Hundreds of Similar FINRA Arbitration Cases Remain Pending
In May 2010, a Financial Industry Regulatory Authority (FINRA) arbitrator awarded $400,000 to an investor who lost money in Medical Capital securities. The award was entered against Peak Securities Corp., which is the brokerage firm that recommended and sold the fraudulent investment product. This appears to be the first arbitration award involving a brokerage firm that sold fraudulent Medical Capital investments. The FINRA arbitrator found Peak Securities liable for breach of contract, breach of fiduciary duty, negligence, and fraud.
Peak Securities failed to respond to the Statement of Claim in the case so there was no in-person evidentiary hearing. Rather, the arbitrator entered the arbitration award based on the written submissions provided by the investor to the arbitrator. While the procedural circumstances of the arbitration award against are somewhat unique, we believe that the award accurately reflects what we believe will be a long line of arbitration awards against brokerage firms in favor of Medical Capital investors. Indeed, hundreds of arbitration claims have been filed against numerous brokerage firms that sold fraudulent Medical Capital securities. And similar arbitration claims have been filed against many of the same brokerage firms that sold other fraudulent private placements issued by Provident and DBSI.
Medical Capital securities are at the center of a Securities and Exchange Commission complaint filed last summer. Medical Capital claimed to provide financing to healthcare providers by purchasing the providers’ accounts receivables and making loans to those providers. The accounts receivables allegedly were packaged into notes and sold through private placements (a/k/a Regulation D offerings) to investors. Approximately 20,000 investors purchased $2.2 billion in Medical Capital notes. Approximately $1 billion of the notes are in default, leaving investors with massive investment losses.
It appears that Medical Capital was a fraudulent Ponzi scheme. The SEC has accused Medical Capital of defrauding investors by improperly using millions of dollars of investor funds to pay administrative fees and by misrepresenting that no prior notes had defaulted on or had been late in making principal or interest payments. The SEC receiver also has concluded that hundreds of millions of dollars of alleged medical receivables that Medical Capital packaged into the private placement notes were overvalued or did not exist at all. According to a report by the court-appointed SEC receiver, Medical Capital also improperly spent lavishly on assets that had nothing to do with medical receivables, including $20 million on a Hollywood movie and an unspecified amount for a 118-foot yacht.
On January 26, 2010, the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth sued Securities America, Inc., another brokerage firm that sold hundreds of millions of dollars of Medical Capital notes, accusing the firm of committing securities fraud on a massive scale in when recommending and selling Medical Capital notes. Similar to at least class-action lawsuits and dozens of FINRA securities arbitration claims that have been filed against Securities America, the Massachusetts lawsuit alleges that Securities America failed to conduct proper due diligence of Medical Capital or ignored red flags of which it was aware. Securities America also is accused of ignoring pleas by its own President and by a third-party due diligence vendor to make certain risk disclosures to investors.
We expect that the arbitration award against Peak Securities foreshadows future arbitration awards against Securities America and the other brokerage firms that sold Medical Capital, Provident, and other fraudulent or risky private placements.