Reg D Scare Fading, But Medcap Sales Still Haunt A Broker-dealer

It appears that the private-placement debacle that swept through the independent-broker-dealer industry and forced dozens of small to midsize firms to close is finally over. It has been several months since InvestmentNews and other industry publications have covered the story in any meaningful way, and a certain amount of stability has returned to the marketplace. For firms that sold Medical Capital Holdings Inc. notes and survived — most notably Securities America Inc. — the litigation is over, and they can get back to business. But the picture for one broker-dealer isn't so clear. Hantz Financial Services Inc. is still dealing with the fallout from Medical Capital, the $2.2 billion Ponzi scheme built on shaky medical receivables that the Securities and Exchange Commission closed down in July 2009. According to InvestmentNews sister publication Crain's Detroit Business, Hantz still faces a potential class action over the sale of the notes. A judge in Michigan's Oakland County soon could decide on what may be a final attempt to certify the class of investors.

UNDER THE RADAR

The report — published Nov. 11, about Hantz's selling MedCap private placements to 300 clients — came as something of a surprise. A midsize firm with 260 affiliated advisers, Hantz had flown under the radar when it came to selling MedCap notes. According to the Crain's Detroit story, the remaining investors could have damage claims against the firm totaling more than $20 million. Hantz general counsel David Shea told Crain's Detroit that the firm stopped selling MedCap notes in 2008 after it learned that a previous series of notes had defaulted. Hantz also performed due diligence on the company and the notes, he said. In an interview last Monday, Mr. Shea said that the plaintiffs failed to certify a class action in another lawsuit in 2010. “It's in front of the same judge as before,” Mr. Shea said, adding that he is confident of a favorable outcome for Hantz. “You don't get a do-over.” The firm has settled with a couple of clients over the sale of the notes, but another client failed to win an award against Hantz in securities arbitration, Mr. Shea said. The firm didn't sell the final series, the disastrous MedCap VI, he added. MedCap is in receivership. Meanwhile, thousands of investors are waiting to find out if they will get any of their money returned. [email protected] Twitter: @bdnewsguy