Almost six years after reaching a settlement with the Massachusetts Securities Division, Securities America Inc. will make a final payment of $1 million to investors, many of them seniors, who bought promissory notes issued by Medical Capital Holdings, a $1.7 billion Ponzi scheme sold mainly through independent broker-dealers.
In 2011, Massachusetts ordered Securities America to pay $2.8 million in restitution to make roughly 60 MedCap investors whole. At the time, that settlement referred to the potential for pending actions. This $1 million in restitution, which was announced Thursday morning, is the final settlement in the Massachusetts case against Securities America.
"The notes Securities America sold were sold under a regulation exemption that allows sale to 'sophisticated and accredited investors,' but these were pushed at dinner seminars for as many as 100 people at a time who were never asked if they were sophisticated and accredited investors," according to a statement from the office of William Galvin, the Secretary of the Commonwealth of Massachusetts.
"People who invested their life savings in these soon-to-be-worthless notes are precisely the people that the Department of Labor's fiduciary rule is designed to protect," Mr. Galvin said in the statement. "These were people trying to protect their savings, but were sold high-risk products which garnered high commissions for the broker-dealer."
Brokers typically receive a 7% commission for selling private placements; broker-dealers usually collect a 1% due diligence fee from the private placement's sponsor company, which also pays for a due diligence report that broker-dealers use when evaluating such offerings.
A spokeswoman for Securities America, Janine Wertheim, did not return a call seeking comment.
Between 2003 and 2009, Medical Capital raised $1.7 billion by selling private notes, purportedly to buy discounted medical receivables such as unpaid doctor or hospital bills that the firm would collect at full price.
Dozens of independent broker-dealers sold the MedCap notes. But Securities America was by far the largest seller, and its advisers sold $697 million. Securities America received more than $26 million in compensation, according to the Massachusetts Securities Division. MedCap went belly up in 2009, and the legal fallout drove many of the firms that sold MedCap notes to shut down.
The Massachusetts Securities Division sued Securities America in January 2010, alleging that the Securities America clients were not sophisticated investors, a requirement to purchase private placements. Massachusetts also alleged that material risk information that would have made clear to investors the high risk of MedCap notes was not provided. It also alleged that Securities America insufficiently considered due diligence analyst reports that recommended investors be informed of the material risks associated with the notes.
Securities America and Massachusetts settled the matter in May 2011. Three months later, the firm's former parent,
Ameriprise Financial Inc., said it was selling Securities America to Ladenburg Thalmann Financial Services Inc. for $150 million in cash and potential future payments.
