Medical Capital Holdings defrauded approximately 20,000 investors of over $2.2 billion in one of the largest Ponzi schemes in Orange County, California history.The operation, which spanned from 2003 to 2009, masqueraded as a legitimate business purchasing discounted medical receivables from healthcare providers and reselling them to generate returns for investors. Instead, it relied on new investor funds to pay earlier ones, fabricating assets and diverting money to lavish personal expenses, including a yacht and film investments.
Key Takeaways
- The fraud: Medical Capital raised $2.2 billion from investors through notes supposedly backed by medical receivables, but operated as a massive Ponzi scheme
- Criminal convictions: Medical Capital’s COO received 10 years in federal prison and was ordered to pay nearly $40 million in restitution
- Broker-dealer liability: Securities America, Wells Fargo, and other firms face liability for selling Medical Capital notes without adequate due diligence
- Recovery options: Investors can pursue claims through FINRA arbitration against broker-dealers who recommended the investment
- Significant settlements: Wells Fargo paid $105 million and Bank of New York Mellon paid $114 million to settle trustee claims
What Was Medical Capital Holdings?
Medical Capital Holdings, Inc. was a Tustin, California-based company that purported to purchase medical receivables at a discount and collect payments from insurance companies and patients. The company raised money by selling promissory notes to investors through six Special Purpose Corporations (SPCs), promising returns backed by these medical receivables.
Between 2003 and 2009, Medical Capital raised over $2.2 billion from approximately 20,000 investors across the country. The notes were marketed as safe, income-generating investments particularly suitable for retirees and conservative investors seeking steady returns. According to the SEC’s enforcement division, broker-dealers sold these notes to investors while collecting substantial commissions of 7% plus an additional 1% due diligence fee.
The reality was far different from the marketing materials. Many of the medical receivables that supposedly backed investor notes did not exist. Medical Capital used new investor money to pay returns to earlier investors in a classic Ponzi scheme structure. When the scheme collapsed in 2009, investors faced devastating losses.
How the Medical Capital Fraud Operated
The SEC investigation revealed a sophisticated fraud operation that exploited investor trust and broker-dealer negligence:
Phony receivables: By the time the SEC filed suit in July 2009, Medical Capital had more than $543 million in fake receivables on its books. The company was selling non-existent receivables at markups among the various funds it controlled.
Ponzi payments: New investor money was used to pay returns to earlier investors, creating the illusion of a profitable business. Medical Capital lost $316 million on various loans while simultaneously collecting $323 million in management fees.
Misappropriation: The SEC alleged that Medical Capital misappropriated approximately $18.5 million of investor funds for purposes unrelated to medical receivables, including $20 million on a Hollywood movie and a 118-foot yacht.
False statements: According to court documents, Medical Capital falsely told investors that no prior offerings had defaulted on or been late in making payments. In fact, five of the SPCs had defaulted on or were late in paying $992.5 million in notes by the time the SEC took action.
Timeline of the Medical Capital Collapse
2003-2009: Medical Capital raises $2.2 billion through note offerings
August 2008: Five SPCs begin defaulting on payments
July 16, 2009: SEC files emergency fraud charges and obtains asset freeze
2011: FINRA arbitration panels begin issuing awards against broker-dealers
2013: Joseph Lampariello sentenced to 10 years in federal prison
2013: Wells Fargo and Bank of New York Mellon pay $219 million combined to settle trustee claims. The case’s full closure was in 2016
Criminal Convictions in the Medical Capital Case
The Medical Capital fraud resulted in significant criminal penalties. Joseph J. Lampariello, the company’s former president and Chief Operating Officer, pleaded guilty to wire fraud and willfully failing to file tax returns. U.S. District Judge David O. Carter sentenced Lampariello to 121 months (approximately 10 years) in federal prison and ordered him to pay nearly $40 million in restitution to investors.
According to federal prosecutors from the U.S. Attorney’s Office for the Central District of California, Lampariello defrauded over 700 investors out of nearly $50 million. The criminal case revealed that Lampariello misappropriated funds over an 11-month period in 2008-2009, using investor money to pay himself administrative fees while the scheme was collapsing.
