Corporate Governance

SEC v. Medical Capital Holdings, Inc.: Misrepresentations of Corporate Health

By Michael Silverman

SEC v. Medical Capital Holdings, Inc., No. SACV 09-0818 DOC, 2010 WL 809406 (C.D. Cal. Feb. 24, 2010) involved allegations by the SEC of fraud in the context of an offering for notes, alleging violations of both Rule 10b-5 under the Exchange Act and Section 17(a) of the 1933 Act.  Specifically, the SEC alleged that Medical Capital Holdings, Inc. (MCHI), Medical Capital Corporation (MCC), Medical Provider Funding Corporation VI, Sydney M. Field, and Joseph J. Lampariello (collectively 'Defendants'), misstated the amount of administrative fees paid from the proceeds of the offering.  Field was the CEO and a director of MCC and CEO and a director of MCHI.    Lampariello was the President, COO, and a director of MCHI. 

Defendants raised $74.7 million from the Medical Provider Funding Corporation VI notes.  The private placement memorandum ('PPM') and the supplemental PPM ('SPPM') represented that less than $4 million of offering proceeds would be used for anything other than purchasing accounts receivables.  The SEC alleged that in fact approximately $20.4 million of the proceeds was used to pay administrative fees. 

Field and Lampariello sought dismissal of the complaint, alleging that the Complaint failed to plead its claims with the requisite particularity required by Rule 9(b). According to defendants, the SEC did not specify the names of defrauded investors, did not specify the documents used to defraud, the persons who defrauded the investors, or the specific acts or omissions that constituted fraud.  The court summarily rejected the argument, concluding that the complaint references the documents and misstatements with sufficient specificity to meet the requirements of Rule 9(b).  As for the failure to identify investors who relied on the misstatements, the court concluded that the SEC had no duty to show reliance and harm by investors.  

With respect to claims that the SEC had not sufficiently pled scienter, the court noted that the heightened pleading standards in the PLSRA were not applicable to the Commission.  The Commission only had to meet the more general requirements of Rule 9(b).  It was enough that Field and Lampariello were alleged to have "helped prepare, reviewed, edited, and approved each PPM" and that they "knew, or were reckless in not knowing, that the statements were false."    

The court did, however, find the complaint deficient in one respect.  It failed to sufficiently connect the alleged misstatements to the purchase or sale of securities.  The complaint did not "set forth the particulars of how the MP VI PPM and SPPM were disseminated, including for what particular securities offerings the PPM and SPPM were provided and when those offerings occurred."  The court dismissed the complaint but provided leave to amend. 

The primary materials for this case may be found on the DU Corporate Governance Website.

Full post as published by The Race to the Bottom on April 13, 2010 (boomark / email).