FINRA Arbitrators Hit Securities America with Punitive Damages in Medical Capital Notes Case

January 5, 2011

On August 3, 2009,in federal court in Orange County, California, the Securities and Exchange Commission ("SEC") obtained an emergency court order halting a $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. SEC v. Medical Capital Holdings, Inc.; Medical Capital Corporation; Medical Provider Funding Corporation Vi; Sidney M. Field; And Joseph J. Lampariello, Civil Action No. SA CV09-818 DOC(RNBx) (C.D. Cal.)] (LR-21165). The Order temporarily enjoined the defendants from future violations of the federal securities antifraud provisions and froze the assets of and appointed a temporary receiver over MCHI, MCC, and MP VI.

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.

SEC Complaint

The SEC's Complaint alleged that since 2003, MCHI, MCC, Field, and Lampariello raised over $2.2 billion through offerings of MP VI notes and five other similar SPCs. 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.

NOTE: The Defendants are presumed innocent unless and until proven guilty. All charges are merely allegations at this time.

The Defendants are charged with defrauding 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. Those 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 -- moreover, contrary to written representations, less than $4 million had been used for purposes other than purchasing accounts receivables. Additionally, the Complaint alleges that the Defendants misrepresented that no prior offerings had defaulted on or been late in making payments to investors of principal and/or interest. However, two MP VI-affiliated SPCs began defaulting on interest and/or principal payments in the same month that MP VI began its offering, and two other MP VI-affiliated SPCs defaulted or were late in making interest payments.


In January 2010, William Galvin, Secretary of the Commonwealth of Massachusetts, filed an administrative Complaint against Securities America, Inc., a subsidiary of Ameriprise Financial, Inc. In the Matter of Securities America, Inc. (2009-0085). In pertinent part, the Massachusetts Complaint alleges that

The Complaint is based on Respondent's material omissions and misleading statements made by Respondent in the sale of 697 million dollars of promissory notes issued by special purpose corporations ("SPCs) wholly owned by Medical Capital Holdings, Inc.

. . .

[T]he MC Notes were offered in a series of private placements under a Rule 506 exemption of Regulation D. The purpose of a Regulation D exemption is to allow for the sale of unregistered securities to sophisticated and accredited investors without generally soliciting the investment to the public

. . .

Since August of 2008, Medical Capital has defaulted on all of its outstanding note obligations and is now in permanent receivership . . .

[t]oday,1.079 billion dollars of MC Notes are in default status, of which 358 million dollars were sold by Respondent. . .

FINRA Arbitration

In a FINRA Statement of Claim filed in December 2009, public customer Wayman sought at least $729,000 in damages associated with various causes of action including breach of fiduciary duty, fraud, negligence, and financial elder abuse arising in connection with her investments in Medical Capital promissory notes. In the Matter of the Arbitration Between Josephine Wayman, Claimant, versus Securities America, Inc. and Randall Ray Talbott, Respondents (FINRA Arbitration 10-00012, December 31, 2010).

Respondents Securities America and Talbott generally denied the allegations, asserted various affirmative defenses, and requested the expungement of all references to the arbitration from Respondent Talbott's Central Registration Depository ("CRD") records.

What You Didn't Know -- Irrelevant

The FINRA Arbitration Panel pointedly noted that its decision was
based on what was actually known by Randall Talbott and Securities America, Inc. at the relevant times and is not based on what additional information could or could not have been discovered by Respondents regarding the subject investments or the company offering the investments
Respondents apparently requested that the FINRA Arbitration Panel issue subpoenas for two witnesses, who would allegedly testify that Respondents Securities America, Inc. and Talbott could not and would not have discovered anything further about the subject investment or the company offering the investment. Although the subpoenas were issued, the witnesses did not appear. Notwithstanding, the Panel noted that the testimony would likely have been deemed irrelevant for the reason cited above in the quoted language.

Bill Singer's Comment: Given the relatively terse nature of the FINRA Arbitration Decision (a common circumstance for such proceedings), we are largely left to infer a number of aspects about the parties' likely contentions.

Apparently, Respondents Securities America and Talbott may have argued that they did not defraud Claimant Wayman because, in part, their representations about Medical Capital to the client were undertaken in good faith and based upon the information available to them at the time. As such, the Respondents may have taken the position that Medical Capital perpetrated a fraud on the market as a whole, and that the brokerage firm and its registered person were similarly duped by the falsehoods and misrepresentations.

Assuming that such a defense was raised, the Respondents may have sought to introduce testimony to corroborate their position that they knew what they knew, didn't know what they didn't know, and would not have been able to uncover the fraud at the time of the transactions at issue.

Notwithstanding the failure of the two subpoenaed witnesses to appear at the hearing, the Arbitration Panel anticipates some likely objections (if not a legal appeal) and makes it clear that its decision is based only on what the Respondents knew during the relevant times -- and not upon any speculative assertions by Claimant, Respondents, or others as to what "could or could not have been discovered. . ." Consequently, even if the two witnesses offered testimony, the Panel suggests that the testimony might have been precluded or struck based upon its anticipated "irrelevancy" as likely speculative in nature.

The Panel Rules

The FINRA Arbitration Panel found Respondents Securities America and Talbott jointly and severally liable to and ordered them to pay to Claimant:
  • $734,118.00 in compensatory damages in the amount with post-judgment interest at the rate of 10% per annum from January 1, 2011 (pre-judgment interest denied);
  • $111,465.00 in attorneys' fees; and
  • $59,883.00 in costs.

Further, Respondent Securities America was found solely liable to and ordered to pay Claimant punitive damages in the amount of $250,000.00.

Finally, the Panel confirmed that should Claimant Wayman receive any additional recoveries from other parties, she is entitled to keep those funds as additional punitive damages, and may also keep any interest. Respondents' request for expungement was denied.