While criminal convictions provide a measure of justice, they rarely result in meaningful financial recovery for victims. The restitution ordered in criminal cases is often difficult to collect from defendants who have already dissipated stolen funds. This is why pursuing civil claims against third parties like broker-dealers remains the most viable recovery option for Medical Capital investors.
Broker-Dealer Liability for Medical Capital Losses
Numerous broker-dealers sold Medical Capital notes to investors while collecting substantial commissions. These firms had a legal obligation under FINRA Rule 2111 to ensure recommendations were suitable for their customers and to conduct adequate due diligence on the investments they sold.
Securities America: One of the largest sellers of Medical Capital notes, Securities America reportedly ignored warnings from its own president about the lack of audited financial statements. The firm collected approximately $30 million in commissions from Medical Capital sales. In 2011, a FINRA arbitration panel issued a landmark award against Securities America, including nearly $750,000 in compensatory damages, $250,000 in punitive damages, and over $110,000 in attorneys’ fees.
Wells Fargo: Serving as a trustee for Medical Capital notes, Wells Fargo faced allegations that it failed to protect noteholders despite having knowledge of problems with the investment. In April 2013, on the eve of trial, Wells Fargo agreed to pay $105 million to settle claims by Medical Capital investors.
Bank of New York Mellon: Another trustee for Medical Capital notes, Bank of New York Mellon settled similar claims in February 2013 for $114 million. The combined $219 million in trustee settlements represented one of the largest recoveries against indenture trustees in United States history.
Suitability Failures
Medical Capital notes were often sold to retirees and elderly investors seeking safe, income-generating investments. For many investors, these high-risk, unregistered private placements were fundamentally unsuitable given their investment objectives, risk tolerance, and financial circumstances.
Due Diligence Failures
Broker-dealers failed to conduct adequate due diligence that would have revealed the absence of audited financial statements, the lack of independent verification of medical receivables, and the unsustainable returns being promised to investors.
Recovery Options for Victims Facing Similar Issues to Medical Capital Victims
If you lost money in money in cases similar to Medical Capital notes, several recovery avenues may be available depending on your specific circumstances and when you invested:
FINRA Arbitration Against Broker-Dealers
The most promising recovery option for many victims of cases similar to Medical Capital is filing FINRA arbitration claims against the broker-dealers who recommended the investment. Unlike class action lawsuits where individual recovery is often minimal, FINRA arbitration allows investors to pursue individual claims based on their specific circumstances.
FINRA arbitration offers several advantages:
- Faster resolution than court litigation (typically 12-18 months)
- Individual presentation of facts to arbitrators
- Potential for compensatory and punitive damages
- Recovery of attorneys’ fees in appropriate cases
- Broker-dealers typically have insurance to satisfy awards
Civil Litigation
Investors may also pursue civil lawsuits against third parties who facilitated the fraud, including accountants, attorneys, and feeder funds. These cases can be more complex and time-consuming than FINRA arbitration but may provide additional recovery sources.
SEC Claims Fund
The SEC may establish a claims fund for victims to similar cases to Medical Capital through its enforcement action. While distributions from government-administered funds often return only a fraction of investor losses, filing a claim ensures you receive any available recovery.
Time Limits for Filing Claims
FINRA arbitration claims must generally be filed within six years of the occurrence or event giving rise to the claim. However, state statutes of limitations for fraud and negligence claims may be shorter. California fraud claims typically must be filed within three years. Because missing these deadlines can permanently eliminate your right to recover, consulting with a securities attorney promptly is essential.
Legal Claims Available to Medical Capital Investors
Investors who lost money in Medical Capital notes may have viable claims under several legal theories:
Unsuitability: Under FINRA Rule 2111, broker-dealers must have a reasonable basis to believe that a recommended transaction is suitable for the customer based on factors including age, financial situation, investment experience, risk tolerance, and investment objectives. Medical Capital notes were often sold to conservative investors for whom such high-risk private placements were clearly unsuitable.
