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Securities America reaches pivotal deal with regulator over private placements

The besieged broker-dealer today agreed to a pivotal settlement with Massachusetts over soured MedCap private placements. The upshot? Investors are to to get 100% of their principal back.

Putting an end to a bitter dispute over the sale of failed private placements, Securities America Inc. has agreed to make whole 63 Massachusetts clients who bought $5 million of failed notes issued by Medical Capital Holdings Inc.
Securities America, which is currently being shopped by its owner, Ameriprise Financial Inc., will pay $2.8 million to clients within 10 days, according to a statement William F. Galvin, secretary of the commonwealth for Massachusetts.
The settlement is, in part, conditional: Securities America could be on the hook for up to another $2.2 million if a class action settlement currently before a federal judge in Dallas falls through, according to Mr. Galvin’s statement. Securities America could also pay more to investors if the receiver for Medical Capital fails to pay 10% back to investors.
Massachusetts investors in the end will get back 100% of the $5 million in principal lost in Medical Capital, which the Securities and Exchange Commission charged with fraud in 2009. Dozens of independent broker-dealers sold the Medical Capital notes, with Securities America by far the largest distributor, raising about $700 million from 2003 to 2008. About half that investor money was lost in the alleged fraud.
The settlement strikes a very different note than Securities America initially took with the Massachusetts Securities Division, which charged the firm in January 2010 with selling the Medical Capital notes without telling investors they were high-risk investments. Lawyers and executives with the firm have consistently said the firm did industry leading due diligence about the product, a high-risk, Reg D private placement, and that the blame for the product’s failure squarely laid with Medical Capital, not Securities America.
The Massachusetts Securities Division also charged that Securities America’s sales tactics ignored warnings of their own analysts. In addition, the regulator claimed that the brokerage pitched the notes to unsophisticated investors.
“Securities America is pleased to be another step closer to final resolution of the Medical Capital matter,” spokeswoman Janine Wertheim said in a statement. “The settlement with Massachusetts does not include any fines against Securities America, and in agreeing to the settlement, we did not acknowledge any wrongdoing in this matter.”
While Ms. Wertheim added that the alleged fraud was committed by the principals of Medical Capital, “we believe the settlement to be the best method of resolving the matter.”