Wells Fargo and Bank of New York Mellon sued over role in Medical Capital 'scam'

The two trustees of Medical Capital Holdings Inc.'s private placements, Wells Fargo & Co. and The Bank of New York Mellon Corp., have been sued by investors seeking class action status.
DEC 07, 2009
The two trustees of Medical Capital Holdings Inc.'s private placements, Wells Fargo & Co. and The Bank of New York Mellon Corp., have been sued by investors seeking class action status. This suit is the latest unwelcome news for Medical Capital investors and the financial-services companies that did business with the firm: In July, the Securities and Exchange Commission charged Medical Capital, which had raised $2.2 billion in private placements from investors since 2003, with fraud. At the same time, the Financial Industry Regulatory Authority Inc. conducted a sweep of broker-dealers looking for information about the sale of the private placements. The new lawsuit alleges that executives with Medical Capital, which issued five private placements in the form of special-purpose corporations, “used the trustee-controlled accounts as their personal piggy banks,” according to the suit, which was filed last Friday in federal court in Santa Ana., Calif. Wells Fargo and Bank of New York Mellon served as trustees of the special-purpose corporations and “were paid substantial fees,” the complaint alleges. “Unfortunately, under the watchful eyes of the trustees, [Medical Capital] was a scam,” the complaint states. The lawsuit claims that Medical Capital executives siphoned off fees of nearly $325 million that they spent on lavish perks, including a 118-foot yacht. All five of the Medical Capital special-purpose corporations are now in default to investors after failing to make interest and principal payments on almost $1 billion in notes. A number of leading independent broker-dealers sold the Medical Capital offerings, and investors have started to file arbitration claims against those firms. Medical Capital of Tustin, Calif., is a medical-receivables financing company that purchased account receivables from health care providers at a discount and then collected on the debts. Last week, the court-appointed receiver raised more questions about the quality of Medical Capital's assets. For example, $543 million, or about 87% of all the accounts receivable controlled by Medical Capital, are “nonexistent,” according to the receiver. “There have been no collections or advances on these accounts for years,” according to Thomas Seaman, the receiver. Spokespeople from both Wells Fargo and Bank of New York Mellon declined to comment.

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