Montana’s Securities Commissioner has filed a legal action against broker-dealer Securities America, the Ameriprise Financial subsidiary, for allegedly withholding “material information regarding heightened risks” of the sale of private placement promissory notes of Medical Capital Holdings Inc. (MCHI), which are now in default, to investors in Montana. Corporate officers and executives as well as three salespersons were named in an August 4 complaint.
The Montana action against Securities America charges that three of the firm’s salesperson’s sold “MCHI promissory notes” indicating that they were “secured notes” and that they were “safe,” for investors. The action seeks “fines, restitution with interest and permanently prohibit Respondents from violating the Act.”
SEC Charged MCHI With Fraud
Earlier, on July 16, 2009, the SEC had charged MCHI with civil fraud, 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 Commission said in its announcement of the charges against MCHI that through special purpose corporations (SPCs), “MCHI, MCC, Fields, and Lampariello have raised over $2.2 billion through offerings of notes in MP VI and five other similarly structured SPCs.” The SEC alleged then that MCHI defendants “defrauded investors by misappropriating approximately $18.5 million of the $76.9 million raised through the sale of MP VI notes to pay administrative fees to MCC,” when it had stated in offering documents that those fees were not to be paid out of the money raised in the sale of the notes.
The SEC further charged that the MCHI “defendants defrauded investors by misrepresenting in MP VI’s offering documents that none of the SPCs affiliated with MP VI had defaulted on or been late in making payments of principal and/or interest to their respective investors.” But, the SEC stated, “two MP VI-affiliated SPCs began defaulting on interest and/or principal payments in the same month that MP VI began its offering,” and later, “two other MP VI-affiliated SPCs have defaulted or been late in making interest payments.”
Securities America and seven executives were named in the Montana complaint: James D. Nagengast, president, CFO and COO; Steven F. McWhorter, chairman and
CEO; Walter Thomas Cross, senior VP and director of product distribution; Kevin Joseph Miller, VP, chief compliance officer and deputy counsel; Debra A. Hansen, first vice president of marketing; Lamar Stuart Jones Jr., VP of risk management; and Pamela Janine Wertheim, VP and chief marketing officer.
According to the Montana suit, “Securities America sold MCHI notes even when proper due diligence would have told or did tell Securities America that the PPMs [private placement memorandums] for the notes were misleading.”
Salespersons Greg Sautter, Barbara Slobojan and Ernest Hathaway were named in the action as well, having “Failed to conduct an adequate suitability analysis” of customers they allegedly sold these private placement securities to. Some of these customers were elderly. The Montana action says Securities America sold $697 million of these securities “nationwide since 2003.”
Massachusetts Filed Suit Earlier
The Enforcement Section of the Massachusetts Securities Division filed a complaint against Securities America related to the sale of the same type of MCHI notes in Massachusetts. In a Jan 26, 2010 complaint, Massachusetts alleged “material omissions and misleading statements” in the sale of the MCHI notes to investors in that state.
Comments? Please send them to [email protected]. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.