Two banks are suing a number of broker-dealers as a legal maneuver to cut down their liability over the sale of failed private placements, according to a memo by Securities America Inc. CEO Jim Nagengast that was obtained by
InvestmentNews.
In the e-mail to the firm's advisers, Mr. Nagengast also claimed that a pending settlement in a class action filed against the broker-dealer, if approved, will wipe out the banks' claims against the independent B-D.
Those two banks, The Bank of New York Mellon Corp. and
Wells Fargo Bank NA, filed separate lawsuits at the end of April against the broker-dealers —including Securities America — stemming from the broker-dealers' sales of notes issued by Medical Capital Holdings Inc.
The medical-receivables firm sold investors $2.2 billion of private placements. The Securities and Exchange Commission in 2009 charged the company with fraud.
Both banks were trustees of Medical Capital.
The Bank of New York lawsuit claimed that the broker-dealers breached their obligation to MedCap investors by selling the product to investors for whom it was not a suitable investment. The complaint also alleges that broker-dealers failed to make proper disclosure of the Medical Capital notes' risks.
The
Wells Fargo complaint claims that the broker-dealers are “obligated to partially or fully indemnify” the bank if it is compelled to pay investors any damages stemming from the plaintiffs' class action.
But in an e-mail sent Friday morning, Mr. Nagengast told Securities America's 1,800 independent reps and advisers the banks' lawsuits are an attempt to lessen any potential judgment the banks may face.
“As background information, the two banks that served as trustees for the investors' funds in Medical Capital have been sued in a number of class action and mass action lawsuits,” Mr. Nagengast wrote in the message. “The banks are suing the broker-dealer to try to reduce or eliminate, to the extent possible, the amount of any judgment against them.”
He went on to note that the banks' argument “is that the broker-dealers are at fault for the investors' loss to some extent, and that any judgment against the banks should be reduced by the amount of the broker-dealers' fault.”
Bank of New York Mellon has sued 13 broker-dealers, seven of which are no longer in business,
Wells Fargo has sued six firms, as well as
Ameriprise Financial Inc., which owns Securities America, the biggest seller of Medical Capital notes. Not all broker-dealers that sold the product were included in the suit.
Janine Wertheim, a Securities America spokeswoman, did not return a call by 2 p.m. on Friday to comment about Mr. Nagengast's e-mail message.
Medical Capital investors sued the two banks in a class action in U.S. District Court for the Central District of California in September 2009, just weeks after the SEC charged MedCap with fraud. The plaintiffs in that class action claimed in an amended 2010 complaint that the two trustees signed off on requests by Medical Capital executives to take $325 million in fees — despite documents for the notes indicating that fees were not supposed to come from investor funds.
Securities America has moved to settle a number of lawsuits against it for the sale of Medical Capital, including a pending class action. The next step in that proposed settlement is a fairness hearing scheduled for the end of July.
“While Securities America does not believe that the banks can hold the broker-dealers responsible for any alleged misconduct by the banks, even if they could, the settlement, pending approval, would wipe out any claim the banks think they may have against Securities America,” Mr. Nagengast wrote the brokers.
Joel Feuer, a lawyer for
BNY Mellon and a partner at Gibson Dunn & Crutcher LLP, did not return a call this afternoon seeking comment about Mr. Nagengast's assessment. Likewise, Marc Dworsky, an attorney representing
Wells Fargo and a partner at Munger Tolles & Olson LLP, did not return a call.
From 2003 to 2008, dozens of independent broker-dealers sold notes of Medical Capital, which raised $2.2 billion. Securities America sold about $700 million.
Investors have lost more than $1 billion in principal, and regulators and the Medical Capital bankruptcy trustees have said the operation was a Ponzi scheme.
