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This action is related to the action entitled Securities and Exchange
Commission v. Medical Capital Holdings, Inc., et al., Case No. SACV-09-0818
(DOC) (RNBx) (the “SEC Action”), pending in this District before the Honorable
David Carter. Pursuant to Section IX of the Court’s Preliminary Injunction Order
in the SEC Action, Plaintiffs have not included in this Complaint claims against
MCH, MCC, its subsidiaries, or its affiliates (collectively referred to as “Medical
Capital”), including Sidney Field and Joseph Lampariello, though Plaintiffs reserve
their right to seek leave from the Court to amend the Complaint to add such claims.
Based on the limited amount of discovery received from Defendants to date,
documents reveal that Medical Capital suffered from systemic problems almost
from its inception as a company. Documents further reveal that the Defendants
disregarded their own policies and explicit provisions of the Note Issuance and
Security Agreements (“NISAs”) that were designed to protect investors such as
Plaintiffs. Plaintiffs anticipate further corroborating details. Therefore, Plaintiffs
allege upon information and belief based, inter alia, upon investigation conducted
by Plaintiffs and their counsel, except as to those allegations pertaining to Plaintiffs
personally, which are alleged upon knowledge.
I. OVERVIEW
1. This action arises from a massive breach of trust by those specifically
charged with representing and protecting the interests of Plaintiffs and other
investors in Medical Capital Holdings, Inc. (“MCH”).
2. Plaintiffs bring this action against defendants Wells Fargo Bank,
National Association (“Wells Fargo”) and The Bank of New York Mellon
(“BNYM”) on behalf of a Class of persons and entities who purchased interests in
notes issued by Medical Provider Financial Corporation II (“MP II”), Medical
Provider Financial Corporation III (“MP III”), Medical Provider Financial
Corporation IV (“MP IV”), Medical Provider Funding Corporation V (“MP V”),
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and Medical Provider Funding Corporation VI (“MP VI”) and suffered damages
(the “Class”).
3. MCH, based in Tustin, California, is a medical receivable financing
company that makes money by purchasing accounts receivable from healthcare
providers at a discount and collecting the debts owed. MCH operates through its
wholly owned subsidiary, Medical Capital Corporation (“MCC”). MCH and MCC
are run by Sidney Field (“Field”), the CEO, and Joseph Lampariello
(“Lampariello”), the President and COO.
4. Since 2003, MCH raised over $2.2 billion from an estimated 20,000
investors, including plaintiffs and other Class members, supposedly to fund its
operations. The money was raised through the offering of notes issued by five
Special Purpose Corporations (“SPCs”) created by MCH: MP II, MP III, MP IV,
MP V, and MP VI.
5. According to Private Placement Memorandum (“PPMs”) prepared for
each SPC, investor funds within each SPC were to be carefully segregated and
used to pay for accounts receivable from medical providers. The PPMs further
assured that investor funds would not be used to pay administrative fees to MCH
and its affiliates.
6. Critically, to ensure these promises were kept, investors were told that
MCH had retained two prominent banks – defendants Wells Fargo and BNYM – to
serve as Trustees of the SPCs and to represent the interests of investors. For their
work, the Trustees were paid substantial fees and given the opportunity to act as a
lender to each SPC and to invest the funds in their own mutual funds, repurchase
agreements with investment banks, and other investment vehicles. Unfortunately,
under the supposedly watchful eyes of the Trustees, MCH was a scam.
7. As now revealed in a pending SEC enforcement action, in reports
issued by the Court-appointed Receiver, and in correspondence from the Trustees
to investors, MCH, MCC, Fields and Lampariello – for years – used the Trustee-
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controlled accounts as their personal piggy banks, improperly requesting and
obtaining investor funds to pay themselves massive “administrative fees” of nearly
$325 million which they used to purchase lavish personal perquisites including a
multi-million dollar, 118-foot yacht.
8. MCH and its affiliates also invested in an array of non-medical
projects that were placed under the personal supervision of Lampariello, including
mobile phone and movie ventures, and commingled investor funds between the
various SPCs, all in violation of the PPMs issued to investors.
9. The SEC and Receiver further found that MCH and its affiliates,
despite controlling hundreds of millions of dollars, operated without financial or
accounting controls, failed to prepare financial statements in accordance with
GAAP, failed to perform annual appraisals of assets, and repeatedly obtained the
Trustees’ permission to pay themselves fees based on a formula that blatantly
violated the PPMs’ mandate that fees not come from investor funds. The Trustees,
over and over again, without exception, willingly and recklessly signed off on the
requests, even though these requests were (1) unsupported by documentation
required under the NISAs; and (2) fraudulent on their face, and certainly
discoverable in any event by trustees that were adequately performing their duties.
10. All five SPCs are now in default to investors, failing to make interest
and principal payments on over $1 billion worth of notes. Based on his review of
internal records, and interviews with company employees, the Receiver recently
reported to the Court that of approximately $625 million of medical accounts
receivable on the SPCs’ collective books, just $80 million is verifiable, and the
remaining accounts – totalling $542 million – “no longer exist.” Undoubtedly, the
Noteholders – Class members herein – will suffer substantial losses. By this
action, Plaintiffs seek to recover damages for such losses.
II. JURISDICTION AND VENUE
11. The Court has jurisdiction over this action pursuant to 28 U.S.C.
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§§ 1332(d) and 1367(a). The amount in controversy exceeds $5,000,000,
exclusive of interest and costs, and there is diversity of citizenship between
Plaintiffs and each of the Defendants.
12. Venue is proper in this district. MCH and MCC, which operated the
SPCs, were also headquartered in this District. The related SEC Action is pending
in this District. Defendants maintained offices in this District. A substantial part
of the events, acts, omissions and transactions complained of herein occurred in
this District. At all relevant times herein, defendant conducted substantial business
and/or committed violations of United States law by acts committed in this
District.
III. PARTIES
A. Plaintiffs
13. Plaintiff Steven J. Masonek is an individual and resident of Butte
County, California. Plaintiff Steven J. Masonek is married to Plaintiff Sandra J.
Masonek. Between 2005 and 2008, plaintiff invested approximately $949,000 to
purchase an interest in notes either held individually, together with Sandra J.
Masonek, or through the Steven J. & Sandra J. Masonek Trust, in MP II, IV and V.
The notes are now in default and, as a result, plaintiff has been damaged.
14. Plaintiff Sandra J. Masonek is an individual and resident of Butte
County, California. Between 2005 and 2007, plaintiff invested approximately
$749,000 to purchase an interest in notes either held together with Steven
Masonek, together with Robert B. Price, or through the Steven J. & Sandra J.
Masonek Trust, in MP II and IV. The notes are now in default and, as a result,
plaintiff has been damaged.
15. Plaintiff Robert B. Price is an individual and resident of Kings
County, New York. In May 2005, plaintiff invested approximately $270,000 to
purchase an interest in a note held together with Plaintiff Sandra J. Masonek in MP
II. The note is now in default and, as a result, plaintiff has been damaged.
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16. Plaintiffs Mary Zahara and Mark Masonek are individuals and
residents of Butte County, California. Plaintiffs Mary Zahara and Mark Masonek
are married. In 2007, plaintiffs invested approximately $330,000 to purchase an
interest in notes either held together or through The Zahara Family Trust Dated 4-
1-91 in MP IV. The notes are now in default and, as a result, plaintiffs have been
damaged.
17. Plaintiff Joann Hosking is an individual and resident of Butte
County, California. Between 2004 and 2007, plaintiff invested approximately
$1,375,000 to purchase an interest in notes either held individually or through the
Ray A. & Joann Hosking Living Trust in MP II, III and IV. The notes are now in
default and, as a result, plaintiff has been damaged.
18. Plaintiff Cynthia Masonek Swanson is an individual and resident of
Butte County, California. In May 2007, plaintiff invested approximately $50,000
to purchase an interest in a note in MP II. The note is now in default and, as a
result, plaintiff has been damaged.
19. Plaintiff Robert H. Ludlow, Jr., on behalf of the Robert H.
Ludlow, Jr. Revocable Trust 1999 is an individual and resident of Santa Cruz
County, California. In January 2008, plaintiff invested approximately $100,000 to
purchase an interest in a note in MP V. The note is now in default and, as a result,
plaintiff has been damaged.
20. Plaintiff Peter Braunstein and Ann Braunstein are individuals and
residents of Marin County, California. Plaintiffs Peter and Ann Braunstein are
married. Between 2006 and 2008, plaintiffs invested approximately $450,000 to
purchase an interest in notes either held together or through Peter Braunstein’s IRA
accounts in MP III, IV and V. The notes are now in default and, as a result,
plaintiffs have been damaged.
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21. Plaintiff Michel Rapoport is an individual and resident of Sarasota,
Florida. In February 2007, plaintiff invested $3,000,000 to purchase an interest in
MP IV. The note is now in default and, as a result, plaintiff has been damaged.
22. Plaintiff Kathleen Darrow is an individual and resident of Glenn
County, California. From 2008-2009, plaintiff invested approximately $650,000 to
purchase interests in notes in MP VI. The notes are now in default and, as a result,
plaintiff has been damaged.
23. Plaintiff John Toungaian is an individual and resident of Los
Angeles County, California. From 2006 to 2007, plaintiff invested approximately
$125,000 to purchase interests in notes in MP III and MP IV. The notes are now in
default and, as a result, plaintiff has been damaged.
B. Defendants
24. Defendant Wells Fargo Bank, National Association (“Wells Fargo”)
has its principal executive offices located in Minneapolis, Minnesota, and other
affiliate offices in San Francisco and Los Angeles, California. Wells Fargo
promotes itself as providing corporate trust services, including “fiduciary and
agency products,” since 1934.
25. Defendant The Bank of New York Mellon (“BNYM”)
is a subsidiary of The Bank of New York Mellon Corporation, a Delaware
corporation. BNYM’s principal executive offices are located in New York, New
York, and it maintains other affiliate offices in Los Angeles, California. BNYM
promotes itself as the “world’s leading provider of corporate trust and agency
services.”
26. Defendants Wells Fargo and BNYM are collectively referred to
herein as the “Trustees” or the “Defendants.”
27. Except as described herein, Plaintiffs are ignorant of the true names
of defendants sued as Does 1 through 10 inclusive and, therefore, sue these
defendants by such fictitious names. Plaintiffs will seek leave of the Court to
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amend this Complaint to allege their true names and capacities when they are
ascertained. Plaintiffs allege that each of these Doe Defendants is responsible in
some manner for the acts and occurrences alleged herein, and that Plaintiffs’
damages were caused by such Doe Defendants.
28. Defendant, and the Doe Defendants, and each of them, are
individually sued as participants, co-conspirators, and aiders and abettors in the
improper acts, plans, schemes, and transactions that are the subject of this
Complaint.
C. Non-Parties
29. Plaintiffs are aware of various non-parties that participated in the
wrongdoing alleged herein. Many of these persons and entities, including some
described below, have been named in the SEC’s related complaint and/or included
in the Court’s Permanent Injunction Order which presently precludes noteholder
investors from bringing legal claims against designated parties, including affiliates
of MCH and MCC. Plaintiffs reserve their right to seek leave from the Court to
amend their Complaint to add such non-parties at a future date, once the bar order
is lifted.
30. Medical Capital Holdings, Inc. (“MCH”) is a Nevada corporation
with its principal place of business in Tustin, California. Through various wholly-
owned operating subsidiaries and SPCs, MCH provides financing to healthcare
providers by purchasing their accounts receivables and making secured loans to
them. MCH uses the SPCs to raise money from investors to fund the financing.
MCH uses the operating subsidiaries to underwrite, monitor, administer, and
service these financings. In February 2001, the California Department of
Corporations issued a Desist and Refrain Order against MCH from the further offer
or sale of securities in the State of California.
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31. Medical Capital Corporation (“MCC”) is a Nevada corporation and
wholly owned subsidiary of MCH, with its principal place of business in Tustin,
California. MCC is the administrator for each of MCH’s SPCs, including MP II,
III, IV, V and VI, and provides management, underwriting, and administrative
services, such as bookkeeping, payroll, and accounting services, including
administration of all investor promissory notes and interest payments. The
directors of MCC are Field and Lampariello, as well as Lawrence J. Edwards.
Field serves as MCC’s CEO and Lampariello serves as MCC’s President and
COO. Other key employees of MCC include Alan Meister (Treasure and Chief
Financial Officer) and Thomas Fazio (General Counsel). MCC’s primary source
of revenue was the Administrative Fees paid through various SPCs.
32. Medical Tracking Services, Inc. (“MTS”) is a wholly owned
subsidiary of MCH. MTS is a Nevada Corporation. MTS provided data entry of
receivables and receivable payments for the SPCs. When the SPCs received
batches of receivables under receivable purchase agreements, claim information
was directly uploaded from the provider to MTS, supposedly to audit the
information and input the data into customized tracking software. As receivable
payments came in from insurance companies, MTS would enter data on the
payments into the tracking programs. MTS would then generate and provide
reports to MCC and the SPCs on receivable collections.
