Category Archives: Medical Capital Holdings

There is some new information for Securities America clients who suffered losses from private placement investments in Medical Capital Holdings and Provident Royalties. On Aug. 4, U.S. District Court Judge W. Royal Furgeson Jr. signed an order to approve an $80 million settlement between Securities America and class action investors suing the broker/dealer over the failed investments.

Earlier this year, a separate $70 million settlement was reached with investors who had filed individual arbitration claims against some brokers.

As reported Aug. 14 by Investment News, approval of the settlement means Securities America reps and financial advisers who had tainted employment records because of open or pending investor arbitration claims from the MedCap and Provident sales will now see closure.

From 2003 to 2008, Securities America brokers sold about $700 million of Medical Capital private placements. Other broker/dealers sold the investments, as well, but Securities America was by far the biggest distributor of them.

In the summer of 2009, the Securities and Exchange Commission (SEC) charged both Medical Capital and Provident Royalties with fraud.

Sales of private placements in Provident Royalties have become the undoing of yet another broker/dealer. Workman Securities announced earlier this week of its plans to close in November, telling 100 advisers they could move as a group to Virginia-based Allied Beacon Partners.

As reported Aug. 5 by Investment News, Workman representatives who agree to the move were promised a smooth transition, with Allied agreeing to keep Workman’s payout schedule or grid for two years.

In the summer of 2009, Provident Royalties was charged with fraud by the Securities and Exchange Commission (SEC). Workman was a large seller of private placements in Provident, selling $9 million of the investments.

According the Investment News story, Workman had up to 20 unsettled investor complaints relating to losses from sales of private placements in Provident Royalties.

In shuttering, Workman Securities joins dozens of other broker/dealers that met a similar fate because of private placement deals gone bad in Provident and another sponsor in bankruptcy, Medical Capital Holdings.

In February, Workman reached an agreement with the Financial Industry Regulatory Authority (FINRA) to pay $700,000 for partial restitution to more than a dozen clients who had sued the B-D over investments in both Provident Royalties and Medical Capital.

Private placement investments in Medical Capital Holdings and Provident Royalties have caused a mountain of legal woes for broker/dealers recently. Now another private placement may come back to haunt Commonwealth Financial and LPL.

As reported Aug. 4 by Investment News, financial reps from both Commonwealth and LPL sold the fund in question, the Laeroc 2005-2006 Income Fund LP. The fund now wants to raise another $12 million to $15 million to pay off – at a big discount – nearly $50 million of debt.

According to the article, real estate investor Laeroc Partners issued a “cash call” notice in June to investors who bought the Laeroc 2005-2006 Income Fund. The notice states that the fund’s lenders will foreclose by the end of the year on a shopping center in Sacramento, Calif., if the new cash isn’t paid. Reportedly, the Laeroc Fund has paid more than $180 million to buy eight properties and owes some $105 million in mortgage debt.

It isn’t clear exactly how much of the Laeroc 2005-2006 Income Fund that Commonwealth and LPL brokers sold.

The fallout from private placements in Medical Capital Holdings and Provident Royalties reached a fever pitch after the Securities and Exchange Commission (SEC) charged the two sponsors with fraud in July 2009. Investors saw about half of their principal wiped out in the two deals. Meanwhile, legal costs associated with client arbitration claims and settlements forced many broker/dealers to close their doors.

Industry executives noted that real estate deals of various stripes, including nontraded real estate investment trusts, which raised money and bought properties from 2006 to 2009, are struggling.

If you are an LPL or Commonwealth client and invested in the Laeroc 2005-2006 Income Fund LP, contact us to tell story.

Soured investments in real estate deals and private placements involving Medical Capital and Provident Royalties have caused a number of broker/dealers to go belly up this year. Closures of broker/dealers, in fact, are outpacing new entrants into the market. Between May 2010 and May 2011, a total of 336 broker/dealers notified the Financial Industry Regulatory Authority (FINRA) that they were closing their doors for business. By comparison, 190 new B-Ds came on board.

And there appears to be more bad news ahead. As reported June 23 by Investment News, the Compliance Department predicts that the broker/dealer industry could see an 11% net loss of broker/dealers by 2014.

The dwindling number of broker/dealers came to a head this year, highlighted by the failures of such names as GunnAllen Financial, QA3 Financial Corporation and Jesup & Lamont Securities.

Other well known B-Ds like Securities America also have come under fire because of legal troubles connected to private-placement sales in Medical Capital Holdings and Provident Royalties. Both companies were charged with fraud by the Securities and Exchange Commission (SEC) in July 2009.

