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Massachusetts State Regulators on Tuesday charged Securities America with selling $697 million of unregistered notes to customers without disclosing the risks.

Securities America, which is owned by Ameriprise Financial Inc., sold notes issued on behalf of Medical Capital Holdings Inc. to 60 Massachusetts investors. What Securities America neglected to tell customers, the Orange County Register reported, was that Medical Capital had never audited a financial statement and was investing in areas outside its core expertise.

What was Medical Capital really investing in? A yacht, mortgages on hospitals that have since closed, production for a film about Mexican Little Leaguers, and all-expenses paid trips given to Securities America executives.

$1.7 billion in Medical Capital notes were issued from 2003 through 2009, and Securities America customers purchased one third of these notes. Medical Capital defaulted on paying investors in August 2008.

Last August, the SEC shut down another attempted sale of $77 million in Medical Capital Notes. In their court order, the federal regulator said the company was perpetuating a fraud, according to Massachusetts State Secretary William Galvin.

Both Medical Capital and Securities America had hired a due-diligence analyst, who warned that investors should be told of the risks. Both companies declined to share the report with their customers, or even with most of its salespeople.

Medical Capital notes are an example of private placement securities, which is typically issued by small private businesses outside the stock market. The SEC only allows private placement securities to be sold to investors with a net worth exceeding $1 million.

By placing this restriction, the SEC is hoping to weed out unsophisticated, or uninformed, investors. But as mentioned on this blog, the most common victim of investment fraud is a married man in his 50’s, someone who understands financial matters.

Medical Capital notes affected any number of investors who didn’t stand a chance with the information they were provided.

If you invested in Medical Capital Notes, contact our attorneys for more information.


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