Medical Capital Holdings Inc., which sold private-placement offerings through a number of independent broker-dealers and has been charged with fraud by the Securities and Exchange Commission, spent freely and lavishly on assets that had nothing to do with medical receivables — its core business — according to court papers filed last week.
Medical Capital Holdings Inc., which sold private-placement offerings through a number of independent broker-dealers and has been charged with fraud by the Securities and Exchange Commission, spent freely and lavishly on assets that had nothing to do with medical receivables — its core business — according to court papers filed last week.
According to a recent report by Thomas A. Seaman, the receiver for Medical Capital, the investments include: $20 million for “The Perfect Game,” a film about a group of Mexican youths who in 1957 became the first non-U.S. team to win the Little League World Series; $7 million in a company that marketed a mobile-phone application that consisted of a live video feed of a hamster in a cage; and an unspecified amount for a 118-foot yacht called The Home Stretch.
Medical Capital, which was based in Anaheim, Calif., packaged medical receivables and sold them as private placements.
The firm raised $2.2 billion over the past six years and had 20,000 investors, according to the SEC.
“It appears that note holders will almost certainly suffer significant losses on their investments,” the report stated.
In a response to the receiver's report filed over the weekend, Medical Capital's chief executive, Sidney Field, and its president and chief operating officer, Joseph Lampariello, said that the receiver “did not hesitate to attack the defendants and their assets with his inchoate, tentative and unsubstantiated analysis.”
“The note holders and the court would have been better-served if the receiver would have spent more time figuring out how to maximize the value of assets and less time trying to conduct discovery for the SEC and trying to provide the court with his analysis of the relative merits of the SEC's case,” the response stated.
In its lawsuit from July, the SEC alleged that Medical Capital had defrauded investors of at least $18.5 million.
But the fraud could be much greater.
According to last week's report by the court-ordered receiver, Medical Capital conducted numerous transactions with itself, transferring accounts receivable from one investment entity to another at least 301 times. The amount totals $829 million of such transfers.
That creates “a number of potential issues,” the report stated. First, some of those receivables were already old when purchased by the new Medical Capital investment entity, and receivables lose value as they age.
Second, some of the receivables that the new investment offerings bought did not exist.
And last, Medical Capital overstated the value of some of the receivables, according to the report.
In its response, the Medical Capital executives said the assertion that old receivables were sold from one investment to another was “perhaps the most ignorant statement in the entire report,” adding: “This assertion is patently false.”
Likewise, the motion picture asset, the boat and the hamster video were “mischaracterized,” according to the response.
Broker-dealers whose reps sold the Medical Capital private placements include: Securities America Inc., American Portfolios Financial Services Inc. and National Securities Corp.
Officials with those firms either were not available or declined to comment.
One law firm has had a dozen calls from investors who bought the Medical Capital offerings and may file arbitration claims against brokers and broker-dealers.
“It's starting to heat up,” said Stephen Ostrofsky, a securities arbitration consultant with Tramont Guerra & Nunez PA of Coral Gables, Fla.
