New fraud alleged in MedCap scandal

In the latest action against a broker for alleged involvement in the Medical Capital scandal, the Colorado Securities Division last week revoked the license of a broker for violating state and federal securities laws by selling private notes marketed by the firm.

The broker, John B. Guyette, violated the Colorado Securities Act by offering and selling Medical Provider Funding Corp. private notes, which were marketed by Medical Capital Holdings Inc., Colorado Securities Commissioner Fred Joseph said last week in a statement.

Specifically, regulators alleged that he sold those private placements to a number of investors with whom he didn’t have a substantial prior relationship. That, attorneys said, put Mr. Guyette in violation of Regulation D, the federal securities law under which private placements are commonly offered.

“I surrendered my license; I did not lose it,” said Mr. Guyette, who said that he invested $205,000 of his own money in Medical Capital notes.

In agreeing to the Colorado order, Mr. Guyette neither admitted nor denied the allegation, the statement said.

“I voluntarily resigned rather than take this to [court]. I decided not to fight this and retired,” said Mr. Guyette, who is 69 and no longer registered with the Financial Industry Regulatory Authority Inc.

According to Mr. Guyette’s record in Finra’s BrokerCheck system, Finra began investigating him in February and received three customer complaints over the sale of Medical Capital notes and private placements. The alleged damages of those three complaints are $650,000.

Mr. Guyette spent the lengthiest period of his career — from 1997 to 2009 — affiliated with Community Bankers Securities LLC. In February, that firm dropped its registration with Finra.

Nicholas Skaltsounis, Community Banker’s former chief executive, didn’t return a call seeking comment.

The Securities and Exchange Commission last summer charged Medical Capital with fraud, and numerous independent broker-dealers and their reps have since been caught up in the scandal. Medical Capital sold $2.2 billion in private notes but allegedly operated as a Ponzi scheme.

Mr. Guyette said that he isn’t sure how much in Medical Capital notes he sold, but he began offering the product in 2003 and last sold it in 2008. The Finra investigation focused on Community Bankers and claims made by Medical Capital that it never lost money, he said.

When the SEC created Reg D offerings in 1982, the intention was to simplify capital raising for small-business owners. Reg D contains exemptions from federal registration for limited offerings of securities.

Critics of the offerings say that the private deals are expensive, lack liquidity and carry risk — all while being lightly regulated.

“Our investigation into the offer and sale of Medical Capital securities by licensed stockbrokers is ongoing. This was a “private offering’ under federal law, so-called Regulation D, meaning the [Colorado Securities Division] was pre-empted from oversight of the offering under federal law,” Mr. Joseph said in the statement.

“But licensed stockbrokers in Colorado were still under a duty to properly research this offering and ensure that the investments were suitable for each investor,” he said.

E-mail Bruce Kelly at [email protected].

Related Topics: Financial Industry Regulatory Authority, Securities and Exchange Commission