Most recently, California-based MCL Financial Group filed its broker/dealer withdrawal form with FINRA. Last year, the receiver for bankrupt real estate syndicator DBSI sued MCL in an attempt to recover commissions generated from sales of tenant-in-common exchanges (TICs). According to court documents, MCL collected $210,000 in commissions from selling TICs issued by DBSI.

Earlier this month, WFP Securities of San Diego, California, also notified FINRA of its plans to shutter. WFP is facing more than $14 million in legal claims, after having sold more than $27 million of private placements issued by Medical Capital Holdings and $6.8 million issued by Provident Royalties.

Reps for Securities America, the troubled broker/dealer whose name is now permanently linked to lawsuits and arbitration claims involving sales of failed private placements in Medical Capital Holdings, have been asked to sign a “letter of support” that they plan to remain with the firm. The unusual move has some people suggesting that Securities America is about to be sold.

Ameriprise Financial, the parent company of Securities America, announced in April of its plans to find a new buyer for the company.

As reported June 8 by Investment News, the letter of support to Securities America states the following:

“We are confident in the abilities of Securities America’s senior management team to navigate the company through these challenges and opportunities.

“We believe they will assist [parent company] Ameriprise in the selection of a new owner with the interests of the advisors and our clients firmly in mind.”

It then concludes: “We intend to stay with Securities America to see what opportunities will come from this process.”

Securities America has been embroiled in legal issues since July 2009, when the Securities and Exchange Commission (SEC) charged Medical Capital Holdings with fraud. Dozens of independent broker/dealers sold private placements in Medical Capital to investors, but Securities America was by far the product’s biggest distributor. It sold about $700 million worth of the notes to clients. Nearly half of that amount is now in default.

In April, Securities America reached a potential $160 million settlement with investors in a class-action law suit.

Omni Brokerage Inc. is the latest broker/dealer to go out of business. The Utah-based B-D, which is facing $2.8 million in claims for selling DBSI tenant-in-common (TICs) exchanges, says its shuttering is tied to lack of business, not legal issues.

However, Omni is at the center of several arbitration claims filed by investors with the Financial Industry Regulatory Authority (FINRA) over failed DBSI deals. As reported in a June 2 story by Investment News, a lawsuit filed by DBSI trustee James Zazzali says Omni generated $271,000 in commissions from pitching the DBSI TICs.

Omni joins dozens of other broker/dealers that sold failed private placements issued by Medical Capital Holdings Inc. and Provident Royalties LLC and, as a result, have gone out of business. As of March 2010, a total of 16 broker/dealers have closed their doors.

DBSI was a leading packager of tenant-in-common exchanges. TICs are a form of real estate ownership in which two or more parties have a fractional interest in a property.

DBSI began to default on its payments to investors in 2008. The firm later filed for Chapter 11 bankruptcy protection.

In December 2010, the trustee for the DBSI bankruptcy sued more than 90 broker/dealers that sold the failed product, including Omni.

According to the Investment News story, the DBSI trustee claims that TICs from DBSI were actually part of a $600 million Ponzi scheme. A similar allegation has been waged against Medical Capital Holdings and Provident Royalties.

Jim Nagengast, CEO of embattled Securities America, claims that The Bank of New York Mellon Corp. and Wells Fargo Bank NA are suing the broker/dealer in an attempt to reduce their liability in the sale of failed private placements in Medical Capital Holdings.

The story, first reported May 29 by Investment News, cites an email to the Securities America advisers in which Nagengast reportedly claims that a pending settlement in a class action filed against Securities America, if approved, would wipe out the banks’ claims against the firm.

The Bank of New York Mellon Corp. and Wells Fargo Bank filed separate lawsuits against Securities America last month. Both banks were formerly trustees for Medical Capital Holdings.

The Bank of New York complaint states that the broker/dealers that sold private placements in Medical Capital breached their obligation to MedCap investors by selling an unsuitable product and failing to disclose the risks of the notes.

Bank of New York Mellon has sued 13 broker/dealers; Wells Fargo has sued six firms, as well as Ameriprise Financial, which owns Securities America.

In September 2009, two months after the Securities and Exchange Commission (SEC) charged Medical Capital with fraud, a group of Medical Capital investors sued The Bank of New York Mellon Corp. and Wells Fargo Bank in a class action lawsuit. The plaintiffs in that class action claimed in an amended 2010 complaint that the two trustees signed off on requests by Medical Capital executives to take $325 million in fees — despite documents for the notes indicating that fees were not supposed to come from investor funds.

