Wells Fargo Agrees to Pay $105M to Settle Allegations Over Role in MedCap Scheme

Bloomberg Law®, an integrated legal research and business intelligence solution, combines trusted news and analysis with cutting-edge technology to provide legal professionals tools to be...

Wells Fargo Bank NA(WFC) agreed April 30 to pay $105 million to settle a consolidated class action in the U.S. District Court for the Central District of California, alleging that it breached its duties as a trustee of special purpose corporations created by a medical receivable financing company, by “willingly” handing out investor funds to the company executives, which were then allegedly used for fraudulent and personal uses (In re Medical capital Securities Litigation, C.D. Cal., Case No. SA 10-ML-2145 DOC(RNB), 4/30/13).

If approved by the court, Wells Fargo will pay the settlement amount within 10 business days after the preliminary approval order.

'Personal Piggy Banks.'

According to the first amended complaint, Medical Capital Holdings Inc. was in the business of purchasing accounts receivable from healthcare providers at a discounted price and collecting the debts. By offering notes issued by five SPCs it created--Medical Provider Funding Corporation II~VI--MCH had raised over $2.2 billion since 2003, the complaint said.

To ensure that investor funds were “carefully segregated and used to pay for accounts receivable[s],” MCH retained Wells Fargo and Bank of New York Mellon to serve as SPCs' trustees. However, the noteholder plaintiffs asserted, “under the claimed watchful eyes of the Trustees, MCH was a scam.”

According to the complaint, MCH and its executives allegedly “used the Trustee-controlled accounts as their personal piggy banks,” requesting and using investor funds to pay themselves “'administrative fees'” totaling nearly $325 million.

Further, it continued, MCH executives used the funds to “enjoy lavish personal lifestyles,” and to invest in a series of non-medical projects. Despite millions of dollars in investor funds being misappropriated, the plaintiffs said, Wells Fargo and BNYM “over and over again, without exception, willingly signed off on the requests.”

The plaintiffs explained that all five SPCs are now in default to investors, and are failing to make interest and principal payments on nearly $1 billion worth of notes. Further, the plaintiffs said, out of $625 million in medical accounts receivable on the SPC's books, only $80 million is “verifiable,” leaving the rest unaccounted for.

To see the Stipulation of Settlement, go to http://www.bloomberglaw.com/public/document/IN_RE_Medical_Capital_Securities_Litigation_Docket_No_810ml02145_/1.

Request Bloomberg Law®