In reading the following post, it is important to bear in mind that Securities America Inc. only acted as the placement agent for approximately 37% of the total notes issued by Medical Capital Holdings, Inc. (MedCap.). Consequently, if you have lost money as a result of your investment therein through another broker/dealer, don’t lose hope. Many of the standards that Securities America were subject to and certain basic facts also apply to these other broker/dealers.
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.
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 antifraud 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. Recently, the receiver issued his seventeenth report, which was filed with the court on December 10, 2010. I have not attempted to summarize the report but, if you glance at it, the report will give you some ideal of the current status of MedCap assets and continuing attempts of the receiver to enhance the company’s asset base. This will become important when the claims process is completed as it will affect how much of a distribution each investor will receive, if any.
As it relates to Securities America, a FINRA arbitration award filed on December 31, 2010, which apparently reimbursed the claimants in that case for the full amount of their investment ($734,118), legal fees and costs, as well as, ordered Securities America to pay punitive damages in the amount of $250,000. This is not a guarantee that you will recoup 100% of your investment, plus, because to a large extent each case rises and falls on its own particular set of facts and circumstances, especially when dealing with broker/dealers other than Securities America.
Rules and facts common to all broker/dealers who sold MedCap Notes
With the above said, it is important to note that all broker/dealers that are licensed with FINRA are required to comply with their obligations under the federal and state securities laws, with the rules and regulations adopted by various regulatory agencies, including FINRA and with their internal rules and regulations.
Interestingly, at the beginning of last year, FINRA issued Notice to Members 10-22, which reminded broker/dealers of their obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings made under the Securities and Exchange Commission’s Regulation D under the Securities Act of 1933-also known as private placements. Regulation D provides exemptions from the registration requirements of Section 5 under the Act. Regulation D transactions, however, are not exempt from the antifraud provisions of the federal securities laws. A broker-dealer has a duty-enforceable under federal securities laws and FINRA rules to conduct a reasonable investigation of securities that it recommends, including those sold in a Regulation D offering. Moreover, any broker-dealer that recommends securities offered under Regulation D must meet its suitability requirements under NASD Rule 2310 (Suitability), and must comply with the advertising and supervisory rules of FINRA and the SEC.
As part of each offering package, the broker/dealer promised each investor that “…the undersigned placement agent 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…”
In the case of Securities America, it claims to have heavily relied on outside due diligence analyst reports to approve the sale of the MedCap notes, yet year after year, Securities American ignored the material risks and disclosure recommendations raised by such reports. The extent of due diligence performed by other broker/dealers and the extent that it was reasonable under the circumstances is a mixed question of law and fact.
In following posts, I will discuss other important considerations that must be taken into consideration relative to the Medcap notes.
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If you believe you have been the victim of securities fraud or stockbroker misconduct, we can help you explore your options and discuss whether you may be able to obtain a financial recovery. Located in Fort Lauderdale, Florida, we represent clients across the United States. Contact us to arrange your free initial consultation. We return all calls by the end of each business day.
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Attachments:
FINRANoticetoMemebers10-22.pdf