33. Sidney M. Field is a resident of Villa Park, California. Field was
the CEO and director of MCH and its affiliates during the relevant period. Just
before forming MCH, Field held an insurance license and owned FGS Insurance
Agency, an Irvine-based auto insurer. According to California Department of
Insurance lawsuits, in February 1987, Field and others arranged for Coastal
Insurance Inc., which they controlled, to pay Field $17.5 million for FGS. Two
years later, just before it slipped into insolvency, Coastal sold FGS back to Field
for $206,000. California Insurance regulators called the deal a “sham transaction”
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that diverted cash from an ailing insurer to Field. Field’s insurance license was
revoked. Regulators also warned Field and Coastal that they would not license
FGS if Field remained involved. Despite that warning, Field allegedly continued
to control FGS and to serve as a “de facto” director of Coastal. Under Field’s
supervision, FGS agents allegedly used a deceptive practice called “sliming” to sell
auto policies, altering the accident records of questionable drivers and falsifying
information about car values and commute mileage so applicants could qualify for
insurance. FGS also allegedly duped customers into paying interest rates of 21-
40% when they financed their premiums. The Department of Insurance sued Field
for civil racketeering in August 1990 and again three years later, this time for
fraud, after he filed bankruptcy. Ultimately, FGS’ license was revoked and the
Company was liquidated by a bankruptcy trustee.
34. Joseph J. Lampariello resides in Newport Beach, California.
Lampariello was the president, COO, and director of MCH and its affiliates during
the relevant period. Like Field, Lampariello is a defendant in the pending SEC
enforcement action.
35. Medical Provider Financial Corporation II (“MP II”) is a Nevada
corporation and wholly-owned SPC of MCH that was formed in October 2003.
From January 2004 to December 2005, MP II conducted two series of note
offerings, raising approximately $251.7 million through the issuance of 3,458 notes
to investors. As of recently, MP II had $88 million in outstanding notes and
defaulted in paying $43 million in principal and $1.3 million in interest to its
investors. After original trustee Zions First National Bank resigned in 2005,
BNYM took over as Trustee for MP II.
36. Medical Provider Financial Corporation III (“MP III”) is a Nevada
corporation and wholly-owned SPC of MCH that was formed in February 2005.
From July 2005 to January 2008, MP III conducted two series of note offerings,
raising a total of about $552 million by issuing 5,318 notes to investors. MP III
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had $109.4 million in outstanding notes, and as of May 2009, MP III had defaulted
in paying principal on $26.5 million in outstanding notes. Wells Fargo served as
Trustee for MP III.
37. Medical Provider Financial Corporation IV (“MP IV”) is a Nevada
corporation and wholly-owned SPC of MCH that was formed in July 2005 and
commenced operations in October 2006. From November 2006 through February
2008, MP IV conducted two series of note offerings, raising a total of $401.3
million by issuing 4,222 notes to investors. As of May 2009, MP IV had $400
million in outstanding notes and defaulted in interest payments in January 2009
and since March 2009. BNYM served as Trustee for MP IV.
38. Medical Provider Funding Corporation V (“MP V”) is a Nevada
corporation and wholly-owned SPC of MCH that was formed in September 2007.
From November 2007 to about July 2008, MP V conducted a note offering, raising
$401.8 million by issuing 4,323 notes that begin to mature in November 2009. As
of March 31, 2009, MP V had $401.1 million in outstanding notes issued to 4,270
investors. MP V recently failed to pay interest to investors and is in default of the
notes. Wells Fargo served as Trustee for MP V.
39. Medical Provider Funding Corporation VI is a Nevada corporation
and wholly-owned SPC of MCH that was formed in April 2008. From August
2008 to the present, MP VI has conducted a note offering and, as of June 19, 2009,
it had raised $76.9 million through the issuance of notes to about 700 investors.
MP VI recently failed to pay interest to investors and is in default of the notes.
BNYM served as Trustee for MP VI.
IV. STATEMENT OF FACTS
A. MCH’s Business
40. MCH provides financing to healthcare providers by purchasing their
accounts receivables at a discount and making secured loans to them. The business
is managed through its chief operating company, MCC, a wholly owned subsidiary
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of MCH. MCC served as the Administrator for each SPC pursuant to an
Administrative Services Agreement. MTS served as the Servicer for each SPC
pursuant to a Master Servicing Agreement.
41. MCC and MTS performed several functions of the SPCs, including
(a) negotiating, executing and issuing promissory notes, (b) identifying and
evaluating potential receivable purchase transactions, loans and other investments,
(c) producing reports and statements to the Trustees for the release of monies for
the funding of receivable purchases, loans and other investments, (d) handling
healthcare provider and noteholder relations, (e) processing receivable payments
and other loan investment payments through lockbox accounts to the Trustees, and
(f) providing periodic reports to the Trustees.
B. Role of the Trustees
42. Medical Capital could not have enjoyed the “success” it did – raising
approximately $2.2 billion dollars from over 20,000 investors, over $1 billion of
which is still due and owed to Noteholders – without Wells Fargo and BNYM,
both prominent financial institutions, lending their names as trustees.
43. Medical Capital’s ability to successfully market the Notes to
Plaintiffs and the other Noteholders thus depended in large part on the appearance
of safety and trust provided by Defendants as trustees on the Notes – as they
themselves acknowledge. For example, Defendants’ own marketing materials tout
how, in their role as trustee, they serve to protect Noteholders’ interests:
● According to Defendant BNYM, “[t]he trustee’s job [is] to act in a
fiduciary capacity on behalf of the bondholder and facilitate payments to the
same.”
● Defendant BNYM also touts that among the benefits it provides to
investors, “Investor’s interests [are] represented by The Bank of New York Mellon
as independent third party [to] ensure interests of noteholders are protected.”
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● According to Wells Fargo, “[a]s trustee, we protect the interests of the
bondholders and investors by monitoring compliance with governing deal
documentation.”
44. Defendants Wells Fargo and BNYM entered into Note Issuance and
Security Agreements (“NISAs”) for each of the SPCs. Pursuant to the NISAs,
which were substantially similar for each SPC, Wells Fargo and BNYM expressly
agreed to act “as trustees for the noteholders” and to “accept the trusts,” thereby
assuming fiduciary duties to protect the Noteholders’ interests.
45. Pursuant to the NISAs, each series of notes issued by the SPCs was
supposed to be secured by its own set of assets, including specific receivables and
all collections relating to the receivables. MCC and MTS, after collecting amounts
related to the receivables, were then required to transfer the funds to the Trustees
for deposit in the respective trust accounts.
46. To ensure adequate segregation and accounting of investor funds,
each Trustee was obligated to maintain a separate trust account for each series of
notes for the benefit of the Noteholders of that series of notes. Amounts relating to
collateral or proceeds of collateral for a series of notes were to be deposited into
the appropriate trust account. Once funds were deposited into the trust accounts,
they were under the exclusive control of the Trustees. Neither MCC, MTS, or any
of the SPCs had authority to make distributions from the funds in the trust
accounts. Rather, the Trustee had the exclusive authority to make distributions,
only after receipt of required documentation from the various Medical Capital
entities, consistent with representations made to Noteholders in the PPMs and the
terms of the NISAs.
47. The NISAs required that, before any collateral was sold, transferred
or otherwise disposed of by Medical Capital, the Trustees received a written
statement of the gross proceeds to be derived from the sale and the person to which
the collateral was to be sold or transferred to. Non-receivable assets were to be
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evidenced by a promissory note and/or other instruments. The Trustees also were
required to receive a schedule of all collateral pledged on assets and all related
UCC-1 financing statements.
48. The NISAs established a priority of payments: first, to pay trustee
fees, then to pay Noteholders principal and interest, and only then, when
appropriate, for administrative fees. The Trustees were not permitted to make
disbursements for administrative fees without certifying that all conditions had
been satisfied and, even then, could not pay fees from investor funds.
49. Pursuant to the NISA and Administrative Services Agreements, MCC
could request payment of an Administrative Fee by providing a written
certification by the SPC (prepared by MCC as Administrator) to the Trustee. The
certification included the calculation of the Net Collateral Coverage Ratio, which
was supposed to be derived by adding together the value of all cash, eligible
receivables and collateral, then dividing that number by the amounts payable under
the NISA and Notes issued thereunder (principal due at maturity and interest then
due to Noteholders).
50. In valuing collateral, accounts receivable were only “eligible” to be
included if they were purchased within 180 days of the date the claim was
submitted to an “approved payor,” as defined. Additionally, loans made by SPCs
had to be valued using the lesser of the principal and interest due from the
borrower or the value of the property securing them. If the Net Collateral
Coverage Ratio was greater than 100% (i.e., the stated value of the assets exceeded
the current liabilities), MCC took the position with the Trustee that it could request
an Administrative Fee in an amount up to the entire balance in the account above
and beyond that necessary to maintain the 100% ratio.
51. According to its agreements and disclosures, the SPCs (through MCC
as administrator) were to have all real and personal property securing loans and
investments appraised at least once a year by an independent appraiser, and
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provide an annual certification to the Trustees of the value. The SPC was also
required to certify each year that the valuations had been completed. Each
certification of the Net Collateral Coverage Ratio was to be based on the most
recent valuations. Thus, MCC was only entitled to an Administrative Fee if, based
on recent independent valuations, the Net Collateral Ratio was at least 100%, and
only if such fees could be payable from valid and collected accounts receivable.
52. To further assure the legitimacy of the operations and valuation of
collateral, the Trustees had the right to ask for whatever instruments or documents
they wanted from the Debtor – so long as it was a “reasonable” request – and the
Debtor was required to promptly deliver such information.
53. The NISAs stated that the provisions were governed by California,
Colorado, or New York law. Under California, Colorado, and New York law,
corporate trustees act as fiduciaries and are held to the highest standard of care and
loyalty with regard to the duties of prudence, loyalty, avoidance of conflict of
interest with trust beneficiaries, and avoidances of self-dealing in their
administration of trusts, including but not limited to the duties set forth in the
California Probate Code. Importantly, nothing in the NISAs abrogated
Defendants’ obligations to comply with applicable Probate Code sections.
54. Based on all the above, the Trustees represented the Noteholders’ last
line of defense and protection against misuse of their funds, particularly since the
SPCs had no employees or offices of their own. Indeed, the Trustees would later
tout: “[t]he role of the Trustee is to protect the interest of the Series II Noteholders.
The Trustee is not related to MedCap IV or Medical Capital Corporation, and
therefore will exercise independent judgment in fulfilling its responsibilities.” See
Exh. 1, attached hereto. The Trustees also had the benefit of experience serving as
trustees of similar investment vehicles created by other medical receivable
companies, with notice of the unique risks to investor funds used to fund such
operations.
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C. Solicitation of Investors
55. MCH funded its operations by offering promissory notes issued by its
SPCs to investors. Since December 2003, MCH raised approximately $2.2 billion
from over 20,000 investors.
56. The notes were sold as private placements pursuant to Private
Placement Memoranda (“PPMs”) explaining the transactions. The PPMs
described the terms of the notes, the nature of and limitations on the loans and
investments that will be made with the proceeds, and the policies and procedures
for the payment of fees. The SPCs sold notes with various maturities (one to seven
years) and interest rates (8.5% to 10.5%). Importantly, the SPCs represented that,
after paying offering expenses of 4% to 8%, they would use the net offering
proceeds to purchase healthcare receivables and make investments in other
healthcare-related businesses.
57. The SPCs also touted to investors the important role of independent
and prominent “trustees” – Wells Fargo and BNYM – which were charged with
representing the interests of Noteholders, communicating with MCH and MCC,
receiving reports, maintaining noteholder funds used to make investments, and
releasing funds to the SPCs for appropriate and permitted purposes, including
payment of interest and principal to Noteholders and payment of appropriate fees.
58. Defendant BNYM served as the Trustee for MP I, II, IV and VI.
Defendant Wells Fargo served as the Trustee for MP III and V.
D. Under The Trustees’ Watch, MCH Misappropriates Investor Funds
1. Defendants Paid Medical Capital Millions in Undeserved
Administrative Fees
59. On July 16, 2009, the SEC commenced an enforcement action against
MCH, MCC, MP VI, Field and Lampariello (“SEC Defendants”), and detailed
various violations of securities laws based on months-long investigation of MCH
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and its affiliated entities, including the overpayment of unauthorized administrative
fees from accounts controlled by the Trustee BNYM.
60. As described in the complaint filed in the SEC Action (S.E.C. v.
Medical Capital Holdings, Inc., et al., Case No. SACV 09-0818 DOC (RNBx),
Dkt. No. 111) (“SEC Complaint”), while MCC was entitled to a fee for its
services, the PPMs highlighted, under the heading “Restrictions on Use of
Proceeds,” that the SPCs would not use “any proceeds from the sales of notes to
pay administrative fees to [MCC] for the services it provides as administrator” and
that such fees would rather be “paid out of amounts collected from the accounts
receivables and proceeds from other investments.” The PPMs further represented
that the SPCs believed that the administrative fees paid to MCC would be “no
greater than those an independent third-party would charge for providing similar
services.”
