Medical Capital Fraud Lawsuit Against Wells Fargo Must Proceed

U.S. District Judge David Carter has turned down Wells Fargo & Co.’s (WFC) bid to throw out a securities lawsuit filed by investors accusing the investment bank of not fulfilling its role as trustee for debt issued by Medical Capital Holdings, which failed in an approximately billion dollar fraud in 2009. His ruling removes any obstacles to a possible trial. Claims could hit the hundreds of millions of dollars.

The investors in this securities case are among those that purchased notes put out by three Medical Capital special purpose companies that named the investment bank as their trustee. They are accusing Wells Fargo of 63 breaches. Meantime, the financial firm maintains that it didn’t act in bad faith and it wasn’t negligent in the way it fulfilled its contractual duties.

Per court documents, the holding company had raised $1.7 billion from over 20,000 investors between 2003 and July 2009, which was when the SEC filed a securities fraud lawsuit against it and two of its executives. The company soon shut its doors. Later, a receiver discovered that investors had lost $839 million to $1.08 billion in a Ponzi-like scam that involved the payment of extra fees.

The plaintiffs contend that rather than disburse funds so that the holding company could provide financing to medical care providers by buying their outstanding receivables, Wells Fargo failed to prevent Medical Capital from diverting their cash to excessive administration fees and non-medical projects. Meantime, in their February filing, attorneys for the investment bank said that even after the plaintiffs deposed its employees no evidence had surfaced to show that any of them knew of any wrongdoing on Medical Capital’s part and that any suspicion of such behavior did not arise until 2009 when payments began defaulting and the SEC began its investigation.

Judge Carter ruled in the investors’ favor on some claims, finding that noteholders demonstrated that there existed a “genuine dispute” over whether any breach committed by Wells Fargo was a “cause in fact” of losses they sustained. He also gave them permission to pursue a claim that the investment bank disbursed certain funds in bad faith. However, he threw out other claims that they made against the financial firm.

It was almost a year ago that ex- Medical Capital president Joseph J. Lampariello pleaded guilty to wire fraud related to the private placement fraud, which ended up forcing dozens of independent brokerage firms to go out of business because of the securities fraud lawsuits by investors that followed. Lampariello also was sued by the SEC in 2009 for running Medical Provider Funding Corp. VI, which was Medical Capital’s final offering. (The civil case against him, however, was closed so that the criminal case could move forward.)

Although investors were told the proceeds raised by MedCap VI would go toward making loans, buying account receivables, paying sales commissions, other expenses, and general operations, Lampariello and others “misappropriated” this money to make Ponzi-type payments to earlier noteholders and pay fees to Medical Capital. The Justice Department said that Lampariello caused MedCap VI noteholders to sustain about $39 million in losses.

Wells Fargo must face lawsuit tied to Medical Capital fraud, Reuters, April 3, 2013

Judge denies Wells Fargo bid as MedCap suit rolls on, Investments News, April 4, 2013

More Blog Posts:
Federal Workers’ Privacy Rights if STOCK Act Provision Mandating Online Disclosure of Financial Data Goes Into Effect, Says District Court Judge, Institutional Investor Securities Blog, April 8, 2013

Previous Dissent by Arbitrator is Not Reason to Vacate Award Morgan Keegan Was Ordered to Pay Investors, Says District Court, Stockbroker Fraud Blog, April 8, 2013

Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit, Institutional Investor Securities Blog, July 14, 2012