Failure to supervise: Brokerage firms have an obligation under FINRA rules to supervise their registered representatives. When brokers sell unsuitable or fraudulent investments, their firms can be held liable for supervisory failures.
Breach of fiduciary duty: Investment advisors and brokers owe duties of care and loyalty to their clients. Recommending fraudulent investments while collecting substantial commissions constitutes a breach of these duties.
Negligence: Broker-dealers who failed to conduct adequate due diligence on Medical Capital notes may be liable for negligence in recommending an investment they should have known was problematic.
Misrepresentation and omissions: Brokers who made false statements about Medical Capital or failed to disclose material risks may be liable for securities fraud.
| Legal Claim | Basis | Potential Damages |
|---|---|---|
| Unsuitability | FINRA Rule 2111 | Investment losses, interest |
| Failure to Supervise | FINRA Rules 3110, 3120 | Investment losses, punitive damages |
| Breach of Fiduciary Duty | Common law | Compensatory and punitive damages |
| Negligence | Due diligence failure | Investment losses |
| Securities Fraud | Rule 10b-5, state law | Rescission, treble damages |
What a Medical Capital Attorney Can Do for You
Pursuing recovery for Medical Capital similar scheme losses requires specialized knowledge of securities litigation and the FINRA arbitration process. At Varnavides Law, attorney Gary Varnavides brings unique insight to these cases: after spending 10 years at a major New York law firm defending broker-dealers against investor claims, he now uses that inside knowledge to fight for defrauded investors in California and nationwide. An experienced securities attorney can:
Evaluate your case: Review your investment history, account documents, and communications with your broker to assess the strength of potential claims and identify all responsible parties.
Identify recovery sources: Determine which broker-dealers, advisors, and other parties may have liability for your losses and whether they have insurance or assets to satisfy a judgment or award.
Build your claim: Gather evidence, develop legal theories, and prepare a compelling case for FINRA arbitration or court litigation.
Navigate the arbitration process: Handle all aspects of FINRA arbitration, from filing the statement of claim through discovery, hearings, and award collection.
Maximize recovery: Negotiate settlements when appropriate and pursue hearings when necessary to obtain the best possible outcome for your specific situation.
Why Broker-Dealers Are Often the Best Recovery Target
While the masterminds behind the Medical Capital fraud are largely judgment-proof (having spent, hidden, or lost the stolen money), the broker-dealers who sold these investments often have substantial resources:
Insurance Coverage
Brokerage firms carry errors and omissions insurance that can satisfy arbitration awards and settlements. This insurance provides a source of recovery even when individual brokers lack personal assets.
Ongoing Operations
Unlike the defunct Ponzi operator, broker-dealers typically continue operating and have ongoing revenue and assets that can be attached to satisfy judgments.
FINRA Membership
FINRA member firms are required to comply with arbitration awards. Firms that fail to pay awards face suspension or expulsion from the securities industry.
The FINRA Arbitration Process for Medical Capital Claims
Understanding the FINRA arbitration process helps investors know what to expect when pursuing claims:
Filing the statement of claim: Your attorney prepares and files a detailed statement of claim with FINRA, outlining the facts of your case, the legal basis for your claims, and the damages you’re seeking.
Respondent’s answer: The broker-dealer files an answer responding to your allegations and may assert defenses or counterclaims.
Arbitrator selection: FINRA provides lists of potential arbitrators, and both parties rank and strike candidates to select the panel that will decide the case.
Discovery: Both sides exchange relevant documents and may take depositions. FINRA discovery is generally more limited than court litigation, which helps reduce costs and time.
Mediation: FINRA offers mediation services to help parties reach settlements without proceeding to a hearing.
Hearing: If the case doesn’t settle, arbitrators conduct an evidentiary hearing where both sides present testimony and evidence. Hearings typically last one to five days depending on case complexity.
Award: The arbitration panel issues a written award, usually within 30 days of the hearing. Awards are final and binding with very limited grounds for appeal.