61. MCH and MCC did not use offering proceeds as represented in the
PPMs and, instead, misappropriated a substantial amount of the investors’ funds to
pay administrative fees to MCC. Indeed, according to the SEC’s complaint, as of
June 19, 2009, MP VI’s administrative fees exceeded its collections by
approximately $20.4 million, in direct contravention to its PPMs’ representations
that administrative fees would solely be “paid out of amounts collected from the
accounts receivable and proceeds from other investments.” These fees were
distributed by the Trustee – BNYM – from investor funds, even though lockbox
collections from medical accounts receivable plainly were insufficient to justify
any such payments.
62. According to the SEC, in a May 27, 2009 Supplemental PPM, MCH
and MCC further misrepresented that, “As of February 28, 2009, we have issued
notes in the face amount of $69,331,558.90. We have used $65,558,703.02 of the
proceeds to finance accounts receivable. We have applied $3,264,410.12 to
commissions and other expenses. The balance is on deposit in our trust account
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awaiting additional accounts receivable financing.” In fact, as of February 28,
2009, MCH and MCC had paid $21.7 million in administrative fees, which
exceeded MP VI’s collections by $18.6 million. In addition, according to the SEC,
MCH and MCC actually spent approximately $48.8 million on receivables, rather
than the $65.5 million represented in the Supplemental PPM. All told, MCH and
MCC took approximately 24% of the amount raised as administrative fees, far in
excess of the collections on receivables, in MP VI.
63. After the SEC Action was filed, the Court appointed a Receiver to
review the records of MCH and its affiliates. The Receiver traveled to the MCC
premises in Tustin, secured the premises and called a meeting of all MCC
employees. The Receiver and his counsel then took several steps to investigate
and secure the assets of the SPCs, including (1) interviewing former MCC
employees and counsel (Fazio and various outside counsel) regarding the
operations and assets of the SPCs, pending litigation and transactions, and the flow
of funds into and out of the companies; and (2) locating and reviewing
company documents pertaining to key non-receivable assets, pending litigation and
various transactions.
64. As a result of his investigation, the Receiver has filed reports with the
Court, including a Nineteenth Report filed on February 10, 2011, confirming
many of the SEC’s original allegations regarding MP VI, as well as a much wider-
scope of improprieties affecting MP II, III, IV and V, which had virtually identical
restrictions on administrative fees.
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65. According to the Receiver, MCC collected Administrator Fees in the
amount of $324.549 million from the various SPCs:
MP I 91,030,000
MP II 55,659,000
MP III 48,650,000
MP IV 56,565,000
MP V 48,030,000
MP VI 24,615,000
Total $324,549,000
The Receiver further prepared a breakdown of the Administrative Fees paid by
year, revealing that the vast majority of fees were paid at the beginning of each
SPC’s existence and well before significant medical accounts receivables had been
collected by the respective SPC. Thus, just as with MP VI described in the SEC
Complaint, it appears that the Trustees allowed other SPCs to pay exorbitant
administrative fees from investor funds, not from accounts receivable collections.
These fees were paid even though it was readily apparent that such payments
exceeded amounts paid into lockbox accounts used to collect accounts receivable
and were thus, facially improper. In the SEC Action filings, Field and Lampariello
acknowledge that fees were “specifically approved by the financial institution
trustees” – i.e., Defendants.
66. Defendants repeatedly disbursed payments for administrative fees
from investor funds despite knowing that the SPCs had not collected sufficient
proceeds from receivables and other investments to cover the requested fees.
Defendants knew precisely how much money had been collected on each SPC’s
receivables and other investments at any given time because, under § 5.08(b) of the
Agreements, the funds in each SPC’s Lockbox Account (which represented recent
collections on receivables and other investments) were transferred to the Trustees
at the end of each business day for deposit in the SPCs’ respective trust accounts.
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Thus, at all times during the existence of the SPCs, Defendants were fully aware of
the total amount of money that each SPC had collected from receivables and other
investments to date, and Defendants knew that MCC’s requests for administrative
fees were improper because each of the SPCs’ collections to date were insufficient
to pay such fees.
67. For example, according to the SEC, one of the SPCs, MP VI (which
had only started to raise investor funds in August 2008), had only collected $4.6
million from receivables and other investments as of June 19, 2009. Nevertheless,
defendant BNYM approved payments of $25 million in administrative fees to
MCC, or $20.4 million more than what MP VI had actually collected by that point.
68. Because the funds in the Lockbox Account for MP VI were
transferred to BNYM at the end of each business day, BNYM was well aware that
MP VI’s collections from receivables and other investments were grossly
insufficient to pay the requested administrative fees, and if BNYM was to pay the
requested fees, the money would have to come from investor funds. As discussed
above, the Receiver’s investigation confirms the SEC’s allegations concerning MP
VI, and shows that the same impropriety was occurring in each SPC.
69. According to the Receiver’s analysis, the vast majority of these
administrative fees were requested, and approved and disbursed by Defendants, at
the beginning of each SPC’s existence and well before the SPCs had collected
significant amounts of receivables. For example, although MP VI had only started
to raise investor funds and purchase receivables in August 2008, by December 31,
2008 – only four months later – BNYM had approved the payment of $18.4
million in administrative fees to MCC. Defendant BNYM knew that MP VI had
not been operating for a sufficient period of time to collect the $18.4 million that
was paid out to MCC as administrative fees; indeed, as discussed above, BNYM
knew exactly how much MP VI had collected at that point in time from its
knowledge of the amounts that were transferred from lockbox accounts to the MP
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VI trust account held by BNYM. Accordingly, BNYM knew that MCC’s
representations in support of its requests for fees from MP VI were false, and that,
if approved, a significant portion of the requested fees would have to come from
investor funds. But despite that knowledge, BNYM approved MCC’s requests and
paid the requested fees.
70. Similarly, although the note offering for MP V (and, therefore, MP
V’s purchase of receivables and other investments) had only just started in
November 2007, Defendant Wells Fargo paid a total of $6.35 million in
administrative fees to MCC by the end of 2007. Wells Fargo knew that two
months was an insufficient amount of time for MP V to collect $6.35 million from
receivables and other assets, and, in fact, Wells Fargo knew exactly how much
money MP V had collected by the end of 2007 from its knowledge of transfers
from lockbox accounts to the MP V trust account held by Wells Fargo.
Accordingly, Wells Fargo knew that MCC’s representations in support of its
requests for fees from MP V were false, and that a significant portion of the
requested fees had to come from investor funds. Despite that knowledge, Wells
Fargo approved MCC’s requests and paid the requested fees.
71. Because Defendants knew how much each SPC had collected in
receivables at any given point in time, based on the transfers from the lockbox
accounts to the trust accounts each business day, Defendants knew full well that
collections of receivables were insufficient to fund the payments of the requested
fees, so that the fees could have only been paid from investor funds. Defendants
paid out an egregious sum of $324 million in administrative fees to MCC, and
those fee requests were nevertheless always approved by Defendants without
question.
72. Defendants did not need to undertake any investigation, or seek
further information from MCC or MCH beyond that which Defendants already
possessed, in order to determine that MCC’s representations in its requests for fees
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were false, and the payment of those fees was therefore improper. Instead,
Defendants already knew – from the Lockbox Account transfers to Defendants that
occurred each business day – that the SPCs had not collected sufficient receivables
from which the requested fees could be paid. Defendants should have refused to
pay those fees from investor funds based on knowledge they already possessed,
even without further investigation into the falsity of MCC’s representations.
2. Defendants Failed To Ensure The Receipt of Conforming
Documentation Before Paying Administrative Fees
73. As described above, Medical Capital was purportedly in the business
of purchasing medical receivables and certain conforming healthcare-related
assets. The NISAs provided for two types of receivables: Eligible Receivables, as
defined, and other receivables purchased from Receivable Sellers. Further, the
NISAs provided for the purchase of “Non-Receivable Assets.” To protect
Noteholders and the trust monies, the NISAs strictly defined and regulated
transactions associated with any expenditure of funds. The defined terms required
the production of substantial documents from the SPCs in order to validate that
funds were being used for the proper purposes. Those documents included, but
were not limited to, certificates, special forms, opinions of counsel, annual and
quarterly reports, UCC filings, copies of promissory notes and other agreements,
NCCR Reports, compliance reports for MCC and MCH, valuation certificates,
statements, and other documents.
74. Despite these clear mandates, Defendants breached their duties under
the NISAs in at least three ways: (1) by failing to ensure documents conformed to
the requirements of the NISAs; (2) by failing entirely to ensure receipt of
documents; and (3) by simply ignoring patently obvious flaws and mistakes in the
documents.
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75. Approved Payors: The NISAs required certificates to be provided to
the Trustee that identified “Approved Payors,” as defined. On information and
belief, each Defendant failed to ensure that these certificates were provided as
required. Approved Payors are particularly important because only receivables
owed by Approved Payors are considered Eligible Receivables, as defined. As
described below, Eligible Receivables are included in the calculation of the NCCR.
Therefore, Approved Payors are the foundation of the entire system – and the
failure to obtain proper documentation of Approved Payors renders all other
reports and calculations worthless. Defendant Wells Fargo’s document production
reveals that Wells Fargo did not even maintain a list of Approved Payors or
supporting certificates or other documentation. On information and belief, nor did
Defendant BNYM.
76. Non-Receivable Assets: Defendants also failed to obtain proper
forms and certificates related to Non-Receivable Assets. Medical Capital’s
business was supposed to involve the purchase of healthcare receivables.
Nonetheless, the NISAs defined Non-Receivable Assets as those that would be
purchased “from time to time,” as long as they were “related to the healthcare
industry.” The NISAs further required the Trustees’ receipt of (1) certificates
identifying identification of Non-Receivable Assets in a particular form and (2)
certain defined “Purchase Documents” upon the acquisition of Non-Receivable
Assets. In violation of the NISAs, the Trustees did not receive these certificates in
the form required, and they did not ensure that the Purchase Documents were
received in the form required. Had they met their duties under the NISAs and
ensured receipt, they would have noticed that Medical Capital was purchasing non-
conforming and ineligible Non-Receivable Assets, such as those described herein
at ¶¶ 114-130.
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77. In fact, before Medical Capital received any funds to purchase any
Non-Receivable Assets, the NISAs required the Defendants to ensure receipt of
certain “Purchase Documents,” as defined, and an “opinion of counsel in form and
substance reasonably acceptable to the Trustee” that following acquisition of a
Non-Receivable Asset, the Trustee would have a perfected security interest in such
asset. On information and belief, for the vast majority, the Trustees did not obtain
such opinions of counsel as required by the NISAs. On information and belief, the
Trustees failed to obtain Purchase Documents for the majority of Non-Receivable
Assets, including assets from LaviPharm Laboratories, Robert Aquino, M.D.,
Capitol Health Management, Parkway Hospital, Concept 1 Academies, eMark
Advertising, Forefront Technologies, and Viva Vision, among others.
78. Examples of abuse of the designation, purchase and maintenance of
Non-Receivable Assets can be found with regards to Trace Life Sciences
(“Trace”), a nuclear medicine provider with its own reactor at its facility in Texas.
MP III disbursed multiple sets of funds to Trace even after it was apparently
unprofitable, so that Trace could continue to make payments on the loan, and
thereby, MP III could avoid an Event of Default. Trace is listed in the December
31, 2007 NCCR Report with a medical receivables amount of $152,439.44. By
April 2009, MCC was reporting that Trace owed over $50 million on the Loan as a
Non-Receivable Asset (the “Trace Loan”). There was even litigation involving
Trace in September 2008 – an officer was ousted, resulting in threats of sabotage
and subsequent litigation to obtain a restraining order. See Exh. 2, attached hereto.
In court filings, MP III admitted to making loans totaling over $27 million since
2006. See Exh. 3, attached hereto. In fact, Trace and MP III even engaged in a
contemporaneous interest payment/draw on the Trace Loan of $785,552.40/
$785,339.03 on May 8, 2008, contemporaneous with numerous other red flags
apparent in the MP III account.
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79. Of course, the situation with Trace could have been avoided entirely if
Defendant Wells Fargo, the Trustee overseeing the Trace Loan, had properly
obtained the Purchase Documents and certifications required under the NISAs to
verify the Trace asset at the inception of the MCC/Trace relationship. On
information and belief, Wells Fargo did not obtain conforming Purchase
Documents.
80. NCCR Reports: As described at ¶¶ 48-50, § 3.05(h) of the NISAs
required MCC to provide the Trustees with a particular type of report, known as a
“Net Collateral Coverage Ratio” report (“NCCR Report”). The NCCR Report,
with supporting documentation, was required in a particular form, and it was
incorporated by reference in other forms and certifications required under the
NISAs. MCC was supposed to use a formula derived by adding together the value
of all assets (including Eligible Receivables (as defined, and relying on receivables
from Approved Payors), Non-Receivable Assets (as defined), the Trustee Accounts
and any amounts in Lockbox Accounts in transit to the Trustee Accounts) divided
by various liabilities (including the balance of notes payable issued, the next
interest payments due, and bank fees) on the other. As long as the resulting ratio
was over 100%, the SPC was not in default. Further, MCC was entitled to the
difference between the assets and liabilities as an Administrative Fee.
