Five years before Medical Capital Holdings Inc.'s private-placement financings disintegrated and wiped out $1.1 billion in investors' cash, securities regulators were concerned about the company's lack of audited financial information.
Officials with NASD, now the Financial Industry Regulatory Authority Inc., “expressed concern that Medical Capital didn't have audited financial statements,” according to a July 2004 e-mail from David Spinar, former head of compliance at Securities America Inc., the largest seller of the Medical Capital private placements.
Mr. Spinar's e-mail to Tom Cross, Securities America's former due-diligence-committee chairman, was part of an exchange about Medical Capital's lack of audited financial statements and now is an exhibit in at least two lawsuits against the firm and its parent company, Ameriprise Financial Inc.
NASD's concern over the lack of audited financials was a “red flag,” said Scott L. Adkins, an attorney with Sonn & Erez PLC, one of the lawyers seeking class action status for a suit against Securities America.
“Is this something that the regulators should have taken a strong look at? Yes,” Mr. Adkins said.
“They knew about it, and they chose to do nothing further,” he said. “Thanks to that, investors are out $1.1 billion.”
Herb Perone, a Finra spokesman, said that he was making inquiries last Thursday but had no further response.
In January, the Massachusetts Securities Division sued Securities America, alleging that it misled clients who bought the notes. In March, Katrina Zinner, on behalf of a class of Securities America clients, sued the firm and Ameriprise Financial Inc., making similar allegations to those in the Massachusetts complaint.
The lack of disclosure at Medical Capital concerned other Securities America executives, including Jim Nagengast, the firm's president.
In a February 2005 e-mail to Mr. Cross, Mr. Nagengast said: “My big concern is the audited financials. At this point, there is no excuse for not having audited financials.”
Mr. Spinar, who left Securities America in 2007, is now a broker with RBC Capital Markets Corp. When asked about NASD's specific concerns regarding Medical Capital's financial statements, he said that he didn't remember.
“All I can do is let the e-mails speak for themselves,” Mr. Spinar said.
Last summer, the Securities and Exchange Commission charged Medical Capital and its founders with securities fraud.
The company, which provided asset-backed financing to health care companies, raised $2.2 billion through six rounds of deals. Dozens of independent broker-dealers sold the notes, which were packages of the company's accounts-receivable loans, through Regulation D private placements.
Although Finra doesn't require that products sold by broker-dealers come from companies with audited financial statements, high-profile scandals such as Bernard Madoff's Ponzi scheme have raised the issue of mandating such disclosure.
It isn't clear from the court filings to what extent or when NASD stepped in, but dozens of broker-dealers sold MedCap notes to investors well into 2008 and early last year.
In the e-mail, Mr. Spinar said that the NASD Kansas City district, which oversees Securities America, had received word from another NASD district that Securities America was “among the larger distributors of MedCap.”
In fact, Securities America was the largest seller of the product, with 400 of its financial advisers selling $680 million of the private placements. It was the “other district” that expressed concern about Medical Capital's lack of audited financials.
Instead, there had only been a “review” of the statements, Mr. Spinar wrote.
Meanwhile, Finra suspended the license of Cullum & Burks Securities Inc., which was heavily involved in the sale of Medical Capital private placements, effective May 25.
The firm had 100 affiliated registered reps, 1,300 client accounts and $150 million in assets, according to an industry source who asked not to be identified.
According to its profile in Finra's BrokerCheck system, Cullum & Burks failed to file its quarterly Focus report with Finra within three weeks after being told it was in danger of suspension. Firms must file Focus reports, which contain detailed financial information, to the SEC.
In November, Finra said the firm was in violation of its net-capital requirement, meaning Cullum & Burks did not have sufficient capital on hand to remain open for business, according to its Finra record. The firm then raised additional capital to continue normal operations, Finra said.
Cullum & Burks was one of three broker-dealers listed as the sellers of Medical Provider Funding Corp. V, one of a series of private placements marketed by Medical Capital Holdings. According to its Reg D filing with the SEC, the November 2007 offering was for $400 million. The other broker-dealers listed as its sellers were First Montauk Securities Corp., which is defunct, and Securities America Inc.
Tim Cullum, the firm's chief executive, was not immediately available for comment.
E-mail Bruce Kelly at firstname.lastname@example.org.