Investor's Watchdog.com: Stock, finance and investment protection for investors

The SEC has charged Medical Capital Holdings, Inc. (“MCH”) with fraud.  Massachusetts Secretary of State has charged Securities America, Inc. with helping to sell MCH’s alleged fraud.To motivate Securities America, MCH treated Securities America executives to trips to Las Vegas and golf outings at Pebble Beach in California.  MCH ultimately paid Securities America more than $26 million in compensation from the note sales.  Given that it defaulted on the notes, perhaps MCH should have spent that money another way.According to Galvin, Securities America should have investigated better before recommending that its customers buy MCH notes.  ”People invested their life savings, while this dealer hid from them the truth of what they were getting into,” Galvin said.

This case points out the tension between a broker-dealer’s need to earn income and its duty to protect its customers.  Were Securities America executives influenced by the prospect of earning millions of dollars by selling MCH notes?  Was Securities America’s supposed “due diligence” investigation skewed by the desire to earn those millions?  With the prospect of $26 million in mind, how could Securities America have done a thorough, objective due diligence investigation?

The two-part solution to this problem is for broker-dealers to hire independent investigators to do these due diligence investigations and for legislators to ensure that regulators like Galvin have the resources to pursue enforcement actions like this one.