Monthly Archives: January 2010

Oren Eugene Sullivan, a former broker with New York Life Securities, was a master at pulling the wool over investors’ eyes. For decades, the former South Carolina broker fleeced investors out of millions of dollars in an elaborate Ponzi scheme. What makes Sullivan’s case truly shocking, however, are the victims Sullivan allegedly preyed upon. Many were more than 80 years of age, mentally and physically impaired, widows, church members and/or long-time family friends. One investor who gave Sullivan $70,000 suffered from Alzheimer’s disease. Another investor was confined to a wheelchair, her legs amputated. She invested tens of thousands of dollars with Sullivan.

In August 2009, the Financial Industry Regulatory Authority (FINRA) permanently barred Sullivan for life from working in the securities industry. On Jan. 4, 2010, Sullivan pleaded guilty to one felony count of mail fraud in connection to operating a Ponzi scheme.

Sullivan apparently ran his scam from 1998 to October 2008, obtaining money from investors for his personal use while leading clients to believe they were investing in promissory notes or other legitimate financial products issued by New York Life and its affiliates.

The scheme came crashing down after one of Sullivan’s elderly customers and her daughter discovered that he had misappropriated $10,000 given to him for the purchase of variable annuities. Instead of investing the money as promised, Sullivan used the funds to pay for his son’s wedding. Over a period of approximately three years, the customer had never received a statement showing the purchase or the investment performance of the variable annuities.

Most of Sullivan’s victims had previously invested in one or more NYLife products sold by the former South Carolina broker. In exchange for the money he took from customers, Sullivan usually provided a one-page note that outlined the amount of principal and the promised annual interest rate. That rate ranged from 6% to 12%.

In total, federal authorities say Sullivan misappropriated $3.7 million from investors.

As for Sullivan, he faces a maximum fine of $250,000 and the possibility of up to 20 years in federal prison. Sentencing is scheduled for April 2010.

Thomas Seaman, the court-appointed receiver in the Medical Capital fraud case, filed his sixth status report on Medical Capital Holdings on Jan. 11, 2010. Among the highlights revealed in the document: Investors are owed more than $1.7 billion and Medical Capital’s lending activities have been deemed unprofitable beginning with the creation of its first Medical Provider Financial Corporation, or MPFC 1. (MPFC 1 is one of several wholly owned special-purpose corporations that Medical Capital used to raise money from investors via offerings of notes.) 

Other interesting details found in Seaman’s latest report include the following:

• Medical Capital requested and was paid administrative fees in excess of $323 million.
• No MPFC ever generated enough profit to pay investors’ principal and interest.
• Medical Capital transferred loans and other assets valued at just under $1 billion between eight money-raising MPFCs, which facilitated payments of earlier investors’ principal from new investors’ funds.

In July 2009, the Securities and Exchange Commission (SEC) shut down Tustin-based Medical Capital for allegedly defrauding investors out of at least $18.5 million. In an amended lawsuit filed in November 2009, however, the SEC alleges a much more systematic fraud against Medical Capital and its subsidiaries. 

The amended complaint accuses Medical Capital of “faking” receivables, which the SEC says were then sold to MPFC-VI. In turn, the fake receivables allowed Medical Capital to charge investors millions of dollars in unjustified fees. 

A Nov. 12 article in the Orange County Register describes how the process allegedly worked: 

“In August 2008, MP-VI bought receivables of NLV, Inc. from an older fund, Medical Provider-V, for $3.39 million in cash. In fact, NLV had been out of business for four years. The receivables were fake.

“In August and September 2008, MP-VI bought three batches of receivables for Trace Life Sciences, a Denton, Texas, radio medicine maker that Medical Capital had just seized. Two of the three batches of receivables were fake. 

“Medical Capital took the first 72 receivables from the first batch and created a fake second batch by adding the number 1045 to each line number to create a new line, the SEC alleged. It also upped the amount for each receivable by $100,000. It created the fake third batch by taking those same receivables and increasing the amount due on each receivable by $200,000.” 

The end result of Medical Capital’s alleged “accounting” was this: Trace Life Sciences generated more than $21 million in fake receivables in less than a month. The SEC alleged that MP-VI paid two earlier Medical Capital funds $9.7 million for the right to collect the fake bills.