81. In violation of the NISAs, the NCCR Reports did not conform to form
as required. Just one example is instructive: from at least July 2005 to February
2008, the NCCR Reports for MP III contained a line item entitled “Less Amount of
Principal Due Within 30 Days,” which was not part of the required formula. Cf.
Exh. 4 with Exh. 5, attached hereto. This line item reduced the liabilities owed,
thus increasing the collateral ratio, and increasing the amount of Administrative
Fees paid to MCC. Despite the use on the face of the Report of an incorrect
formula to determine the amount of Administrative Fees, the Trustees improperly
approved the payment of Administrative Fees.
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82. In addition, other forms and certifications required under the
NISAs and incorporated by reference in the NCCR Reports were missing entirely.
For example, the amount of Eligible Receivables was used as part of the ratio to
determine the amount of Administrative Fees. The NISAs required Eligible
Receivables to be supported by a form and a certificate to the Trustees. These
forms and certificates were not provided for all Eligible Receivables. Those that
were provided, were not provided in the form required. Therefore, the Trustee
breached its duties under the NISAs in releasing Administrative Fees.
83. Further, Eligible Receivables were defined as those that an “Approved
Payor” was obligated to pay. As described above, under the definition of
“Approved Payor,” the NISAs required further certificates to be provided to the
Trustee that identified such payors, but these certificates were not provided as
required. Therefore, for those forms and certificates for Eligible Receivables that
were received, many payors were listed that were not, in fact, Approved Payors as
required. On information and belief, the Trustees did not even maintain a list of all
approved payors.
84. UCC-1 Financing Statements: The NISAs further required
Defendants to ensure receipt of UCC-1 financing statements related to trust assets.
The UCC-1 financing statements were required to document the Trustees’
purported security interest in trust assets. Section 3.05(g) of the Agreements
required Medical Capital to provide Defendants with collateral schedule that set
forth information concerning the UCC-1 financing statements showing
Defendants’ security interest in collateral held by the SPCs. The collateral
schedules did not contain the required UCC-1 financing statement information for
the collateral listed on the schedules.
85. As discussed above, the Receiver has now found that there were no
active UCC-1 filings for 53 of Medical Capital’s 104 accounts, and there were no
collections or advances on those accounts for many years. These 53 accounts
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represented $542 million of the $625 million in total receivables that was
purportedly held by the SPCs as of March 31, 2009. At least one NISA (for MP II)
required the Trustee to file UCC-1 financing statements upon acquiring knowledge
that they were missing. Because these UCC-1 financing statements did not exist,
the collateral reports and other documents required by the NISAs and provided by
Medical Capital to Defendants could not possibly have identified the UCC-1
information required by § 3.05(g), and therefore, the reports did not conform to the
stated requirements of the Agreements. By accepting those defective collateral
reports, and by disbursing fees to MCC on the basis of those defective reports,
Defendants breached the explicit requirements of § 5.06(a)(ii) to the detriment of
the Noteholders.
86. Nonetheless, and in clear violation of the NISAs, Defendants
proceeded to improperly approve all requests for Administrative Fees. In
approving these payments, Defendants claim that they relied “conclusively” on the
collateral reports submitted by MCC that supposedly supported its request for
administrative fees. However, the NISAs specify that the Trustees cannot rely
“conclusively” on forms and certifications that do not conform to the requirements
of the NISAs, including those forms and certifications related to NCCR Reports,
Eligible Receivables, Non-Receivable Assets, UCC-1 statements, and others.
87. Eligible Receivables: According to Medical Capital’s Receiver, the
valuations of collateral in the NCCR Reports were falsely inflated because the
valuations included receivables that were aged over 180 days. An Eligible
Receivable, however, is defined as one that is not aged over 180 days. Under the
terms of the NISAs, the Trustees were supposed to ensure their receipt of
certificates containing information about the Eligible Receivables, including the
date of purchase. As described above, these certificates were not provided for all
Eligible Receivables. Therefore, the Trustees breached their duties in relying on
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the stated collateral values on the NCCR Reports when they failed to obtain the
documents required under the NISAs.
88. Of course, the reason for requiring this information was to prevent
just the type of fraud that occurred. According to the Receiver, the accounts
receivable held by the SPCs as of March 31, 2009 had a total stated value of
approximately $625 million. Through his investigation, the Receiver has found
that while the $625 million in receivables purportedly held by the SPCs were
attributable to 104 accounts, most of those accounts either did not exist or did not
support the amounts of collateral that Medical Capital attributed to them.
89. Of those 104 accounts, only 42 could be verified, representing just
$80 million of the purported $625 million total. Of those 42 verified accounts,
only 6 contained receivables that were under 180 days old (and therefore, which
could be counted in the NCCR Reports), representing only $6 million of the
amounts owed. The remaining verified accounts, representing $74 million of
receivables, were older than 180 days (and therefore could not be counted in the
NCCR Reports), with the vast majority of receivables purchased between 2002 and
2006 and just two accounts showing receivables purchased in 2008.
90. Receivable Acquisition Certificates: The NISAs provided for the
withdrawal of trust funds for the purchase of “Eligible Receivables, Non-
Receivable Assets, or both,” provided that Defendants received a particular
certification known as a “Receivable Acquisition Certificate” with supporting
documents incorporated therein. Part of the supporting documents submitted with
these Receivable Acquisition Certificates included a list of all the allegedly
“Eligible Receivables.” Even a cursory review reveals the patently obvious nature
of MCC’s fraud. In one example, a Receivable Acquisition Certificate submitted
for MP V on April 17, 2009 reveals that MCC requested money to purchase
receivables for “Charity,” “Rebill” (many of which were designated as “Claim
Marked Ineligible”), “Private Pay”, and Ricoh Business Solutions, among others.
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See Exh. 6, attached hereto. None of these receivables were Eligible Receivables,
and none of them were owed by Approved Payors. Defendant Wells Fargo signed
off on the withdrawal of noteholder funds based on these obviously fraudulent
documents even as it knew that Medical Capital’s other SPCs were in default.
3. Defendants’ Own Policies Required Them to Review and Track
Medical Capital’s Business Practices
91. Separate and apart from the NISAs, Plaintiffs allege on information
and belief that Defendants’ own internal policies required them to perform due
diligence on a regular basis to ensure that this type of situation did not occur. For
example, on information and belief, Defendants’ policies, and the common practice
of corporate trustees, required Defendants to set up “tickler” systems to help them
track the business practices of Medical Capital. The tracking system monitored the
due dates for (1) the age of receivables; (2) when principal and interest was due
and payable to Noteholders; and (3) when reports, certificates, and statements were
due to the Trustees. These due dates were imposed by the NISAs.
92. Defendants’ tickler systems were automated so that Defendants’
employees were alerted to the relevant dates and could ensure that Medical Capital
complied with the NISAs. Defendants ignored the tickler system and did not
enforce the terms of the NISA and request the appropriate documents from
Medical Capital, in some cases letting many months elapse before they took
appropriate action. One example from MP V is illustrative. On January 15, 2008,
Medical Capital was required to provide the Trustee with certain items for MP V,
including (1) a Fourth Quarter 2007 schedule of all collateral and related UCC-1
filings, and (2) the NCCR Report for December 2007. Although Defendant Wells
Fargo knew that the items were due that day, its tickler system reflects that it did
not ensure that items were received until July 11, 2008 and March 28, 2008,
respectively – months after the items were originally due. See Exh. 7, attached
hereto. Communication received from Wells Fargo indicates that it did not
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actually receive the UCC schedule until July 22, 2008. See Exh. 8, attached
hereto.
93. Of course, had Defendants been requesting and ensuring timely
receipt of the documents required by the NISAs, and tracking the information
regarding the age of the receivables, their own internal systems would have
revealed the Medical Capital fraud. Defendants were not only negligent in not
following their own internal policies, but their own systems provided them with
actual knowledge.
94. Defendants’ own policies also required them to conduct due diligence
and thoroughly investigate new corporate trust clients, due to the prevalence of
money laundering and other problems that Defendants, like all financial
institutions, have historically experienced. Sidney M. Field, the CEO and a
director of MCH and its affiliates, was sued for civil racketeering and fraud in
connection with sham transactions and other deceptive practices arising out of his
ownership of a California auto insurance company. As a result of those suits, Field
ultimately had his insurance license revoked and the company was liquidated by a
bankruptcy trustee. Defendants should have been aware of Field’s troubling
history from the due diligence they should have performed when retained as
trustees. Indeed, according to its own marketing materials, Defendant BNYM
actively conducts background research on prospective clients and on active clients
on an ongoing basis. Awareness of Field’s past history should have caused
Defendants to view instructions from MCH and its affiliates with heightened
skepticism, and their failure to do so evidences their bad faith.
95. The limited document production that Plaintiffs have received
describes some of Defendants’ internal policies. Defendants’ internal policies (at
least those that have been produced to date) provide extensive detail and guidance
for the activities they are supposed to be undertaking with regards to their
corporate trust clients. Many of these policies were not followed.
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4. Defendants Improperly and Negligently Relied On Inflated
Collateral Reports
96. Section 5.08(a)(ii)(F) of the Agreements only allows the Trustees to
disburse funds “[to pay the Administrative Fee if permitted by § 3.05(h)”, and §
3.05(h) sets forth the certifications that MCC was required to provide to
Defendants in support of its fee requests. If Defendants knew that those
certifications were false, they were prohibited under § 5.06(a)(ii) from relying on
those certifications, and in the absence of reliable certifications from the
administrator, Defendants were required to refuse payment of those fees.
However, Defendants breached the terms of the Agreements by disbursing funds
to MCC in payment of administrative fees in bad faith and despite their awareness
that the certifications submitted in support of those fee requests were false.
97. As already determined by the SEC and the Receiver, the NCCR
Reports set forth in the certifications provided to Defendants were significantly
inflated. Collateral reports submitted to Defendants to justify payments of
administrative fees, on their face, openly and notoriously inflated the value of SPC
assets, including the inclusion of assets that were incapable of valuation, assets
valued far in excess of their market value, medical accounts receivable that had
been sold at false valuations between various SPC accounts managed by
Defendants, and medical accounts receivable from accounts that were obviously
inflated and, in the majority of cases, no longer even exist.
98. The SEC’s complaint provides examples of specific instances in
September 2008 where Defendants rubber-stamped the payment of administrative
fees to MCC based on obviously false certifications. For example, MCC requested
$7.85 million in administrative fees from MP VI based on a certification which
stated that MP VI had collateral (receivables, other assets and cash) totaling $24.9
million against liabilities of $18.0 million. See SEC Complaint at ¶ 52. However,
MCC’s calculation of collateral was falsely overstated by $18.5 million –
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approximately 75% – through the inclusion of fake and vastly overvalued
receivables. If Defendants had not willingly ignored MCC’s blatant fraud but had
instead challenged the accuracy of MCC’s certification, not only would MCC not
have been entitled to any administrative fees, but it would have revealed that MP
VI was actually in default.
99. The following chart shows other examples of false calculations of
collateral used by MCC, and accepted without question by the Defendants, to
obtain millions of dollars of administrative fees in September 2008:
See SEC Complaint at ¶ 53.
100. One reason that those certifications were false was because they
included falsely inflated collateral values of receivables that had been sold from
one SPC to another. As discussed at ¶¶ 132-143, and as set forth in detail in the
SEC’s complaint, Defendants executed numerous sales of falsely inflated, aged
and worthless receivables between SPCs, at Defendants’ instructions, and those
inter-SPC transactions were used to further Medical Capital’s Ponzi scheme. The
falsely inflated valuations of those fake, overstated and/or aged receivables were
also fraudulently included in collateral reports submitted to Defendants as support
for the payment of undeserved administrative fees to MCC.
101. The Receiver’s investigation has uncovered numerous instances
where the same batch of receivables was sold and re-sold numerous times, over
SPC Claimed
Assets
Claimed
Liabilities
Actual Assets Actual NCCR
MP IV
series 1
$257 million
$250 million
$128 million 51%
MP IV
series 2
$172 million
$153 million
$73.7 million 47.5%
MP V $417 million $405 million $94.8 million 21%
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periods much longer than 180 days, and despite the advanced age of those
receivables, the prices, and their associated collateral values, increased rather than
decreased over time. Medical Capital included the inflated valuations of those re-
sold assets on the reports they submitted to Defendants, and which Defendants
accepted without question. For example, between February and April 2004, MP I
acquired receivables associated with healthcare provider Advanced Radiology for
$14.96 million. In July 2007, despite the fact that MP I did not receive any
payments from those receivables, and did not purchase any additional Advanced
Radiology receivables, MP I sold those same receivables to MP VI for $18.55
million – an increase in value of nearly $3.6 million, despite the substantially
increased age of those receivables. In October 2008, MP IV turned around and
sold that same batch of receivables to MP VI for $20.59 million – another increase
of over $2 million, despite the fact that those receivables were now over four years
old (and, for all practical purposes, entirely uncollectible). See AMD. 10 Day
Receiver Report at 23-24. Defendant BNYM was the trustee for each of MP I, MP
IV and MP VI at all relevant times, and in that role, BNYM executed each of those
highly suspect sales of Advanced Radiology receivables from one SPC to another,
at ever-increasing prices, despite the fact that those prices were obviously falsely
inflated.
