The broker-dealer has fired back at a state regulator with some stinging accusations of ignorance.
In a stinging reply to accusations that it misled investors who bought high-risk private placements, Securities America Inc. on Tuesday told Massachusetts regulators that the state's lawsuit against the firm “misstates facts and miscomprehends the regulatory structure of” such deals, know as Regulation D offerings.
The formal response, obtained exclusively by InvestmentNews, claims that the Massachusetts Securities Division lawsuit against Securities America is full of holes — and that the state's regulators don't understand the workings of private placements and Reg D deals.
The lawsuit “mischaracterizes or simply ignores the role of selling securities broker-dealers who are not underwriters [such as Securities America] outside analysts' reports, private-placement memoranda, subscription agreements and selling agreements,” Securities America said in its formal reply to the complaint, which was filed in January.
“Having thus set up its own inaccurate version of how Regulation D offerings operate, [Massachusetts enforcement regulators] then misstates or omits numerous relevant facts pertaining to [Securities America's] sales of the Medical Capital offerings, portraying [the firm's] normal, legitimate conduct as actionable. The complaint should be dismissed.”
The Massachusetts Securities Division lawsuit alleges that Securities America misled investors who bought nearly $700 million of private placements from 400 of the firm's brokers.
The private placements at the center of the dispute were a series of offerings issued by Medical Capital Holdings Inc., which is currently in receivership.
Last summer, the Securities and Exchange Commission charged Medical Capital with fraud. Since then, numerous investors' lawsuits and arbitration complaints over the private placements have been filed against nearly 50 securities firms.
The Massachusetts lawsuit alleges that between 2003 and 2008, a group of Securities America executives repeatedly failed to heed the warning of an outside due-diligence analyst about the risks of private placements.
The group also failed to acknowledge the concerns of some of the firm's top executives, including president and chief financial officer Jim Nagengast, the complaint alleges.
“Year after year, [Securities America] ignored the material risks and disclosure recommendations raised by” due-diligence reports for each Medical Capital deal, the lawsuit alleges.
But in its response to the regulator, Securities America claims that it fulfilled its obligations to its brokers and their clients when selling Medical Capital notes.
“Contrary to the allegations in the complaint, selling agreements between product sponsors and broker-dealers such as [Securities America] do not permit the broker-dealers to provide extraneous information such as outside-analyst reports to investors,” the response said. “Also contrary to the [lawsuit, Securities America] did not withhold material information from investors.”
The Medical Capital private-placement memorandum fully disclosed risks on which the lawsuit focused, Securities America said. And the complaint “selectively quotes certain documents in a way that distorts the full record,” including an e-mail from Mr. Nagengast.
In the Massachusetts complaint, he expressed strong concern over Medical Capital's lack of audited financials. But in its response, Securities America said that relevant portions of Mr. Nagengast's testimony were omitted.
“While he did raise certain issues for discussion, he found that in subsequent conversations with Medical Capital management specifically about financial statements, they always seemed to have good answers to the concerns he expressed,” the firm said.
In an e-mail sent Wednesday to Securities America's advisers, Janine Wertheim, senior vice president and chief marketing officer for the firm, wrote that Massachusetts' "allegation that advisers sold Medical Capital offerings to unaccredited investors is simply not true. Our records indicate that every investor that purchased Medical Capital through Securities America was an accredited investor." She added that Securities America plans to "vigorously defend the Massachusetts action."
Brian McNiff, a spokesman for the Massachusetts Securities Division, did not immediately return a phone call requesting a comment.
