Wells Fargo, BNY Mellon to Pay $106M in MedCap Ponzi Settlement

Wells Fargo, BNY Mellon to Pay $106M in MedCap Ponzi Settlement

SANTA ANA, Calif. - The receiver for Medical Capital Holdings Inc. (MedCap) said yesterday that he had reached a $106 million settlement with Wells Fargo Bank NA and Bank of New York Mellon (BNY Mellon), resolving allegations that the banks were complicit in MedCap's alleged Ponzi scheme (Securities and Exchange Commission v. Medical Capital Holdings Inc., et al., No. 09-00818, C.D. Calif.).

In a declaration in support of his motion for approval of the settlement filed in the U.S. District Court for the Central District of California, MedCap trustee Thomas A. Seaman said Wells Fargo agreed to pay $49 million and BNY Mellon agreed to pay $57 million.

Litigation Costs, Risks

MedCap raised money by setting up special purpose corporations, known as medical provider funding corporations (MPFCs), which sold notes to investors.  In July 2008, the U.S. Securities and Exchange Commission sued MedCap, its entities and principals Sydney Field and Joseph Lampariello, alleging that Field and Lampariello engaged in a Ponzi scheme to defraud investors in the MPFCs. 

The banks served as indenture trustees for the MPFCs.  The banks were alleged to have breached the noteholder issuance and security agreements, which outlined their control and disbursement of funds.  On Oct. 12, 2010, the District Court issued an order authorizing Seaman to file claims against the banks if Seaman deemed proper.  He then entered settlement discussions with the banks.  Seaman said he opted for a settlement because he was concerned about the costs and risks of litigation against the banks.

"In [the] worst case scenario, if the Trustees prevailed (or if this Settlement is not consummated and the Trustees prevail in the future), the Receivership Estate would recover nothing, and would face indemnity claims that could well exceed $50 million, wiping out half of the Receivership Estate," Seaman said.

Related Actions

Seaman also said the settlement is the best option in light of related class and mass actions against the banks.

"The net benefit of the Settlement is significantly greater than $104 million, as it eliminates the risk to the Receivership Estate of having to pay the Trustees' legal fees should the Class Action or Mass Actions ultimately fail - an indemnity claim that I estimate currently exceeds $25 million, and would likely exceed $50 million if those cases are tried," he said.

Seaman is represented by Ronald Hayes Malone and Frank A. Cialone of Shartsis Friese in San Francisco.  Wells Fargo is represented by Edward T. Wahl, Stephen M. Mertz and Theresa H. Dykoschak of Faegre & Benson in Minneapolis, Jesse S. Finlayson of Finlayson Williams Toffer Roosevelt & Lilly in Irvine, Calif., and Timothy William Loose of Gibson Dunn & Crutcher in Los Angeles.  Counsel information for BNY Mellon was not available.

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