Articles Posted in Medical Capital

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.”
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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 Law Group 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.

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.

UBS sold approximately $1 Billion of Lehman Structured Notes in the United States. Many of these “Structured Notes” were called “Principal Protected Notes.” Many of these “Principal Protected Notes” were sold as safe, conservative investments that provide income. The ugly reality is that these investments were high-risk products secured only by a promise of Lehman Brother Holdings Inc. to repay the principal.