Case 8:10-ml-02145-DOC-RNB Document 428 Filed 12/17/12 ...

Case 8:10-ml-02145-DOC-RNB Document 428 Filed 12/17/12 of 242 Page ID #:15973

PLTFS.’ FOURTH AMENDED CONSOL. COMPL.; Lead Case No. SA-10-ML-02145 DOC (RNBx) 1

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v

LAW OFFICES COTCHETT, PITRE

& MCCARTHY, LLP

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”),



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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-



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

§§ 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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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,


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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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,


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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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”



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.”



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

● 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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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 –



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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%



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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).



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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”).



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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;



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

(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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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:



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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.

//

//

//

//

//

//

//

//

//



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& MCCARTHY, LLP

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



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28v


& 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


EXHIBIT 13


Case 8:10-ml-02145-DOC-RNB Document 428 Filed 12/17/12 ...

Documents

Transcript of Case 8:10-ml-02145-DOC-RNB Document 428 Filed 12/17/12 ...