Maddox Hargett & Caruso continue to file arbitration claims against various brokerage firms that sold investors Medical Capital Notes. If you suffered investment losses in Medical Capital Holdings, contact us today.

Kevin O’Brien’s past has come back to haunt him. After learning the former Robert W. Baird & Co. broker was kicked out the brokerage industry, a group of Cincinnati residents have waged a campaign to get O’Brien to resign from his position as the newly elected trustee of Anderson Township.

O’Brien took office in November. As trustee, he shares management responsibilities for overseeing the town’s finances.

The residents who are calling for O’Brien’s resignation cite the former broker’s records with the Financial Industry Regulatory Authority (FINRA). On Sept. 14, O’Brien was banned for life from the working in the securities industry over allegations that he misappropriated for his own use some of the $378,000 he transferred from a client’s account. O’Brien accepted the sanction without admitting or denying FINRA’s findings. He was later fired from Robert W. Baird & Co., the brokerage firm where he worked when the alleged violations occurred.

O’Brien’s records can be viewed here.

As reported Jan. 15, 2010, by Investment News, a group of Anderson Township citizens have filed a subpoena requesting O’Brien’s records from Robert W. Baird. According to the article, the information will offer additional evidence as to why a court should order O’Brien to significantly increase the $1,000 bond all Ohio township trustees must have before they take office. The higher bond would give the township greater protection in the event possible legal action against O’Brien occurs from the securities case.

“The right thing for him to do would be to resign,” said Courtney Laginess, an Anderson Township resident, in an article posted on Cincinnati.com. “To be permanently barred from practicing securities is a very big deal. It really goes to the honesty and trust issue.”

The story of Main Street Natural Gas Bonds serves as an invaluable lesson on the Wall Street-Main Street connection. Marketed as a supposedly “safe” investment, Main Street Natural Gas Bonds have spurned a cadre of lawsuits from investors who allege that brokerage firms misrepresented the safety of the bonds and omitted other key material facts about them. 

Among those facts: The Main Street Natural Gas Bonds shared very little in common with the safety of traditional municipal bonds. That’s because the Main Street bonds were connected to a gas supply contract of Lehman Brothers Holdings. When Lehman Brothers filed for bankruptcy protection in September 2008, the fate of the bonds was immediately put into jeopardy because their “safety” depended on the fiscal viability of Lehman Brothers.

In turn, individual and institutional investors were subsequently wiped out after Lehman’s commodities unit stopped delivering gas to the nonprofit corporation. 

Many of the investors who purchased Main Street Natural Gas Bonds did so because they were looking for a safe, tax-free income-producing investment backed by a municipality. What they got was far different than what they had in mind. 

The Financial Industry Regulatory Authority (FINRA) has launched an investigation into whether banks and brokerages that sold various issues of Main Street Natural Gas Bonds were forthcoming with investors about the true state of Lehman Brothers’ deteriorating financial condition. 

“One interesting firm ran a bunch of senior citizens’ sales seminars where they promoted these particular bonds as good,” said Malcolm Northam, FINRA’s director of fixed income securities, in a Sept. 24 Bloomberg article. “Maybe they were, at the time they were promoted. I don’t know. It raises interesting questions.” 

It’s also raising lawsuits. One Florida investor sued a broker, claiming the Main Street bonds were falsely touted as general obligation bonds guaranteed by the state of Georgia. 

If you invested in Main Street Natural Gas Bonds, you may have a viable claim to recover any investment losses you suffered following Lehman’s bankruptcy. Please contact our firm to tell us your story.

An increase in fraudulent private placement offerings has state regulators pushing for tougher regulatory reforms that will give them more control and oversight of private placement issuers. In particular, states securities regulators want authority to control those issuers that have prior convictions for securities fraud or other offenses. Case in point: Medical Capital Holdings.

The Securities and Exchange Commission (SEC) filed fraud charges against Medical Capital in July for private placement sales totaling $77 million. In the complaint, the SEC accuses Medical Capital and its principals of defrauding investors and misappropriating about $18.5 million of investor funds. The regulator also alleges that Medical Capital misrepresented the private placements by failing to inform investors that it had defaulted on loans connected to prior offerings, as well as was late in making payments to investors on principal and/or interest.

Following the SEC’s charges, it’s been determined that a number of broker/dealers knowingly marketed and sold unregistered Medical Capital notes to thousands of unsuspecting investors.

