures can be complex. Firms must ensure that their promotional materials or communications to the public regarding these products are fair and balanced, and do not overstate either the level of protection offered or an investment's potential returns. Firms also have a duty to ensure that their registered representatives understand the risks, terms and costs associated with these products, and that they perform an adequate suitability analysis before recommending them to a customer.

Among other things, the FINRA notice reminds brokerage firms that in marketing PPNs, they must ensure their communications accurately and fairly explain how the securities operate. Promotional materials must disclose the level of principal protection offered, the credit-worthiness of the guarantor, the potential returns and pay-out structure, the investor’s ability to access funds and any costs or fees that might affect the return of principal. FINRA also advises representatives to perform an adequate suitability analysis based on the aforementioned aspects and components of the PPN.

The risks of PPN's were highlighted with the highly publicized Lehman Brothers' Principal Protected Notes. Brokers at UBS and other firms pitched these products as similar to buying a basket of stocks (such as the S&P 500) but with the added benefit of up to 100% principal protection if the market went down. However, Lehman Brothers declared bankruptcy in September 2008 and the notes became worthless.

Blum and Silver, LLP is actively involved in representing investors in PPN cases. For further information, please contact us.

Scott L. Silver of Blum & Silver, LLP was recently awarded the most effective Securities Lawyer in South Florida by the Daily Business Review. Mr. Silver received this esteemed accolade for his success in obtaining one of the largest arbitration awards ever awarded against an individual broker. A FINRA panel awarded a group of investors over $7 million, including over $4 million in punitive damages, against former UBS broker, Gary J. Gross based upon what the panel found to be Gross's "willful and wanton" conduct and in "flagrant disregard" of the investors rights.

On December 4, 2009, the Wall Street Journal reported that a FINRA Arbitration Panel awarded an investor $200,000.00 against UBS because the broker inappropriately sold her risky Lehman Brothers principal protected notes.

Blum & Silver, LLP is representing investors in FINRA arbitration claims who suffered losses at UBS as a result of losses in Lehman principal protected notes and Lehman preferred shares. These securities were typically recommended as safe investments. However, many investors allege they were not warned of the risk and suffered extraordinary losses as a result.

Provident Royalties and Medical Capital securities were both offered under Regulation D of the Securities Act (or Reg D). Reg D contains exemptions from the registration requirements, allowing some issuer companies to offer and sell their securities without having to register the securities with the SEC.

Because securities offered under Reg D are not registered with the SEC, the transparency of these companies is limited. Broker-dealers must engage in the due diligence process to determine the validity of the offering, the issuer’s operations and suitability of the investments for their clients. Some broker-dealers engage an outside due diligence firm, whereas others perform their own due diligence, or a combination of both.

Many of the broker-dealers that sold Provident Royalties and Medical Capital securities “relied” on reports prepared by outside diligence firms and actually collected a due diligence fee for allegedly reviewing these reports. The problem with relying on such reports, however, are two-fold: 1) the firms preparing the reports are typically paid by the issuer, posing a conflict of interest and 2) the due diligence firms tend to produce only the most rudimentary information, providing only a brief overview of the issuers and their finances.

As reported September 27, 2009 by Investment News, an undisclosed broker-dealer hired and paid a firm to conduct additional due diligence on Medical Capital. Medical Capital “wasn’t very cooperative” and objected that the firm was going to show the report to more than one broker-dealer. This is not surprising, as any meaningful due diligence would have revealed red flags.

Blum & Silver, LLP is aggressively pursuing FINRA arbitration claims against broker-dealers for losses incurred based on recommendations to purchase Provident and/or Medical Capital.

If you were sold limited partnership interests and/or preferred stock in Provident or Medical Capital, contact our office.

A federal court filing by the SEC revealed an alarming e-mail by W. Thomas Cross, an executive at Securities America. According to the July 2008 e-mail to a Medical Capital official, Mr. Cross feared a panicked run on the bank because of issues at Medical Capital. This e-mail is dated months before Securities America stopped selling the Medical Capital notes.

The SEC alleges that, since 2003, Medical Capital has raised more than $2.2 billion through private securities offerings in the form of notes, and that since August 2008, nearly $1 billion of the notes have been in default or were late in paying principal and/or interest.

Blum & Silver, LLP and its co-counsel have obtained one of the single largest arbitration awards against an individual financial advisor.

The award was against a former Boca Raton stockbroker who was ordered to pay a $7 million arbitration award — including $4 million in punitive damages — by a FINRA arbitration board.

The FINRA arbitrators found Gary J. Gross made false representations and didn’t tell customers about the risks and suitability of securities he bought for them while working for Axiom Capital Management and UBS. The investments included private placements, mutual funds and low-priced securities.

Many of Gross’ customers were elderly and lost their life savings. Gross preyed on members of his community and continues to live in the same home valued in excess of several million dollars.

The FINRA award found Gross fabricated values while generating commissions from frequent trades on customer accounts and engaged in unauthorized trading and other sales practice violations.

Last yar, Gross consented in a Securities and Exchange Commission civil case to the entry of a permanent injunction that barred him from working in the securities industry until all FINRA arbitration awards against him are concluded.

Investment News recently reported that multiple claims have been filed against the brokerage firms which sold interest in Medical Capital and its related business. The allegations include claims of negligence and breach of fiduciary duty,

The Medical Capital investment was a private placement. Private placements are generally considered to be risky and cannot easily be sold . However, many investors are alleging that the firms sold these interests as safe conservative investments appropriate for people seeking an interest stream in retirement or other conservative investments. Multiple issues have now been raised regarding what, if any, due diligence was done into Medical Capital and the principals of the company amongst other issues.

The law firm of Blum & Silver, LLP represents multiple investors in claims against the selling broker-dealers. If you have any information about our claims or want a free consultation to discuss your legal rights, please contact our law offices.

On July 16, 2009, the Securities and Exchange Commission filed an emergency court action to halt a $77 million offering fraud perpetrated by defendants Medical Capital Holdings, Inc. ("Medical Capital"), Medical Capital Corporation ("MCC") and others. The SEC's complaint alleges 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. Our investigation has learned that Medical Capital allegedly used investor funds for movie projects, personal expenses, expensive yachts and other improper activities.

However, it now appears that the fraud was much larger and that numerous brokerage firms including Securities America sold investments in Medical Capital without allegedly doing the proper due diligence.

As alleged in the SEC's complaint, the defendants defrauded investors by misappropriating millions raised through the sale of notes. The selling agents received fees and/or commissions for the sale of these investments. Many of these brokerage firms are small or regional brokerage firms which was responsible for performing a reasonable investigation before selling these investments to its investors.

To determine if some, or all, of the investment losses in Medical Capital are recoverable through FINRA securities arbitration claims, please contact Blum & Silver, LLP.