On New Year’s Eve, Securities America was hit with a $1.2 million award as a result of its sale of Medical Capital Notes. The award included $734,000 in compensatory damages, $250,000 in punitive damages and $171,000 in attorney and expert fees. According to attorney H. Davis at Page Perry, a securities arbitration and litigation firm currently handling millions of dollars of Securities America claims, “the award of punitive damages by a FINRA panel is a foreboding sign for Securities America going forward as punitive damages are rarely awarded in FINRA arbitrations.”
According to Mr. Davis, the panel apparently did not buy into Securities America’s argument that Medical Capital was solely to blame. The award specifically stated that: “The panel’s decision is based on what was actually known by Randall Talbott and Securities America Inc. at the relevant times and is not based on what additional information could or could not have been discovered by respondents regarding the subject investments or the company offering the investments.”
Along with claims filed by individual investors, Securities America faces regulatory actions from Massachusetts and Montana. The collapse of the Medical Capital investments has left investors nationwide in the hole to the tune of about $1 billion.
In the claims filed by Page Perry and other firms across the nation, injured investors are alleging that a Securities America Due Diligence Committee failed to alert investors of the risks contained within an outside due diligence analyst’s reports and that Securities America also appears to have failed to address any of the recommendations raised by the due diligence analyst and purposely chose to withhold the actual reports from investors.
Securities America was apparently informed by the due diligence analyst of material risks of each issue and failed to take reasonable steps in addressing these material risks with Medical Capital. Instead, Securities America appears to have accepted whatever explanation Medical Capital provided. Evidence and documentation collected to date from the Massachusetts’ Complaint indicates that Securities America failed to inform investors that a due diligence analyst had been raising a number of issues as material risks and after being advised to provide a specific type of risk disclosure to investors, Securities America apparently choose specifically chose not to do so.
According to information contained in the Massachusetts’ Complaint, it is clear that these issues were discussed within Securities America. In fact, according to the Massachusetts’s Complaint, one of the identified risks, the lack of “audited financials,” was highlighted in 2005 as a risk by Securities America’s own President and a voting member of the Due Diligence Committee, Jim Nagengast. According to the Massachusetts’ Complaint, Mr. Nagengast wrote an email in 2005 to Mr. Cross indicating,
“my big concern is the audited financials. At this point, there is no excuse for not having audited financials ‘. It is a cost they simply have to bear to offer product through our channel. We simply have to tell them that if they don’t have financials by XXXX date we will stop distributing the product on that date. Then they can decide if it’s worth spending $50,000 to have it done. If they won’t spend the money, that should give us concerns.”
Mr. Cross also apparently testified, according to allegations in the Massachusetts’ Complaint, that the due diligence analyst’s reports were never given to investors even after the outside due diligence analyst himself made that request. The due diligence analyst apparently asked Securities America to insure that each investor sign and acknowledge receipt of the client disclosure form prior to investing in the Medical Capital notes. Securities America appears to have never provided this risk disclosure form to any of its investors.
Further, according to information in the Massachusetts’ Complaint, the outside due diligence analyst was so concerned for the investors’ safety, that he recommended that if the material risks disclosed in the due diligence analyst reports and later the client disclosure form were not given to investors that Securities America at least set some restriction on investors’ potential losses.
This concern is evidenced by an email referenced in the Massachusetts’ Complaint that was addressed directly to Securities America’s Due Diligence Committee dated November 30, 2006, wherein the analyst stated:
“as I stated to both of you, none of the recommended changes from MPFC III were implemented, including simple definitional problems in the Administrative Service agreement. It also appears that the consolidated financials have degraded a bit. If you decide to approve, please do so with restrictions on percentage of net worth, liquid and non-liquid, no reinvestment of interest, capping future note principal reinvestment to note proceeds from redemption or even a reduced percentage. Frankly, I am upset an organization brining in these dollars cannot agree to a partial sinking fund and an appointment of an independent overseer as BNY doesn’t commit to doing anything ‘”(emphasis in original)
Apparently, Securities America failed again to take any action in receiving such an email. Further, not only did Securities America fail to disclose these risks to investors, they appear to have taken active steps to prevent such a disclosure. According to the Massachusetts’ Complaint, Mr. Cross testified that the reason for not giving representatives the report was that
“the analyst makes a statement and we put that statement in the hands of the advisor, guess what happens?’ Somehow that document is its infinite wisdom will find its way into the hands of an investor ‘ So somehow do you figure out a way to get it in a secured server so that nobody can see it, you know, other than advisors? The problem, even if you do that, is that when you create that, guess what they can do? Hit the print screen. Then they take that document to the investor and that’s just a bad thing.”
Investors who have lost money in Medical Capital Notes need to be active about pursuing their recovery options. Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in securities cases. For further information, please contact us.