102. Defendants knew that the collateral values set forth in Medical
Capital’s certifications were fraudulently inflated and included aged batches of
receivables because Defendants had themselves disbursed the funds for Medical
Capital’s repeated sales and re-sales of those batches of receivables between SPCs
at falsely inflated prices. Those repeated sales of receivables between SPCs were
inherently suspicious and put Defendants on notice of Medical Capital’s
misconduct. More specifically, because Defendants knew that certain batches of
receivables were sold and re-sold multiple times over periods longer than 180 days
at constantly increasing prices (and valuations), Defendants were aware that the
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collateral values of those receivables were falsely inflated. Thus, Defendants paid
hundreds of millions of dollars in administrative fees despite their knowledge that
the collateral reports used to support the fee requests were false and unreliable.
103. However, the accounts receivable that were sold between SPCs were
not the only assets that were falsely valued on the certifications. According to the
Receiver’s investigation, the overwhelming majority of the receivables that were
held by the SPCs were greatly overvalued, aged, worthless or simply do not exist.
Those receivables were included at falsely inflated valuations on the certifications
submitted in support of requests for administrative fees, and despite the falsity of
those certifications, the Trustees approved those requests and paid the requested
fees without question. Indeed, as Mr. Lampariello testified to the S.E.C., the
Trustees never questioned the existence or valuations of any of the receivables
alleged to have been purchased. See Declaration of Nicholas S. Chung (Dkt No. 6
in the SEC Action), Exh. 1 at p. 40.
104. As noted above, the operation of each SPC was governed by, among
other contracts, a NISA between the SPC and the Trustee. Pursuant to the NISA
and Administrative Services Agreements, MCC could request payment of an
Administrative Fee by providing a written certification by the SPC (prepared by
MCC as Administrator) to the Trustee. The certification included the calculation
of the Net Collateral Coverage Ratio, which was supposed to be derived by adding
together the value of all cash, eligible receivables and collateral, then dividing that
number by the amounts payable under the NISA and Notes issued thereunder
(principal due at maturity and interest then due to Noteholders). In valuing
collateral, accounts receivable were only “eligible” to be included if they were
purchased within 180 days of the date the claim was submitted to the payor.
Additionally, loans made by SPCs had to be valued using the lesser of the principal
and interest due from the borrower or the value of the property securing them. If
the Net Collateral Coverage Ratio was greater than 100% (i.e., the stated value of
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the assets exceeded the current liabilities), MCC took the position with the Trustee
that it could request an Administrative Fee in an amount up to the entire balance in
the account above and beyond that necessary to maintain the 100% ratio.
105. According to its agreements and disclosures, the SPCs (through MCC
as administrator) were to have all real and personal property securing loans and
investments appraised at least once a year by an independent appraiser. The SPC
was to then certify each year that the required valuations had been completed.
Each certification of the Net Collateral Coverage Ratio was to be based on the
most recent valuations. Thus, MCC was only entitled to an Administrative Fee if,
based on recent independent valuations, the Net Collateral Ratio was at least
100%, and only if such fees could be payable from valid and collected accounts
receivable.
106. As of March 31, 2009, MCC, as administrator of the SPCs, controlled
receivables, loans, or investments owned by the SPCs with a purported total value
of over $1.2 billion.
107. Despite raising about $2.2 billion from investors and controlling over
$1 billion in purported assets, MCH and MCC did not keep the SPCs’ financial
statements in accordance with GAAP or even keep their accounting records in a
manner that would allow GAAP financial statements to be generated. For
example, according to the Receiver, at the time they purchased a batch of
receivables, the SPCs recorded as revenue the amount that expected collections
exceed the purchase price and never reconciled actual collections with expected
collections.
108. Further, while the Receiver’s most recent Report indicates that the
medical accounts receivable were attributed to just 104 accounts, most of these
accounts either did not exist or did not support the collateral values assigned to
them. According to the Receiver, the 104 accounts total about $625 million.
However, of those 104 accounts, only 42 could be verified, representing just $80
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million of the total. Of the 42 verified accounts, just six contained accounts
receivable aged under 180 days, representing $6 million of the amounts owed. The
remaining verified accounts, representing $74 million of debt, were aged more
than 180 days (with the vast majority purchased between 2002 and 2006 and just
two accounts showing receivables purchased in 2008).
109. Even more troubling, 53 of the 104 accounts – representing $542
million of the $625 million total medical accounts receivable – could not be
verified at all, i.e., they “no longer exist.” The Receiver further found that there
were no MediTrak reports to support such accounts and, instead, that the MediTrak
reports either indicate that the accounts were closed or did not list the accounts at
all. The Receiver found that there were no active UCC-1 filings for the accounts
and that there were no collections or advances on the accounts for years. The
Trustees willfully and/or recklessly ignored all of this information and approved
fees without question.
110. The same overstatement of collateral values occurred with respect to
non-medical receivables assets, which were consistently and grossly overstated in
MCC’s reports to the Trustee Defendants. For example, a substantial acquisition
loan was listed at the amount of its outstanding balance despite the fact that the
lendee could only make interest payments by drawing down on its letter of credit
extended by an MCC affiliate. MCC listed the entire balance due on other loans
after foreclosure on the collateral, rather than the post-foreclosure value of the
assets confirmed by appraisals. With the Trustee Defendants unwilling to consider
or challenge such clear evidence and, instead, merely rubber stamping their
requests for fees, MCC continued to seek and obtain administrative fees based on
the submission of such inflated collateral reports.
111. Of course, the Trustees had full power and discretion to require
further verification. The Trustees were specifically provided the right to require
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the “Debtor” to provide a confirming opinion of independent counsel that all
conditions were satisfied. In the exercise of their fiduciary and contractual duties,
the Trustees should have insisted upon such confirming opinions of independent
counsel and other additional information.
112. The Trustees also could rely only on documents that it “reasonably”
believed to be genuine. These provisions, and others, essentially created a duty on
the part of the Trustees to request and review the information provided to them
with reasonable care and professional skepticism, and not merely to rubber stamp
requests for disbursements.
113. Indeed, while acting as a Trustee for SPCs, The Bank of New York
Trust Company, N.A. (“BNYTC”) was in the heat of major litigation with
noteholder investors of another California-based medical receivables company,
DynaCorp Financial Services, relating to its role as a trustee. According to
plaintiffs in the case, BNYTC allowed company insiders to improperly commingle
investor funds between various trusts and operate a Ponzi scheme. In 2005, a jury
found that BNYTC breached its agreement and acted with gross negligence,
returning a verdict of $15.7 million. In January 2008, the Court of Appeal
affirmed the trial court’s order granting a new trial and denying both plaintiffs and
BNYTC’s respective motions for judgment notwithstanding the verdict.
114. In recent correspondence sent to Noteholders, the Trustee Defendants
have highlighted their efforts – in 2009 – to monitor the SPCs’ accounts
receivable, including the engagement of third parties to value collateral.
Defendants have further noted their refusal to honor requests by MCC to release
funds from trust accounts to pay for accounts receivable due to MCC’s failure to
provide sufficient information to make a reasonable determination about whether
the funds would be paid back. Defendants don’t explain their failure to take action
prior to 2009.
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5. Defendants Improperly Disbursed Funds for the Purchase of
Plainly Impermissible Assets
115. Defendants breached their duties under the Agreements by improperly
disbursing Trust funds for the purchase of assets which were plainly and obviously
impermissible uses of funds under the express terms of the Agreements.
According to the Agreements, MCH was supposed to use the proceeds from the
sale of the Notes to purchase healthcare related accounts receivables at a discount
and make investments in other healthcare related assets. Defendants were required
to, among other things, obtain certain documentation prior to disbursing of funds,
and disburse funds only for the purchase of healthcare-related assets as provided
under the Agreements.
116. However, Defendants disbursed trust funds for the purchase of
numerous unpermitted assets, despite the obvious fact that these investments were
entirely unrelated to the healthcare industry. It would have been clear on the face
of the documentation submitted to the Trustees by Medical Capital that these assets
were non-healthcare-related and were thus unpermitted.
117. The Agreements strictly limited the types of assets that could be
purchased by Medical Capital to either: (1) healthcare related accounts
receivables; or (2) any “stock, debt instruments and other tangible and intangible
assets, moneys, rights, and properties related to the healthcare industry.”
Agreements at Article I (“Definitions”); see also § 5.08(a)(ii)(E). On the
“Acquired Assets” schedule that accompanied the certificate Medical Capital
submitted to the Trustees to request disbursement of funds, Medical Capital was
required to “specify the type of Non-Receivable Asset” it sought to acquire. See
Agreements at § 5.08(a)(ii)(E), Exhibit A-2 (“Non-Receivable Asset Acquisition
Certificate”) and Schedule A to Exhibit A-2 (“Acquired Assets” schedule).
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118. Despite the clear mandate of the Agreements, Defendants nonetheless
approved the disbursement of funds for the purchase of non-healthcare related
assets, pursuant to certificates that were, on their face, in violation of the
Agreements, including: an “investment” in a company that owns the rights to a
film about little-league baseball players; “investments” in companies whose
primary business is marketing content and/or ringtones for mobile phone
applications, including marketing for a live video stream of a hamster in a cage;
and a loan to an internet advertising company that specializes in pornographic
website advertising and spam email services:
a. The Perfect Game, LLC
119. The Perfect Game, LLC (“TPG”) is a Nevada limited liability
corporation whose primary asset is the rights to a film entitled The Perfect Game.
The Perfect Game is about a Little League team from Mexico that won the Little
League World Series in 1957. MP IV owns a 40% interest in TPG and also made
loans to TPG of over $18 million. MCH holds 75% of the voting rights in TPG.
TPG formed High Road Entertainment Group, LLC (“High Road”) to produce the
film. MP IV owns a controlling interest in High Road.
120. According to the Receiver, the film was released in the United States
and Canada in April 2010, but “[b]ox office receipts did not meet projections and
the Receiver does not expect a return from the theatrical sales of the film.”
b. Viva Vision, Inc.
121. Viva Vision, Inc. (“VVI”) is a California corporation whose primary
business is marketing content for mobile phone applications. According to the
Receiver’s interview of Fazio, the initial content being marketed by VVI was a live
video feed of a hamster in a cage, though Field and Lampariello now claim it has
significant potential. It appears that MCH and/or MP III.2 purchased stock in VVI
over time, beginning in November of 2005, for a total purchase price of $12.0
million, and that MCH and/or MPIII.2 now own 99.4% of the company. VVI was
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also provided with a line of credit, and currently owes $7.2 million in loans to
Medical Capital entities. As of June 30, 2009, MCC listed as collateral for MP
III.2 “Non AR Purchase” owed by “Vivavision” in the amount of approximately
$6.9 million.
122. On July 30, 2010, the Court approved the sale of the VVI stock held
by MP III.2 for $1.25 million – $10.75 less than MCH and/or MP III.2 paid for the
stock. According to the Receiver, VVI “is not financially capable of repaying the
loan from Medical Capital.”
c. Single Touch Interactive, Inc.
123. Single Touch Interactive, Inc. (“STI”) is a Nevada corporation whose
primary business is providing mobile phone applications such as “shortcuts”
dialing and ringtones. According to the Receiver, loans were apparently made to
STI and its former majority shareholder, Anthony Macaluso, that were secured by
25 million shares of STI. Fazio also told the Receiver that this account was
handled personally by Lampariello and that, after loan defaults occurred, there was
a consensual foreclosure on the STI shares.
124. As of June 30, 2009, MCC listed as collateral for MP IV.1 under “All
Other Receivables, Supporting Receivables” an amount owed by STI of
approximately $5.4 million, and listed a “Non AR Purchase” owed by Macaluso in
the amount of approximately $10.5 million.
d. E Mark
125. According to the Receiver’s latest Report, MP III made a loan to E
Mark, an internet advertising company. The OCWeekly, in an article entitled,
SEC Investigation of Medical Lender Sets Sail for a Party Yacht, reported that E
Mark specializes in pornographic website advertising. OCWeekly also
interviewed a former MCH executive who reportedly stated that the E Mark
account was “untouchable” and that there was no documentation for underwriting
the loan. According to the Receiver’s latest report, he has found evidence that
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Medical Capital was allowing payments on this loan to be made “to an account not
controlled by Medical Capital,” and the Receiver’s investigation into this asset is
ongoing.
e. Pyramid Technologies, Inc.
