Securities America Faces a New Wave of Medical Capital Problems

 

The Commonwealth of Massachusetts Securities Division recently filed a Complaint (“Complaint”) that makes some startling allegations about Securities America’s actions in selling Medical Capital Notes. The collapse of the Medical Capital investments has left investors nationwide in the hole to the tune of about $1 billion.

The Complaint alleges that Securities America’s Due Diligence Committee failed to alert investors of the risks contained within an outside due diligence analyst’s reports and failed to address any of the recommendations raised by the due diligence analyst. In short, the Commonwealth claims that Securities America purposely chose to withhold the actual reports from investors.

Securities America was apparently informed by a 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 blindly accepted whatever explanation Medical Capital provided and to have failed to inform investors that a due diligence analyst had been raising a number of material risks. Even after being advised to provide a specific type of risk disclosure to investors, Securities America apparently chose not to do so.

According to information contained in the Complaint, it appears that these issues were discussed within Securities America. 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. The Complaint states that Mr. Nagengast wrote an email in 2005 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.”

According to the Complaint, Securities America’s internal Due Diligence Committee ignored its President’s recommendations and continued to sell hundreds of millions of dollars of the Medical Capital Notes without any audited financials.

The Commonwealth contends that the due diligence analyst’s reports were never given to investors even after the outside due diligence analyst himself made that request. In 2006 the outside due diligence analyst not only asked Securities America to give investors his report so the material risks associated with Medical Capital could be highlighted to investors, but he also created a client disclosure form. This disclosure form highlighted six of the seven risks raised in the due diligence and analyst report of 2006. At that time, 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 but Securities America never provided this risk disclosure form to any of its investors.

The Complaint quotes an email addressed to Medical Capital from the outside due diligence analyst expressing his dismay with Medical Capital’s responses to the client disclosure form by saying “Fred, I disagree with every point and nothing in MCP IV has changed structurally. It is very unfortunate that you have the ability to enhance this offering but see fit to peel off cash every month. For $250 million if BNY wants to do nothing in its capacity that doesn’t prevent you from appointing an independent audit person or firm to actually accomplish oversight for investors. Nothing similarly prohibits you from leaving some of the cash in a sinking fund to provide extra measure of security. Joey told me last time that either he or Sid would personally certify the CCR at 1:1 or better every month: I even drafted a certification to use, which was never implemented. I could go on and on but if you guys figure ‘the money keeps rolling in, why not do anything?’ then that’s certainly your business decision.”

Further, not only did Securities America fail to disclose these risks to investors, it appears to have taken active steps to prevent such a disclosure. According to the Complaint, Securities America did not give representatives the report because “if 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 can take that document to the investor and that’s just a bad thing.”

According to Pratt H. Davis of Page Perry, “Based on the allegations in the Massachusetts Complaint and other documents, Securities America not only mislead investors but also intentionally made material misrepresentations and omissions to investors in order to get them to purchase these Medical Capital Notes. Mr. Davis further stated, “If these allegations are true, Securities America not only turned a blind eye to the red flags and significant warnings in the due diligence reports, but also took specific actions to mislead the investors into believing such risks did not exist.”

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 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in Medical Capital cases. For further information, please contact us.