Lessons from the Medical Capital Fraud
The Medical Capital case offers important lessons for investors considering private placements or other alternative investments:
Verify registration: Medical Capital notes were unregistered securities sold under Regulation D exemptions. Always verify the registration status of both the investment and the person selling it using free tools at Investor.gov and BrokerCheck.finra.org.
Demand audited financials: The absence of audited financial statements was a major red flag that many broker-dealers ignored. Legitimate investment offerings provide independently audited financial statements.
Question high returns: Medical Capital promised attractive returns with supposed low risk. Any investment promising consistent above-market returns without corresponding risk should be viewed with extreme skepticism.
Understand the business: Many investors didn’t fully understand how medical receivables financing worked or how their returns were generated. Never invest in something you don’t understand.
Diversify: Some Medical Capital victims invested their entire retirement savings in these notes. Proper diversification could have limited their exposure to any single fraudulent investment.
Frequently Asked Questions About Medical Capital Claims
Can I still file a claim for Medical Capital losses?
The ability to file claims depends on several factors including when you invested, which broker-dealer sold you the notes, and whether applicable statutes of limitations have expired. FINRA arbitration claims must generally be filed within six years of the occurrence giving rise to the claim. Contact a securities attorney to evaluate whether your specific claim remains viable.
How much can I recover from a similar Medical Capital claim?
Recovery amounts vary significantly based on the strength of your case, the specific broker-dealer involved, and whether the case settles or goes to arbitration. FINRA arbitration awards against Medical Capital broker-dealers have included full compensatory damages (the amount invested minus any distributions received), punitive damages, and attorneys’ fees. However, every case is different and outcomes cannot be guaranteed.
Do I need an attorney to pursue a similar claim to Medical Capital claim?
While you can technically represent yourself in FINRA arbitration, doing so against well-funded broker-dealers with experienced defense attorneys puts you at a significant disadvantage. Securities litigation requires specialized knowledge of industry rules, regulations, and arbitration procedures. An experienced securities attorney can significantly increase your chances of a favorable outcome.
What if my broker is no longer in the industry?
Individual brokers are rarely the primary target in these cases. Claims are typically filed against the brokerage firm that employed the broker and had supervisory responsibility. Firms remain liable even after individual representatives leave the industry. Additionally, the firm’s errors and omissions insurance provides a source of recovery regardless of the individual broker’s current status.
How long does a Medical Capital arbitration case take?
FINRA arbitration typically takes 12-18 months from filing to award, though complex cases may take longer. Many cases settle before hearing, which can shorten the timeline. By comparison, court litigation often takes 2-4 years or more to resolve.
What documents do I need to pursue a claim?
Helpful documents include account statements, trade confirmations, new account forms, correspondence with your broker, promotional materials about Medical Capital, and any written communications related to your investment. If you don’t have all these documents, your attorney can obtain them through discovery or regulatory requests.
What is the difference between filing with FINRA and joining a class action?
Individual FINRA arbitration allows you to present your unique circumstances and pursue recovery based on your specific losses, suitability issues, and dealings with your broker. Class actions typically result in much smaller per-investor recoveries because claims are aggregated and attorney fees are substantial. Most securities attorneys recommend individual arbitration for investors with significant losses.
Take Action to Protect Your Rights
If you lost money in similar cases to Medical Capital notes, time may be running out to pursue recovery. Statutes of limitations and FINRA eligibility rules can bar claims if you wait too long to take action. Even if you believe the filing deadlines have passed, consulting with a securities attorney can help determine whether any legal options remain available.
The broker-dealers who sold Medical Capital notes while ignoring red flags profited handsomely from their sales commissions.
Lost Money in a Fraudulent Investment?
At Varnavides Law, we have extensive experience pursuing FINRA arbitration claims against broker-dealers who sold unsuitable or fraudulent investments, including cases similar to Medical Capital notes. Attorney Gary Varnavides can evaluate your situation, explain your legal options, and help you pursue the recovery you deserve. Contact us today for a free consultation to discuss your investment losses.
