Don't expect Securities America Inc. to extricate itself anytime soon from the legal headaches and expenses connected with the private placements it sold from Medical Capital Holdings Inc., a now-bankrupt company that turned medical receivables into promissory notes.
According to attorneys representing clients who bought Medical Capital's private placements and are suing Securities America, the broker-dealer could face 150 or more arbitration claims over the next 12 to 18 months. These claims, filed with the Financial Industry Regulatory Authority Inc., involve $90 million in investor losses on MedCap notes, attorneys said.
On Dec. 31, Securities America was dealt a costly legal blow when a Finra arbitration panel awarded almost $1.2 million in damages and legal fees to an elderly client who had sued the firm and a broker over the sale of Medical Capital private placements that regulators alleged were fraudulent.
The Securities and Exchange Commission charged Medical Capital with fraud in 2009.
Securities America quietly has begun to settle other MedCap arbitration claims, lawyers said.
The broker-dealer “is definitely settling cases. I think the firm knows they have a huge problem on their hands,” said Andrew Stoltmann, a plaintiff's attorney who represents about 25 Securities America clients with $15 million in losses from Medical Capital.
The award was the first against Securities America from sales of MedCap private placements. It included compensatory damages of $734,000, plus attorney and expert-witness fees of $171,000.
The claimant, Josephine Wayman, also sued representative Randall Ray Talbott, who is also liable for the award, according to the arbitrators' decision.
Securities America was solely liable for $250,000 in punitive damages, according to the award.
In her claim, Ms. Wayman alleged fraud, deceit, intentional misrepresentation of fact and financial elder abuse, among other allegations.
'POWERFUL WIN'
Punitive damages are uncommon in Finra arbitration awards.
“This is a powerful win for the claimants,” said Scott Silver, a plaintiff's attorney who represents more than 100 clients in similar arbitration claims seeking more than $35 million in damages against Securities America. The punitive damages awarded in this decision show that the three arbitrators were “shocked” by Securities America's action involving Medical Capital notes, Mr. Silver said.
According to his profile on Finra's BrokerCheck system, Mr. Talbott has 11 pending customer disputes involving the sale of Medical Capital notes, but he is not named as a defendant in the majority of the arbitration cases. Finra rules require the disclosure of a pending claim on a broker's record whenever the broker's name is mentioned in a complaint, even though he or she is not being sued.
When asked about the award, Mr. Talbott said, “I don't know anything about it.” He added that the matter is “very unfortunate.”
STATES INVESTIGATING
Securities America could be on the hook for millions of dollars more in legal damages involving the sale of private placements before the market collapse of 2008. The securities divisions of Massachusetts and Montana are also suing the firm.
Hearings into the sale of Med Cap notes by Securities America continue in Massachusetts.
Securities America has tried to pin the blame for the losses on Medical Capital.
“If there's a problem here, Medical Capital is to blame, not Securities America,” Bruce Bettigole, the broker-dealer's lead attorney, told the Massachusetts Securities Division during a September hearing.
In November, Jim Nagengast, the firm's chief executive, said: “We feel very strongly we did industry-leading due diligence, and are vigorously defending” the firm and its advisers.
Mr. Bettigole, a partner at Sutherland Asbill & Brennan LLP, also represented Securities America in the Finra arbitration involving Ms. Wayman.
Dozens of independent broker-dealers sold private Medical Capital notes, which raised $2.2 billion from 2003 to 2008. Securities America was by far the biggest seller of the Medical Capital product, with 400 brokers selling almost $700 million in notes. Medical Capital is in bankruptcy protection, and the receiver estimated that about half of investors' money, $1.1 billion, is gone.
As is common in Finra arbitration awards, the decision gives no detailed explanation for the action. However, the arbitrators did offer comments about their decision, a point of great interest to other clients suing Securities America.
“The panel's decision is based on what was actually known by Randall Talbott and Securities America Inc. at the relevant times and is not based on what additional information could or could not have been discovered by respondents regarding the subject investments or the company offering the investments,” according to the award.
A Securities America spokeswoman continued to defend the firm's actions in an e-mail. “We conducted industry standard due diligence and believed the investment was suitable for accredited investors seeking higher rates of return,” spokeswoman Janine Wertheim wrote, adding that the firm has not yet decided whether it will appeal the $1.2 million Finra award.
Securities America, which has about 1,900 reps and advisers, is owned by Ameriprise Financial Inc., one of the largest retail-brokerage firms in the country. Chris Reese, a spokesman for Ameriprise, declined to comment.
E-mail Bruce Kelly at [email protected].
