Montana securities cops sue Securities America

State follows Massachusetts in targeting the broker-dealer over sales of failed private placements

Aug 23, 2010 @ 3:13 pm

By Bruce Kelly

Montana's commissioner of securities and insurance has sued Securities America over the sale of failed private placements, making it the second state to target the broker-dealer for selling the risky investments.

The office of the state auditor for Montana on Aug. 4 sued Securities America and a number of its top executives, including current chief executive James Nagengast, alleging that they “withheld material information regarding heightened risks” from its representatives and their clients regarding notes issued by Medical Capital Holdings Inc.

Securities America, whose brokers sold $698 million of the notes from 2003 to 2008, “concealed these risks” from its brokers and their clients, the lawsuit said.

According to the suit, Montana may revoke the firm's registration in the state “because it is in the public interest to protect Montana investors from broker-dealers” if those broker-dealers withhold material information related to heightened investment risks.

Those risks included Medical Capital's failure to maintain audited financial statements, the lawsuit said. Medical Capital's was charged with fraud by the Securities and Exchange Commission last summer.

In January, the Massachusetts Securities Division sued Securities America, alleging it failed to reveal pertinent information to investors about high-risk notes issued by Medical Capital.

In total, Medical Capital sold $2.2 billion of notes through dozens of independent broker-dealers, a number of which have failed or shut down. Securities America sold the largest amount of Medical Capital notes.

Securities America is also facing a handful of complaints from investors who bought Medical Capital notes and seeking class action status. On Aug. 11, U.S. District Judge David O. Carter for the Central District of California dismissed two of those complaints. Attorneys familiar with the matter, however, said the firm cannot declare victory yet as lawyers for clients who bought Medical Capital notes will likely soon file amended complaints.

According to the Montana lawsuit, Securities America brokers sold the Medical Capital notes to non-accredited investors, meaning investors with a net worth of less than $1 million. The Massachusetts lawsuit also alleged that Securities America brokers sold the notes to non-accredited investors.

“Every Montana client who purchased the Medical Capital private placement attested to his or her accredited status,” Janine Wertheim, senior vice president with Securities America, wrote in an e-mail.

“We were not given an opportunity to provide the state with additional information prior to the action being filed, and we have requested a hearing,” wrote Ms. Wertheim, who is also one of the executives named in the Montana suit.

Two current and one former Securities America advisers were also named in the Montana suit.

Meanwhile, Securities America's showdown with Massachusetts has been postponed for the second time in as many months. A hearing scheduled to begin next Monday has been pushed back to Sept. 23.

Securities America, with 1,898 representatives and advisers, is the independent broker-dealer arm of Ameriprise Financial Inc.


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