Securities Law Blog

Last week saw the first FINRA arbitration claim filed in connection with promissory notes issued by Medical Capital Holdings Inc. The industry expects to see many more such arbitrations in the coming months. On July 16, 2009, the Securities and Exchange Commission filed an emergency court action seeking to enjoin halt an alleged $77 million offering fraud perpetrated by defendants Medical Capital Holdings, Inc. ("MCHI"), Medical Capital Corporation ("MCC"), Medical Provider Funding Corporation VI ("MP VI"), Sidney M. Field, and Joseph J. Lampariello. The SEC's complaint, filed in federal court in Orange County, California, alleges that the defendants defrauded investors by misappropriating about $18.5 million of investor funds and by misrepresenting to investors that no prior offerings had defaulted on or been late in making payments to investors of principal and/or interest.

MCHI is a medical receivables financing company that operates through MCC, its wholly-owned subsidiary, to administer several Special Purpose Corporations ("SPCs"), including MP VI. Field and Lampariello are directors of MCHI, MCC, and MP VI, with Field also serving as the defendant entities' CEO and Lampariello serving as their president and COO. The SEC's complaint alleges that, since 2003, MCHI, MCC, Fields, and Lampariello have raised over $2.2 billion through offerings of notes in MP VI and five other similarly structured SPCs. As of March 31, 2009, MP VI and its affiliated SPCs had over $1.2 billion in notes outstanding, and since August 2008, five of the SPCs have been in default or late in paying principal and/or interest on $992.5 million in notes.

As alleged in the SEC's complaint, the defendants defrauded investors by misappropriating approximately $18.5 million of the $76.9 million raised through the sale of MP VI notes to pay administrative fees to MCC. The complaint alleges that these fee payments were contrary to representations in MP VI's original offering documents, which stated that administrative fees would not be paid out of proceeds from the sale of notes. The complaint also alleges that these fee payments were contrary to representations in MP VI's May 27, 2009 supplemental offering documents that less than $4 million had been used for purposes other than purchasing accounts receivables.

In addition, the SEC's complaint alleges that the defendants defrauded investors by misrepresenting in MP VI's offering documents that none of the SPCs affiliated with MP VI had defaulted on or been late in making payments of principal and/or interest to their respective investors. In fact, two MP VI-affiliated SPCs began defaulting on interest and/or principal payments in the same month that MP VI began its offering, and recently two other MP VI-affiliated SPCs have defaulted or been late in making interest payments.

The SEC's action seeks emergency relief, including an order temporarily enjoining all defendants from future violations of the antifraud provisions and freezing the assets of and appointing a temporary receiver over MCHI, MCC, and MP VI. The SEC also seeks preliminary and permanent injunctions, disgorgement, and civil penalties against all defendants.

Claims against broker-dealers who recommended the MCHI notes no doubt will focus on those firms’ due diligence of the sponsor and offerings.