Due Diligence on Medical Capital Notes at Issue in Massachusetts Case Against Securities America

In the Commonwealth of Massachusetts v. Securities America Inc, the United States is seeing the first instance of a state regulator bringing an enforcement case against a company over private placement deals.

The allegations contained in the initial complaint are partially based on the claim that Securities America failed to follow through with proper due diligence. A broker is required to perform due diligence on a product to ensure that it is a legitimate offering worthy of sale to clients. If there is evidence that the product, in this case Medical Capital private placement offerings, is fraudulent or otherwise unfit for would be investors, that product is abandoned.

The issue in the current case is that Securities America sold a private placement deal (Medical Capital Holdings Inc.) to hundreds of investors over multiple years despite incontrovertible evidence that the Medical Capital financial records were meritless.

Securities America clients were only one such group sold Medical Capital notes. Of the more than $1.7 billion worth of notes sold to investors, Securities America clients represent a capital investment of $697 million, or roughly 37% of the whole. It is worth noting that the enforcement case in Massachusetts is only applicable to residents of the Commonwealth who were sold Medical Capital notes through Securities America. However, given the damning evidence introduced by state regulators, the repercussions of this case will reach far beyond the 60 investors to which it applies.