As reported Dec. 1 by Investment News, examples of private placement deals like those involving Medical Capital are one reason state regulators are calling for more authority over private-offering issuers with prior convictions for securities fraud. As it currently stands, private placements are generally exempt from review, which means state have no power to shut down issuers with past problems from selling private placements in the future.

“Before the North American Securities Administrators Association (NSMIA), if John Brown wanted to do a private placement but he had been convicted of securities fraud, he couldn’t use the exemption,” said Texas Securities Commissioner Denise Crawford, who is president of NASAA. “After NSMIA, the same John Brown could use the exemption” to sell private placements without registering,” the Investment News article said.

On Jan. 14, 2010, state regulators from across the country appeared on Capitol Hill to voice their concerns over private placements to the Financial Crisis Inquiry Commission. The Commission, which was created in May 2009 by President Obama, has been charged with dissecting the root causes of the nation’s financial meltdown. The consensus among state regulators who provided testimony thus far: Give states back the authority to police private-placement offerings or be prepared to see more private placement frauds down the road.

IIf you were ill-advised about the risks of investing in private placement offerings, contact our securities fraud team. We will evaluate your situation and explain your options.

The Behringer Harvard REIT and other unlisted real estate investment trusts like it are generating a myriad of questions by investors who say their broker/dealer misrepresented the products as safe investment vehicles that offered guaranteed dividends and little to no volatility.

Some broker/dealers and their financial reps may have been motivated by the large commissions – 15% is typical – tied to sales of unlisted REITs. Investors, however, may be unaware of these hefty fees. They also may not clearly understand the liquidity and valuation issues associated with unlisted REITs versus publicly traded REITs.

Unlisted REITs – also referred to as non-traded REITs – are registered with the Securities and Exchange Commission (SEC) but they don’t trade on national stock exchanges or over counter. Retail investors who invest in unlisted REITs purchase shares through a broker/dealer, with the idea that they will collect a steady dividend check from their investment.

It’s the fine print surrounding unlisted REITs that often comes back to haunt investors. Unlisted REITs can tie up investors’ money for years. In other words, an investor’s money essentially is “illiquid” until the end of the investing term. That means any shares in the REIT cannot be sold before that specified date.

In addition, it’s more and more common for unlisted REITs to deny redemption requests altogether if too many investors attempt to redeem their investments at once.

It’s also become increasingly common for some of biggest names in the non-listed REIT business to cut their dividends to investors. As reported by Investment News last fall, several of the most prominent non-traded REITs did just that, including the Behringer Harvard REIT I.

If you were ill-advised about the risks of investing in unlisted REITs like the Behringer Harvard REIT, contact our securities fraud team. We will evaluate your situation to determine if you have a viable claim for recovery.

The phrase “Medical Capital lawsuit” has become increasingly popular among investors following recent fraud charges filed against the Tustin-based healthcare company by the Securities and Exchange Commission (SEC).

In its complaint, the SEC accuses Medical Capital Holdings, Medical Capital Corporation, Medical Provider Funding Corporation VI and company officers Sidney M. Field, and Joseph J. Lampariello of securities fraud and misappropriating about $18.5 million of investors’ funds.

The SEC goes on to state that Medical Capital and related subsidiaries lied to backers as the companies allegedly raised and misappropriated millions of dollars of investors’ money while at the same time failing to disclose information about $1.2 billion in outstanding notes and $993 million in notes that had entered into default.

On the same day that the SEC filed fraud charges, the Financial Industry Regulatory Authority (FINRA) issued a sweep notice to an undisclosed number of brokerage firms to obtain information about sales of the Medical Capital Notes.

Investors who bought Medical Capital Notes based on the recommendation of a broker/dealer or investment firm may be able to recover their financial losses by filing an individual arbitration claim with FINRA. If you sustained investment losses in Medical Capital Holdings, contact our securities fraud team. We can evaluate your situation to determine if you have a viable claim.

Medical Capital losses may be changing the face of future private placement deals. In July, the Securities and Exchange Commission (SEC) levied fraud charges against Medical Capital Holdings, bringing into question the suitability of the products and the sales tactics used by broker/dealers that sold the private placements to individual investors.