126. According to the Receiver’s latest Report, MP IV made a loan to
Pyramid Technologies, Inc., a company that supplies liquid filtration products, on
information and belief. The loan is currently in default and there is an outstanding
principal balance of approximately $14 million.
f. Mail.com Media Corporation
127. According to the Receiver’s latest Report, MP III made a loan to this
entity (formerly known as Velocity Services, Inc.), a leading publisher and digital
media company that owns properties such as OnCars.com, Deadline.com,
HollywoodLife.com, Movieline.com, BGR.com, YHAwards.com, HollyBaby.com,
Fan.com, India.com and others, that had an outstanding principal balance of $15
million. The Receiver agreed to a discounted payoff of this loan, and the Court
approved the transaction.
128. These investments were plainly and obviously unrelated to the
healthcare industry, and Defendants should have been aware of that fact. None of
these assets were healthcare related, and all of these purchases were in direct
breach of the Agreements. Indeed, looking at the forms for disbursing such funds
– which required Medical Capital to “specify the type of Non-Receivable Asset” it
sought to acquire – it should have been clear on their face that Medical Capital was
seeking to purchase non-healthcare-related assets. In light of the obvious non-
healthcare-related nature of the assets in question, the Certificates could not
have set forth any explanation of these assets which Defendants could have
accepted as falling within the definition of “Non-Receivable Assets.”
129. Accordingly, Defendants knew the SPCs were not permitted under the
Agreements to purchase these non-healthcare-related assets, and Defendants were
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not permitted to assist Medical Capital’s purchase of those assets. However,
Defendants nevertheless dispersed funds for the assets in clear violation of the
Agreements.
130. Further, although Defendants were presented with Non-Receivable
Asset Acquisition Certificates for the purchase of assets plainly unrelated to the
healthcare industry, Defendants’ failure to question those instructions or seek an
opinion of counsel demonstrates their bad faith. The Agreements contain
provisions which expressly permit Defendants to demand additional assurances
from Medical Capital, including “an opinion of counsel reasonably acceptable to
the Trustee,” that the representations provided in Medical Capital’s instructions to
Defendants were truthful and accurate. See §§ 3.07(a), 9.04 (except MP III & MP
IV § 10.04). Defendants’ refusal to exercise the authority to seek additional
information from Medical Capital to verify the accuracy (or confirm the falsity) of
Medical Capital’s instructions supports the conclusion that Defendants performed
their contractual duties in bad faith.
131. The Receiver’s reports show that many of these unpermitted assets are
now worth significantly less than their original cost, demonstrating that the
Noteholders were harmed by Defendants’ purchase of these unpermitted assets.
See generally Receiver’s Fourteenth Report to the Court (Dkt. No. 375 in the SEC
Action) (“Fourteenth Receiver’s Report”).
6. Defendants Knowingly Executed Fraudulent Sales of Receivables
Between SPCs
132. According to the Receiver and the SEC, Medical Capital’s records
indicate that the Trustees regularly effected the sale of fake, overstated and/or aged
accounts receivable from older SPCs to newer SPCs, at Medical Capital’s
instructions, so that the older SPCs would have cash to (a) pay principal and
interest to investors, and (b) pay administrative fees to MCC. This Ponzi-like
scheme allowed Medical Capital to use new investor funds (invested in the newer
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SPCs) to conceal the fact that the older SPCs did not have sufficient assets to pay
out principal and interest owed to investors, and to pay administrative fees to
MCC.
133. According to the SEC, the numerous sales of fake and overvalued
receivables between SPCs amounted to a Ponzi scheme whereby Medical Capital
siphoned off millions of dollars in newly invested funds and funneled them to other
SPCs to pay to investors. See First Amended Complaint (Dkt. No. 111 in the SEC
Action) at 3 (“Field, Lampariello, and MCC orchestrated intercompany transfers of
new investor funds to earlier offerings, through the sale of fake, overstated and/or
aged and worthless receivables, to make those new investor funds available to pay
principal and interest to investors in prior offerings, as well as to pay
administrative fees to MCC.”).
134. The scheme enabled the Trusts to continue meeting their payment
obligations to existing investors while artificially postponing the day of reckoning
for all of the SPCs. The Receiver, who has identified 301 such sales between
SPCs, has found that “Medical Capital transferred loans and other assets
purportedly valued at just under $1 billion between the eight money raising
[SPCs], which facilitated the payment of earlier investors’ principal from new
investors’ funds.” See Fourteenth Receiver’s Report at 7.
135. In light of the pattern of these repeated sales of fake and overstated
receivables between SPCs, which usually occurred at extremely suspicious times
(i.e., when the older SPCs desperately needed cash to make payments of principal
and interest to investors), as well as other highly suspicious aspects of these
transactions, the Trustees knew or purposely turned a blind eye to the fact that
Medical Capital was using these sales to perpetuate its Ponzi scheme to maintain
the false appearance that the older SPCs were in sound financial condition.
136. Because Defendants controlled the funds in the trust accounts for each
SPC, Defendants were involved in the execution of each of these sham sales of
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receivables between SPCs. The perpetration of this Ponzi-like scheme would not
have been possible had BNYM and Wells Fargo honored their obligations under
the Agreements and rejected the facially improper requests to transfer receivables
between SPCs. Defendants would have been aware that Medical Capital was using
these sales of receivables between SPCs to facilitate its fraudulent scheme based,
among other things, on (a) the suspicious timing between the sales of receivables
and Medical Capital’s payments of principal and interest to investors, and (b) the
increasing overvaluation of the same batches of receivables as they were sold from
one SPC to another. Had Defendants not acted in bad faith, but instead refused to
execute Medical Capital’s obviously fraudulent instructions, the older SPCs would
have been unable to meet their payment obligations, which would have triggered
Defendants’ heightened post-default duties to act for the benefit of Noteholders.
137. In its Complaint, the SEC sets forth details concerning sales between
SPCs and payments to Noteholders, and the close timing between (I) the SPCs’
receipt of cash from sales of overvalued receivables to other SPCs, and (ii) the
SPCs’ payments of principal and interest to investors, which support an inference
of Defendants’ actual knowledge that those intercompany sales were being used to
prop up Medical Capital’s Ponzi scheme. See SEC Complaint at ¶¶ 30-31.
138. For example, according to the SEC, of the $76.9 million that was
raised from investors by MP VI between August 2008 and June 19, 2009, over 54
percent (approximately $41.7 million) of those funds were used to purchase
overvalued, aged and/or worthless receivables from prior offerings. SEC
Complaint at ¶ 30. In contrast, according to the Receiver, only 12 percent
(approximately $9.3 million) of those investor funds were used by MP VI to
purchase new receivables and other assets, while approximately 32 percent ($24.6
million) of those funds were paid to MCC in administrative fees. See Amended 10
Day Report and Accounting of Receiver (Dkt. No. 40 in the SEC Action) at 12
(“AMD. 10 Day Receiver’s Report”).
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139. In fact, the SEC explains that, in September 2008 alone, over $16
million in investor funds were transferred from MP VI to older SPCs, through
sham sales of receivables, so that those older SPCs could meet their payment
obligations to investors. MP VI first began raising funds from investors in August
2008. Only one month after MP VI began raising funds from investors, Medical
Capital used over $16 million of those newly invested funds to cause MP VI to
purchase receivables at inflated prices from older SPCs:
● MP VI paid $2 million of newly invested funds to MP II, and MP II
paid over $5.4 million in redemptions and $1.48 million in interest to investors in
that same month;
● MP VI paid $5.7 million of newly invested funds to MP III series 1,
which paid over $7.8 million in redemptions and $700,000 in interest to investors
in that same month;
● MP VI paid $2.3 million of newly invested funds to MP III series 2,
which paid over $3.5 million in redemptions and $680,000 in interest to investors
in that same month; and
● MP VI paid over $4.1 million of newly invested funds to MP IV series
1, which paid $3.825 million in administrative fees to MCC in that same month.
● MP VI (together with MP V) paid over $3.2 million of newly-invested
funds to MP IV series 2, which in turn paid $1.9 million in administrative fees to
MCC.
SEC Complaint at ¶¶ 31-32. Defendants knew or deliberately ignored the
fact that Medical Capital essentially stole these funds from MP VI – which had
been raised from investors only one month earlier – and gave them to older SPCs
in exchange for overvalued, aged and/or worthless receivables so that Medical
Capital could avoid defaulting on the payment obligations of those older SPCs.
Moreover, a detailed schedule of inter-SPC transactions filed by the Receiver
shows that Defendants effected MP VI’s purchase of tens of millions of dollars in
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falsely overvalued receivables from older SPCs in August 2008 – the very same
month that Medical Capital began raising funds from the Noteholders for MP VI.
See AMD. 10 Day Receiver’s Report at its Exh. 2.
140. Even more remarkably, despite its knowledge that MP II was in
default on its payment obligations in August 2008, Defendant BNYM (which
served as the trustee for both MP II and MP VI) effected the sale of receivables
from MP II to MP VI in September 2008 – only one month after MP II’s default –
in exchange for $2 million of MP VI’s new investor funds. According to the SEC,
since August 2008, MP II had defaulted on over $44 million in payments of
principal and interest. See SEC Complaint at ¶ 34. However, as discussed above,
BNYM, at Medical Capital’s instruction, effected the sale of overvalued, aged
and/or worthless receivables from MP II to MP VI in exchange for $2 million
which had only recently been invested in MP VI. It must have been obvious to
BNYM that Medical Capital was orchestrating this sham transaction so that
Medical Capital could use MP VI’s newly-invested cash to meet the obligations of
MP II, which (as BNYM knew) was already in default and was desperately in need
of cash. However, BNYM ignored the obviously suspicious nature of this
instruction from Medical Capital, and, in bad faith, simply executed Medical
Capital’s instructions to effect this fraudulent transaction.
141. The Receiver’s reports show that some intercompany transactions
involved the sale of receivables at prices higher than the expected net receivables
(“ENR”), i.e. not at a discount as represented in the Agreements and PPMs. For
example, Wells Fargo disbursed funds for the purchase of Carter Medical
receivables by MP III from MP I for $4.1 million, even though the ENR for those
receivables was only $3.3 million. See AMD. 10 Day Receiver Report at Exh. 2.
Further, many of these resales were for amounts greater than the original purchase
price, and valued at amounts greater than the original collateral value. See AMD.
10 Day Receiver Report at p. 22-25.
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142. Common sense dictates that a successive sale should be priced and
valued at a lower amount than the previous sale, not only because of collections to
date, but also because of the greater risk involved in holding older receivables.
With each successive sale between the SPCs, however, the receivables were often
sold at a higher price and given a higher collateral value than the previous sale.
For example, MP I sold NLV, Inc. (“NLV”) receivables to MP IV for $3.7 million
in August 2007. MP IV then sold the NLV receivables to MP V for $3.8 million in
January 2008, which then sold the receivables to MP VI for $4.2 million in August
2008. See AMD. 10 Day Receiver Report at 24-25. At minimum, Defendant
BNYM, which oversaw MP I, IV, and VI, must have known that something was
awry, since Medical Capital was claiming a higher collateral value and price for
the last sale compared to the first.
143. On their face, such transfers – which followed the classic, obvious
pattern of a Ponzi scheme in which cash from new investors is used to pay earlier
investors – were presumptively improper and support an inference of Defendants’
actual knowledge that should have triggered their obligations with respect to entry
of default. Defendants’ execution of hundreds of sales of receivables between
SPCs, in bad faith and despite their knowledge that those receivables were vastly
overpriced and that Medical Capital was using the cash from those sales to
continue its fraudulent scheme, constituted a further breach of the Agreements,
even beyond Defendants’ payment of administrative fees based on collateral
reports reflecting those overvalued receivables.
E. Events of Default
144. Throughout the NISAs, there are references to Events of Default, and
the NISAs contain special sections to describe the Trustees’ responsibilities upon
notification or knowledge of Events of Default. Once an Event of Default occurs
and continues, the Trustee is held to a heightened duty of care to protect
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Noteholders. The Trustee is also required to notify Noteholders within 90 days of
the occurrence of an Event of Default.
145. Under the terms of the NISAs, default occurred in at least three ways.
The NISAs provide several definitions for an “Event of Default,” including but not
limited to (1) a breach of “any other covenant or provision” of the NISAs; (2)
failure to pay interest/principal to Noteholders; (3) the “inability or unwillingness”
of the SPC to pay debts, including administrative fees.
146. Breaches of Covenants and Provisions of the NISAs: As described
extensively above, there were numerous breaches of the NISAs, including but not
limited to the SPCs’ failure to deliver statements, certificates, forms, opinions of
counsel, schedules, and other documents required by the terms of the NISAs. If
delivered at all, documents did not conform to the form required by the NISAs.
These breaches were unquestionably material because they enabled Medical
Capital to obtain excessive administrative fees and to continue as a going concern
without the proper review and scrutiny that should have occurred once covenants
and provisions of the NISAs were breached.
