Securities America settles with state in conditional resolution of Reg D mess

Besieged broker, Massachusetts settle over sale over MedCap failed private placements

May 29, 2011 @ 12:01 am

By Bruce Kelly

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 being shopped by its owner, Ameriprise Financial Inc., agreed to pay $2.8 million to clients within 10 days, William F. Galvin, secretary of the commonwealth of Massachusetts, said in a statement last week.

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 before a federal judge in Dallas falls through, according to Mr. Galvin's statement.

Securities America also could 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 MedCap 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 different note than Securities America initially took with the Massachusetts Securities Division, which charged the firm in January 2010 with selling the MedCap notes without telling investors that they were high-risk investments. Lawyers and executives with the firm have consistently said that 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 lies with Medical Capital.

The securities division also charged that Securities America's sales tactics ignored warnings of the firm's 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.”

Although Ms. Wertheim said that the alleged fraud was committed by the principals of Medical Capital, she added: “We believe the settlement to be the best method of resolving the matter.”

E-mail Bruce Kelly at bkelly@investmentnews.com.

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