Among the charges outlined in the SEC’s complaint: Medical Capital and top executives Sidney M. Field and Joseph J. “Joey” Lampariello allegedly defrauded investors, wrongfully diverted $18.5 million of their money and failed to disclose information about several defaults. A receiver has since taken over Medical Capital’s business.

According to the SEC, Medical Capital raised some $2.2 billion from approximately 20,000 investors over the past six years. The company, which is based in Tustin, California, places investors’ money primarily into unpaid bills, or receivables, from hospitals and doctors.

In November, a class action lawsuit was filed against a number of brokerage firms that sold the private placements in question. Those firms include: National Securities Corp., Cullum & Burks Securities, Securities America, Ameriprise Financial, Inc., and CapWest Securities.

The broker/dealers responsible for selling private placements in Medical Capital had an obligation to their clients to perform due diligence on the investments they sold. This didn’t happen. And now investors are paying the price.

Maddox Hargett & Caruso P.C. continues to investigate the sales practices of broker/dealers that sold Medical Capital notes to investors. If you sustained investment losses in Medical Capital Holdings, contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

Synthetic collateralized debt obligations, or CDOs, are complex mortgage-linked debt products that have been blamed for bringing Wall Street to its knees and pummeling millions of investors in the process. It was in the fall of 2007, when the financial markets first started to become unhinged, that these high-risk instruments found their way into the public’s eye.

Today, CDOs are a hot topic on Capitol Hill, where members of Congress and regulators like the Securities and Exchange Commission (SEC) are trying to determine exactly how and why synthetic CDOs created the financial tsunami that they did.

As reported Dec. 24 in an article by Gretchen Morgenson and Louise Story for the New York Times, regulators are said to be looking at whether current securities laws or rules of fair dealing were violated by the investment firms and banks that created and sold CDOs and then turned around to bet against clients who purchased them.

“One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded,” the article says.

Pension funds and insurance companies are some of the institutional investors that lost billions of dollars on synthetic CDOs – investments they thought were safe investments.

The New York Times article devotes space mainly to the synthetic collateralized debt obligation business of Goldman Sachs and, specifically, mortgage-related securities called Abacus synthetic CDOs. Abacus CDOs were developed by Goldman trader Jonathan Egol, who had the idea that they would protect Goldman from investment losses if the housing market ever collapsed.

According to the article, when the market did tank, Goldman created even more of these securities, enabling it to pocket huge profits. Meanwhile, clients of Goldman who purchased the CDOs – and who thought they were solid investments – lost big.

One can easily infer from the article and other news reports on the subject that Goldman put the best interests of clients in harm’s way with Abacus because it not only served as the structurer of the deals involving the product, but also held onto the short side of those same deals. In other words, the company would be advising clients to buy assets that, in turn, it was betting to fail.

Goldman certainly is not the only investment firm that employed this strategy. Others banks created similar securities that they sold to clients and then bet against the future performance of those assets.

Goldman and other investment banks will soon have to answer tough questions about accountability and fiduciary duty. In the meetings being held on Capitol Hill, the Financial Crisis Inquiry Commission – a group that has been compared to the 9/11 Commission – plans to call several panels of investment banks to appear as witnesses. Among them: CEOs of Goldman Sachs, Morgan Stanley, JP Morgan Chase, and Bank of America.

The number of investors who suffered losses in private securities issued by Medical Provider Funding Corporation and Medical Capital Holdings is growing daily. In July, the Securities and Exchange Commission (SEC) filed fraud charges against Medical Capital in connection to the sale of $77 million of these investments. A short time later, a class lawsuit was filed in the U.S. District Court for the Central District of California against various brokerage firms that sold the securities (called Medical Capital Notes). Among the firms cited as defendants: Cullum & Burks Securities, Securities America, Ameriprise Financial, and CapWest Securities.

According to the complaint, the private placement memoranda issued for the Medical Capital Notes misrepresented and omitted material facts regarding the terms of the offerings, the use of investors’ funds, the track record of various Medical Capital entities, the backgrounds and qualifications of the executives responsible for running the companies, and the overall risks of an investment in the Medical Capital Notes. 

In addition, the complaint alleges that the notes should have been registered with the SEC, but in fact were not. 

Maddox Hargett & Caruso currently is building cases for investors who lost money in Medical Capital Holdings. To begin your Medical Capital Fraud Recovery, complete this form.