147. Further, based on the limited documents that Defendant Wells Fargo
Bank has provided to date, it appears that in the entire history of the existence of
both MP III and MP V, those SPCs failed on each occasion a NISA-required
document was due to submit the document on time as required. For example, the
Fourth Quarter 2007 schedule reflecting UCC financing statements for collateral
for MP V was turned in on July 24, 2008, although it was due seven months before
on January 15, 2007. See Exh. 7, attached hereto. On information and belief, the
same practice existed with regards to MP II, IV, and VI. Meanwhile both Trustees
continued to pay out Administrative Fees and allow MCC to make withdrawals for
other purposes, even as they did not receive the documents as required under the
NISAs and did not inform Noteholders of the SPCs’ severe and continuing
defaults.
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148. For example, the NISAs required Defendants to ensure receipt of
UCC-1 financing statements related to SPC assets. The UCC-1 financing
statements were required to document the Trustees’ security interest in SPC assets.
Section 3.05(g) of the NISAs required Medical Capital to provide Defendants with
a schedule that set forth information concerning the UCC-1 financing statements
showing Defendants’ security interest in Collateral held by the SPCs. But many, if
not most of these schedules omitted the required UCC-1 financing statement
information. The Medical Capital Receiver has found that there were no active
UCC-1 filings for 53 of Medical Capital’s 104 accounts, and there were no
collections or advances on those accounts for many years. See AMD. Ten Day
Receiver Report at 11. (These 53 accounts represented $542 million of the $625
million in total receivables that was purportedly held by the SPCs as of March 31,
2009. Id.) Because these UCC-1 financing statements did not exist, they could
not have been delivered to Defendants.
149. The absence of the required Purchase Documents means that the
statement in Exhibit A-1 (for MP II, MP III, and MP IV) that those documents had
been delivered to the trustees, or were being delivered along with the request for
disbursement (the “Purchase Documents Representation”) was absolutely false.
150. Defendants knew that the Purchase Documents Representation was
false because Defendants knew that they had not been, and were not, receiving the
required Purchase Documents from Medical Capital. This was true of MP I and
continued throughout the course of Medical Capital’s scheme. There are at least
three separate bases to establish Defendants’ knowledge:
(a) First, when one of the Defendants received a request to disburse funds
from an SPC for the purchase of receivables from a potential seller for the first
time by that SPC, it knew that it had not received a Purchase Agreement prior to
that time, and it knew whether or not it was receiving the purchase documents
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referred to in Exhibit A-1. Accordingly, funds should not have been disbursed
until the documents had been obtained.
(b) Second, Plaintiffs allege that the Trustees had internal policies and
procedures requiring them to verify receipt of required documentation. These
policies and procedures included an electronic “tickler” system that would advise
the Trustee of any missing items. Yet the Trustees mostly failed to use and/or act
in accordance with the tickler system (and their own internal policies) to ensure
they were receiving such items as Purchase Agreements and UCC statements.
(c) Even without tickler systems, on information and belief, the Trustees
were aware that Purchase Documents were rarely or never provided because they
had a filing system for each SPC’s disbursement requests. Those files contained
numerous Exhibit A-1 forms but no other documents, a fact readily apparent to any
Trustee employee who viewed them, including the employees who filed the
incoming forms.
151. BNYM and Wells Fargo were well aware of Medical Capital’s
practice of not delivering the required Purchase Documents, even though doing so
was required by the NISAs for MP II, MP III, and/or MP IV. Indeed, all sides
tacitly acknowledged this inconsistency between contract and practice, as reflected
by the removal of the Purchase Documents Representation in the NISAs for MP V
and MP VI when those documents were negotiated and finalized in late 2007 and
mid-2008, respectively.1 On information and belief, recognition of this
inconsistency did not spur the Trustees to improve their efforts to collect Purchase
Documents for ongoing transactions involving the earlier SPCs.
152. Despite actual knowledge of Medical Capital’s repeated failures to
produce the required transaction documents, Defendants continued to disburse
1 The MP V NISA was dated as of October 8, 2007, while the MP VI NISA was
dated as of August 7, 2008.
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funds freely for Medical Capital’s use instead of promptly giving notice to the SPC
of its need to correct the inaccuracy in Exhibit A-1 within 30 days by providing the
necessary documentation.
153. As an example of how BNYM failed to conduct its non-discretionary
duties, on July 9, 2007, at 12:38 p.m., MP I emailed BNYM requesting that MP
IV-Series II purchase Advanced Radiology receivables owned by MP I. MP I
advised that it attached a PDF file, and directed BNYM to “examine the
accompanying documentation and if adequate, please initiate the wire transfer as
requested.” Exactly one hour later, at 1:41 p.m., BNYM emailed MP I and advised
that BNYM has transferred $2,838,296 even though there was no Purchase
Agreement, or other Purchase Documents satisfying the minimum requirement of
the NISA.
154. Wells Fargo freely admitted that it was not requiring production of the
documents required by the NISAs at the time of the transaction, yet, it was
disbursing funds anyway. For example, in one instance, some seven months after
disbursing funds (on December 10, 2007) to purchase a Non-Receivable Asset,
Wells Fargo requested, for the first time, the missing transaction documents.
Those documents should have been sought by Wells at the time the funds were
originally requested, but they were not.
155. Because of Defendants’ failure to pursue correction of the statements
they knew were inaccurate, they have waived and/or are estopped from arguing
that an Event of Default was not triggered under NISAs § 6.05.
156. The SPCs’ practice of not producing the required documents,
conforming to the NISAs, was a material breach of the NISAs, and Defendants’
refusal to take steps – either to obtain the required documentation and/or to declare
an Event of Default – was similarly material.
157. Failure to Pay Interest to Noteholders: On information and belief,
from inception of the SPCs, there were isolated incidents of default in principal
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and interest payments. On information and belief, by August 2008, MP II had
massively defaulted in principal and interest payments. However, BNYM, the
Trustee for MP II, not only did nothing to help Noteholders, it went even further –
by deepening its relationship with Medical Capital.
158. Even with knowledge of the MP II default, Defendant BNYM
continued to lend its name to allow Medical Capital to defraud even more
investors. In August 2008, MP II defaulted on payments of principal. Despite its
failure to pay principal to MP II Noteholders in violation of the PPM, Medical
Capital nevertheless prepared a new offering, MP VI, to investors in that same
month. Much like the other offerings, Medical Capital secured a trustee – BNYM
– to provide an aura of legitimacy to the new offering. Although Defendant
BNYM, as the trustee for MP II, was well aware of MP II’s default in August
2008, it nevertheless agreed to lend its name once again as trustee for the MP VI
offering. BNYM did not give notice to MP II Noteholders of an Event of Default
in MP II until November 10, 2008 – even as it continued to reap fees from its
investment of Medical Capital-related funds.
159. Defendant Wells Fargo also knew of default in principal and interest
to Noteholders. With respect to MP III, Series I notes with a maturity date of July
19, 2008 were in default – even as, as alleged in ¶ 147, MCH was seven months
behind in meeting its reporting obligations for MP III. An Event of Default occurs
when MCC fails to make any payment of principal and such default continues for
15 days. The 16th day was August 4, 2008, but Defendant Wells Fargo allowed
MCC to purchase so-called Eligible Receivables on that day – in clear violation of
the NISA for MP III.
160. Inability to Pay Debts: The suspicious timing of transfers
(described at ¶¶ 132-143 above) between trust accounts reveals that the SPCs had
an inability to pay their debts as they became due. Had they not made such
transfers, the SPCs would have been unable to pay their debts as they became due.
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The Trustees had actual knowledge of the insufficiency of the balance of the
accounts because they maintained the accounts.
F. The Trustees’ Non-Action Following the Events of Default
161. As described above, the failure to ensure compliance with the
covenant and conditions of the NISAs constituted an event of default. Defendant
Wells Fargo and, on information and belief, BNYM, were aware almost from the
inception of their relationship with Medical Capital that the company was failing to
meet the covenants and conditions of the NISAs. Moreover, the tickler detail
reports received to date demonstrate that Defendant Wells Fargo’s employees did
not seek to enforce the terms of the NISAs and negligently allowed weeks and
months to pass before contacting Medical Capital to obtain the requisite
documentation – even as they paid the requested Administrative Fees to the non-
compliant MCC.
162. On information and belief, both Trustees were informed of the default
in principal and interest payment to Noteholders in MP II no later than August
2008. Yet they did not (1) inform Noteholders of the default; (2) move to exercise
any rights inuring to them under the NISAs in the case of Events of Default; or (3)
otherwise act to protect Noteholders’ interests for months. In fact, they did not
even send out a notice to Noteholders until November 2008.
163. By February 2009, Medical Capital and the Trustees were in
communication about Medical Capital’s Events of Default. Despite the Events of
Default, for which Defendants’ own internal policies and the NISAs required
specific action, Defendants continued to communicate with Medical Capital’s
management and did not take prudent action to protect the Noteholders. In
February 2009, Medical Capital retained an “independent” consultant known as
Waverton Group LLC (“Waverton”). This consultant was, on information and
belief, referred to Medical Capital by an affiliate of one of Medical Capital’s
broker-dealers, a company known as Signature Advisors (“Signature,” and together
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with Waverton, “Medical Capital’s Consultants”). Signature and Waverton
worked together to “validate” MP II’s assets and began work on a second report
for MP III, which was never finished. Throughout this process, although
Defendant Trustees, their own consultant CT Moffitt, and even broker-dealer due
diligence provider Mick & Associates, apparently expressed doubt about the
independence and/or the truthfulness of the report produced by Medical Capital’s
Consultants, the Trustees still did not act as required by the terms of the NISAs.
See Exhs. 10, 11, attached hereto.
164. Beginning in December 2008, both Trustees noticed and participated
in conference calls with Noteholders, where they assured Noteholders that their
role was “[t]he role of the Trustee is to protect the interest of the Series II
Noteholders. The Trustee is not related to MedCap IV or Medical Capital
Corporation, and therefore will exercise independent judgment in fulfilling its
responsibilities.” See Exh. 1, attached hereto. These representations were
misleading to Noteholders such as Plaintiffs, as the Trustees now assert that they
do not have any obligations or duties except as prescribed in the NISAs.
Moreover, Defendant Wells Fargo waited until March 23, 2009 – months after
Events of Default had begun and were continuing – to inform MCC that it was
holding it to a “stricter adherence to the requirements of the [NISAs].” See Exh.
12, attached hereto.
165. Of course, the Trustees were not even meeting their obligations and
duties under the NISAs – and had not been for many months. On June 9, 2009 –
months after the original Event of Default in MP II – Wells Fargo finally hired its
own consultant, CT Moffitt & Co. (“CT Moffitt”), which almost immediately
discovered systemic problems at Medical Capital, including severe problems with
the form of the documents that Wells Fargo had blindly accepted to approve the
payment of administrative fees to Medical Capital. CT Moffitt discovered, for
example, that documents required to authenticate the requests for administrative
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fees – such as those required to authenticate Approved Payors, and therefore
Eligible Receivables and the NCCR Reports themselves – were missing or
improperly completed. See Exh. 13, attached hereto. On information and belief,
each MP suffered from the same problems, and believe that once document
production is complete, there will be evidence to support this assertion.
Meanwhile, on information and belief, CT Moffitt was paid out of noteholder
funds to perform the work that Wells Fargo should have been doing all along.
166. Nearly twelve months passed between the August 2008 default in MP
II and the SEC’s Complaint and request for the appointment of a receiver. During
this entire period, the Trustees did nothing, except act to protect their own
interests. Making matters worse, Defendants’ recent actions have only
exacerbated Plaintiffs’ losses and constitute further breaches of their fiduciary
duties to Plaintiffs. According to recent Trustee correspondence, the Trustees have
incurred substantial professional fees and expenses to try to determine the true
scope of the SPCs’ business and the true value of their assets, work they should
have performed years ago.
G. The Trustees Profit From Their Negligence and Bad Faith
167. The Trustees profited handsomely from their continued relationship
with Medical Capital. The Trustees received a fee of $35,000 per year per SPC for
which they served as Trustee. In addition, they received administrative fees, such
as fees for frequent wire transfers, including transactions between themselves.
168. BNYM also apparently reaped profits fromits investment purchases
through the receipt of “12B1 Fees.” Such fees are received by fiduciaries, such as
trustees, who exercise their independent judgment in managing the assets of trust
monies. The larger the amount of money under management, the higher the
amount of 12B1 Fees that the trustee can receive. BNYM was able to invest not
only in conservative securities such as Treasury bonds and certificates of deposits,
but also in mutual funds of its choosing, and even repurchase agreements that it
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could execute with investment banks such as Goldman Sachs. On information and
belief, these investments were profitable for BNYM. On information and belief,
certain of these investment vehicles required that BNYM maintain monies for
periods of time, and if they were withdrawn early, then BNYM’s profits would be
reduced.
169. Based on the incomplete document production received from
Defendants to date, Defendant BNYM earned at least $313,000 in 12B1 Fees..