From 2003 to 2008, dozens of independent broker/dealers sold private placements in Medical Capital, raising $2.2 billion. By far, Securities America is the biggest seller of Medical Capital notes, selling about $700 million.

In total, investors have lost more than $1 billion in principal. Today, regulators and the Medical Capital bankruptcy trustees say Medical Capital operated as nothing more than a Ponzi scheme.

The private-placement game is changing, thanks in large part to ongoing legal cases over failed private placements – also known as Reg D offerings – in Provident Royalties and Medical Capital Holdings. Both companies were charged with fraud by the Securities and Exchange Commission (SEC) in 2009.

Major private-placement players like Securities America are feeling the ramifications of the issues involving Medical Capital and Provident Royalties – including a rash of lawsuits and arbitration claims filed by investors, as well as fraud charges issued by state securities regulators.

For some broker/dealers, the legal troubles stemming to Provident and Medical Capital, as well as to other failed private-placement offerings, have proven too much. Unable to sustain sufficient capital to fight their legal battles, many have gone out of business. Among the broker/dealers that have shuttered: Cullum & Burks Securities Inc., Securities Network, GunnAllen Financial, QA3 Financial Corp. and Jesup & Lamont Securities Corp., among others.

For the broker/dealers that do remain in the private-placement game, it’s likely they will see stricter oversight of the investments they market and sell to investors in the future. Just this week, the head of the Financial Industry Regulatory Authority (FINRA) publicly called upon broker/dealers that sell private placements to engage in a more vigorous due diligence process, “pushing and pulling” for information about the products.

“We want to recognize where there’s limited disclosure and appears to be a speculative investment, you need to push to try to get more information,” said Richard Ketchum, chairman and chief executive of FINRA, at the regulator’s annual meeting in Washington

“It’s not good enough to go to a canned information session. You need to push and pull,” he said of the due diligence process for broker/dealers touting risking private-placement deals.

Following a lengthy legal battle with various state regulators over failed private placements issued by Medical Capital Holdings, broker/dealer Securities America has agreed to make whole 63 Massachusetts clients who bought $5 million worth of the investments.

According to Massachusetts Secretary of State William Galvin, Securities America will pay $2.8 million to clients within 10 days.

The settlement, however, is contingent on several factors. As reported May 24 by Investment News, Securities America could be liable for up to another $2.2 million if a class action settlement currently being heard before a federal judge in Dallas falls through.

In addition, Securities America may have to pay more if the receiver for Medical Capital fails to pay 10% back to investors.

In the end, Massachusetts investors will recover 100% of the $5 million in principal they lost in Medical Capital. In July 2009, the Securities and Exchange Commission (SEC) charged the company with fraud.

Dozens of independent broker/dealers – the largest of which was Securities America -sold private placements in Medical Capital. From 2003 to 2008, Securities America sold about $700 million of the notes to investors. About half was lost in the alleged fraud.

In 2010, the Massachusetts Securities Division charged Securities America with fraud and accused the company of failing to disclose to investors that the Medical Capital notes it was selling were high-risk investments.

Massachusetts regulators also charged Securities America of using sales tactics that ignored warnings of their own analysts. In addition, the regulator claimed that the broker/dealer touted the Med Cap notes to unsophisticated investors.

In the wake of investor lawsuits over private placements in Medical Capital Holdings and Provident Royalties LLC, the Securities and Exchange Commission (SEC) is considering changes to its offering rules to make it easier to purchase non-public company shares. In addition, the SEC also is looking into whether it should revisit the current ban on public marketing of non-registered offerings as part of an overall review of securities-offering regulation.

As it is, private placements, also known as Regulation D offerings, are exempt from SEC registration. In the past year, the deals have come under increased scrutiny from regulators – with much of the attention generated by failed deals in Medical Capital Holdings and Provident Royalties. In 2009, the SEC charged both entities with fraud.

As reported May 10 by Investment News, in addition to possible changes in the ban on soliciting investors for non-registered offerings, the SEC is examining various restrictions on communications in initial public offerings, the thresholds that trigger public reporting and other regulatory questions that new capital-raising strategies create.

The SEC’s review comes on the heels of a proposal by the Financial Industry Regulatory Authority (FINRA) for a 15% cap on commissions and fees for private placements, as well as more disclosures about offering proceeds.

According to SEC Chairman Mary Schapiro, about 22% of the SEC’s enforcement cases in 2010 year involved investor fraud from securities offerings.