Five years before a series of Medical Capital Holdings Inc. private placements disintegrated — wiping out $1.1 billion in investor cash — securities regulators were already concerned about the lack of audited financial information for the deals.
Officials with the NASD, now the
Financial Industry Regulatory Authority Inc. “expressed concern that MedCap did not have audited financial statements,” according to a July 2004 e-mail from David Spinar, the former head of compliance at Securities America Inc., the largest seller of the Medical Capital private placements.
NASD's concern over the lack of audited financials was a red flag, said Scott L. Adkins, an attorney with Sonn & Erez PLC, one of the lawyers in a lawsuit that is seeking class action status against Securities America. “Is this something that the regulators should have taken a strong look at? Yes.”
“They knew about it and they chose to do nothing further,” he said. “Thanks to that, investors are out $1.1 billion.”
Herb Perone, a Finra spokesman, said he was making inquiries but had no response on Thursday afternoon.
Mr. Spinar's e-mail is an exhibit in at least two lawsuits against Securities America and its parent company,
Ameriprise Financial Inc.
In January, the Massachusetts Securities Division sued Securities America, alleging that it misled clients who bought the notes. In March, Katrina Zinner, on behalf of a class of Securities America clients, sued the firm and Ameriprise, making similar allegations to those in the Massachusetts complaint.
Mr. Spinar's e-mail about Medical Capital's lack of audited financials was sent to Tom Cross, Securities America's former due diligence committee chairman.
Medical Capital's lack of audited financial information appears to have worried other Securities America executives. In a February 2005 e-mail to Mr. Cross, Jim Nagengast, Securities America's president, wrote: “My big concern is the audited financials. At this point, there is no excuse for not having audited financials.”
Mr. Spinar, who left Securities America in 2007, is now a broker with RBC Capital Markets Corp. When asked about the NASD's specific concerns regarding Medical Capital's financial statements, Mr. Spinar said he did not remember. “All I can do is let the e-mails speak for themselves,” he said.
The Securities and Exchange Commission charged Medical Capital Holdings Inc. and its founders last summer with securities fraud. Medical Capital raised $2.2 billion through six rounds of deals from investors. Dozens of independent broker-dealers sold the notes.
Both the SEC and Finra have come in for criticism for failing to protect investors from
investment scams — notably Bernard Madoff's $50 billion Ponzi scheme and R. Allen Stanford's alleged $7.2 billion fraud.
Last October, a a special committee commissioned by Finra — and led by a former U.S. comptroller general — issued a report on the regulator's failure to detect Mr. Madoff's scam or the alleged scheme operated by Mr. Stanford. The report cited significant problems related to Finra's exams of broker-dealers, often getting bogged down in questions of jurisdiction.
The SEC, meanwhile, has said that it failed for years to act on credible and specific allegations regarding Mr. Madoff's fraud.
Because Medical Capital Holdings was not a broker-dealer, Finra did not have jurisdiction over that company. The self-regulator did have authority over dozens of broker-dealers who sold the deals, however.
Finra does not require broker-dealers to provide audited financials information about the products they sell. But with the unraveling of hundreds of Ponzi schemes over the past two years, the issue of audited financials has come to the fore.
It is not clear from court filings in the MedCap case whether NASD stepped in at all.. But dozens of broker-dealers sold Medical Capital notes to investors well into 2008 and early 2009.
In the e-mail, Mr. Spinar said that the NASD district overseeing Securities America, which is the Kansas City district, had received word from another NASD district that Securities America was “among the larger distributors of Med Cap.” In reality, Securities America was the largest seller of the product, with 400 of its advisers selling $680 million of the private placements.
It was the other district that expressed concern about Medical Capital's lack of audited financials. Instead, there had only been a “review” of the statements, Mr. Spinar's e-mail said.