The receipt of these 12B1 Fees, as well as the tying up of SPC funds in particular
investments of BNYM’s choosing, provided BNYM with the incentive to keep
Medical Capital going at all costs, to neglect its duties to follow up on the
numerous breaches of the NISAs, and not to provide Noteholders with notice of an
Event of Default, lest Noteholders demand that Medical Capital be liquidated.
H. The Trustees’ Liability
170. With regard to Defendants’ contractual duty to verify instructions
from Medical Capital, the Agreements explicitly state that “in the case of any such
certificates or opinions which by any provisions hereof are specifically required to
be furnished to the Trustee, the Trustee shall be under a duty to examine the same
to determine whether or not they conform as to form with the requirements of this
Note Agreement and whether or not they contain the statements required by this
Note Agreement.” See, e.g., MP IV NISA § 5.06(a)(ii). As described in detail
above, Defendants’ failure to ensure that documents required by the NISAs did not
conform as to form, and therefore, the Trustees breached their duties under §
5.06(a)(ii).
171. In addition to Defendants’ duty to examine all certificates or opinions
provided by Medical Capital, the Agreements state that Defendants may only rely
on the truth of the statements in any certificates or opinions “[i]n the absence of
bad faith on [the Trustees’] part.” Id. Plaintiffs allege that the Trustees acted in
bad faith by (1) disregarding months of dilatory practices from MCC and MCH;
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(2) ignoring the requirements of the NISAs; (3) acquiring actual knowledge of
breaches of the NISAs; (4) in the case of BNYM, lending its name to a further
Medical Capital offering under such circumstances; and ultimately, (5) refusing to
act to protect Noteholders’ interests – until it was too late to do anything. Further,
the Trustees’ delay in declaring Events of Default as to the respective SPCs
constituted bad faith.
172. Defendants’ ability to exculpate themselves from liability is also
expressly limited by § 5.06(f), which states that “[t]he Trustee[s] shall have no
liability for actions taken at the direction of the Debtor, except for negligence or
willful misconduct in the performance of its express duties hereunder.” Similarly,
§ 5.06(j) states that “[t]he Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its powers;
provided, however, that the Trustee’s conduct does not constitute willful
misconduct, negligence or bad faith.” Therefore, regardless of whether Defendants
were acting at the direction of Medical Capital or were acting on their own, the
Agreements explicitly provide that Defendants can be held liable for actions that
they performed negligently, with bad faith or with willful misconduct.
173. Defendants did not even provide normal good faith scrutiny of
Medical Capital’s instructions, and there were many red flags that should have
caused Defendants to perform their duties under the Agreements with heightened
scrutiny.
174. Defendants were aware that of all of the entities involved in the
issuance and administration of the Notes, they were the only entities that were
unrelated to the issuer, and, thus, were the Noteholders’ only line of defense
against possible fraudulent and collusive actions by Medical Capital. For this
reason alone, Defendants should have carefully examined any suspicious or
questionable instructions from Medical Capital.
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175. Defendants had the benefit of experience serving as trustees of similar
investment vehicles created by other medical receivable companies, with notice of
the unique risks” associated with such operations. For example, while BNYM was
serving as Trustee for certain of the SPCs, it was involved in litigation with
investors in a California-based medical receivables company for its role as trustee;
in that litigation, the trustee allegedly allowed company insiders to operate a Ponzi
scheme and improperly commingle investor funds between trust accounts.
Defendants’ awareness of these circumstances – including involvement in
litigation where the issuer was alleged to have engaged in the same types of
improper conduct as alleged in this action – should have caused Defendants to
exercise greater scrutiny of the instructions submitted by Medical Capital, and their
failure to do so speaks to Defendants’ bad faith.
I. Damages
176. Beginning in August 2008 and continuing through the present, MP II
through VI defaulted on their obligations to make payments of interest and/or
principal to Noteholders. According to the Receiver, over $1 billion in principal is
still owed to Noteholders and “it appears that noteholders will almost certainly
suffer significant losses on their investments.”
177. According to the Receiver, as of June 30, 2009, MCC reported
collateral securing obligations to Noteholders with an aggregate value of over $1.1
billion, but in July 2009 collected only approximately $317,000. The Receiver
also found the existing financial records of the SPCs to be generally unreliable
based on, among other things, the failure to comply with GAAP accounting rules,
and that accountants were in some cases given specific instructions as to how to
account for various matters, calling into questions the resulting figures.
178. The Receiver further detailed the fees paid by, and the amounts owed
to Noteholders for each of the SPCs, as follows:
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MP II
179. MP II received total funds from investors in the amount of
approximately $251 million. MCC was paid administrative fees of approximately
$55.6 million. As of June 30, 2009, reports by MCC indicate that the outstanding
balance payable on issued notes was approximately $88 million.
MP III
180. MP III, which is divided into two series, received total funds from
investors in the amount of approximately $354 million. MCC was paid
administrative fees of approximately $48.6 million. As of June 30, 2009, reports
by MCC indicate that the outstanding balance payable on issued notes was
approximately $109 million.
MP IV
181. MP IV, which is divided into two series, received total funds from
investors in the amount of approximately $407 million. Investors have received
principal in the amount of $6.416 million and interest in the amount of $58 million.
MCC was paid administrative fees of approximately $56.6 million. As of June 30,
2009, reports by MCC indicate that the outstanding balance payable on issued
notes was approximately $401 million.
MP V
182. MP V received total funds from investors in the amount of
approximately $403 million. Investors received principal in the amount of $2.32
million and interest in the amount of $41.063 million. MCC was paid
administrative fees of approximately $48 million. As of June 30, 2009, reports by
MCC indicate that the outstanding balance payable on issued notes was
approximately $401 million.
MP VI
183. MP VI received total funds from investors in the amount of
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approximately $75 million. Investors received principal in the amount of $.914
million and interest in the amount of $3.688 million. Of the amount raised by
investors, $9.326 million was used to purchase new accounts receivable and make
other investments, and $41.715 million was used to purchase assets from prior
MPs. MCC was paid administrative fees of approximately $24.6 million.
As of June 30, 2009, reports by MCC indicate that the outstanding balance payable
on issued notes was approximately $74 million.
V. CLASS ALLEGATIONS
184. Plaintiffs bring this action as a class action under Rule 23 of the
Federal Rules of Civil Procedure. On July 26, 2011, the Court certified the Class
as follows:
All persons or entities who purchased or otherwise acquired notes
issued by one or more of Medical Provider Financial Corporation II,
III, and IV and Medical Provider Funding Corporation V and VI
(collectively, the “SPCs”) and did not receive some or all of their
principal or interest payments. Excluded from the Class are: (i) the
Defendants herein, and their subsidiaries, parents, affiliates, and
controlled persons or entities, as well as their family members,
employees and representatives; and (ii) Medical Capital Holdings,
Inc., Medical Capital Corporation, Medical Tracking Services, Inc.,
and the SPCs, and their subsidiaries, parents, affiliates, and controlled
persons or entities, including specifically all of their past or present or
directors (including Sidney M. Field and Joseph J. Lampariello) as
well as their family members, employees and representatives.
185. The members of the Class are so numerous that joinder of all
members is impracticable. Plaintiffs are informed and believes that the notes were
sold to approximately 20,000 Class members.
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186. Plaintiffs’ claims are typical of the claims of the members of the
Class, as the Defendants served as Trustees over MP II, III, IV, V and VI and the
claims are based upon similar conduct affecting all Class members.
187. Plaintiffs will fairly and adequately protect the interests of the
members of the Class and have retained counsel competent and experienced in
class and securities litigation. Plaintiffs have no interests which are contrary to or
in conflict with those of the Class members which they seek to represent.
188. A class action is superior to other available methods for the fair and
efficient adjudication of this controversy since joinder of all members is
impracticable. Furthermore, as the damages suffered by individual members may
be relatively small, the expense and burden of individual litigation make it virtually
impossible for the Class members to individually seek redress for the wrongs done
to them. Plaintiffs know of no difficulty which will be encountered in the
management of this litigation which would preclude its maintenance as a class
action.
189. There is a well-defined community of interest in the questions of law
and fact involved in this case. Common questions of law and fact exist as to all
members of the Class, and predominate over any questions affecting solely
individual members of the Class. Among questions of law and fact common to the
Class are:
a. whether Defendants breached contractual duties owed to
Plaintiffs; and
b. whether Class members were damaged and the measure of
damages.
190. The names and address of the Class members are available from the
business records of Defendants or from the various SPCs. Notice can be provided
to the Class members by first class mail and by using other techniques customarily
used in class actions.
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VI. CAUSE OF ACTION
FIRST CAUSE OF ACTION
(BREACH OF CONTRACT)
191. Plaintiffs hereby incorporate all of the foregoing paragraphs.
192. Defendants acted as Trustees for the holders of notes issued by the
SPCs under Note Issuance and Security Agreements (“NISAs”), as described
herein.
193. For example, Defendant Wells Fargo entered into a NISA dated June
25, 2007, a First Supplemental NISA dated April 10, 2007, and a NISA dated
October 8, 2007. Similarly, Defendant BNYM entered into a NISA dated October
23, 2006 and a First Supplemental NISA dated May 23, 2007. Discovery is
continuing as to the full extent of documents executed by Defendants.
194. Plaintiffs and members of the Class were intended third party
beneficiaries of the NISAs entered into by the Defendants, who promised to
perform certain duties as trustees and to be paid for providing these trustee
services.
195. Under the terms of the NISAs, each series of notes issued by the SPCs
was supposed to be secured by its own set of medical receivable assets.
Defendants were charged with maintaining a separate trust account for each series
of notes, with amounts relating to collateral deposited into the appropriate trust
account. Once funds were deposited into the trust accounts, they were under the
exclusive control of the Defendants.
196. MCC, MCH, MTS and the SPCs had no authority to make
distributions from the funds in the trust accounts. Rather, the Defendants had the
exclusive authority to make appropriate distributions based on appropriate inquiry
and verification, and pursuant to the priority of payments stated in the NISAs. The
Defendants were not permitted to approve and permit disbursements for
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administrative fees without certifying that all conditions had been satisfied and,
even then, could not pay fees from investor funds.
197. For all these reasons, Defendants failed to perform their contractual
obligations under the NISAs as required and alleged herein.
198. As a result of the wrongful conduct of Defendants, Plaintiffs and the
Class have suffered and will continue to suffer economic losses and other general
and specific damages, all in an amount to be determined according to proof.
WHEREFORE, Plaintiffs pray for relief as set forth below.
VII. PRAYER FOR RELIEF
WHEREFORE, Plaintiffs, on behalf of themselves and the Class, pray for
judgment as follows:
1. Declaring this action to be a proper class action on behalf of the Class
defined herein;
2. Damages according to proof;
3. Prejudgment interest at the maximum legal rate;
4. Costs of the proceedings herein;
5. Reasonable attorneys’ fees;
6. All other and further relief as the Court deems just.
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JURY DEMAND
Plaintiffs demand a jury trial on all issues so triable.
Dated: September 24, 2012 COTCHETT, PITRE & MCCARTHY LLP
/S/ MARK C. MOLUMPHY MARK C. MOLUMPHY
JOSEPH W. COTCHETT (36324) [email protected] MARK C. MOLUMPHY (168009) [email protected] JORDANNA G. THIGPEN (232642) [email protected] HESTER H. CHENG (273578) [email protected] 840 Malcolm Road, Suite 200 Burlingame, CA 94010 Telephone: (650) 697-6000 Fax: (650) 697-0577
Dated: September 24, 2012
MILBERG LLP
/S/JEFF S. WESTERMAN JEFF S. WESTERMAN
JEFF S. WESTERMAN (94559) [email protected] DAVID E. AZAR (218319) [email protected] MICHIYO MICHELLE FURUKAWA (234121) [email protected] 300 S. Grand Avenue, Suite 3900 Los Angeles, CA 90071 Telephone: (213) 617-1200 Fax: (213) 617-1975 Co-Lead Counsel for the Class
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LAW OFFICES COTCHETT, PITRE
& MCCARTHY, LLP
MINAMI TAMAKI DEREK G. HOWARD (118082) [email protected] BETHANY L. CARACUZZO (190687) [email protected] 360 Post Street, 8th Floor San Francisco, CA 94108 Telephone: (415) 788-9000 Facsimile: (415) 398-3887
LAW OFFICE OF MICHAEL D. LIBERTY MICHAEL D. LIBERTY (136088) [email protected] 1290 Howard Avenue, Suite 303 Burlingame, CA 94010 Telephone: (650) 685-8085 Facsimile: (650) 685-8086
AITKEN* AITKEN* COHN WYLIE A. AITKEN (37770) [email protected] DARREN O. AITKEN (145251) [email protected] 3 MacArthur Place, Suite 800 Santa Ana, CA 92707 Telephone: (714) 434-1424 Facsimile: (714) 434-3600 Attorneys for Class and Members of Class’ Executive Committee
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EXHIBIT 13
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