Wells Fargo Pays Medical Capital Investors $105 Million

Wells Fargo & Co. agreed to pay $105 million to settle a lawsuit by Medical Capital Holdings Inc. noteholders who alleged the bank, as a trustee, failed to protect their investment.

The noteholders and the bank filed a settlement agreement today in federal court in Santa Ana, California. Wells Fargo denies wrongdoing, according to the filing. Bank of New York Mellon Corp. in February agreed to pay $114 million to settle similar claims that it breached its duty as trustee for notes issued by Medical Capital.

“This case is really about a fraud committed by Medical Capital, which unfortunately caused a number of parties to suffer losses,” Jen Hibbard, a spokeswoman for San Francisco-based Wells Fargo, said in an e-mailed statement. “We are pleased to be able to put this matter behind us.”

Medical Capital, based in Tustin, California, raised money through private placements to buy accounts receivable from health-care providers at a discount. The company sought to make money by collecting the debts. The U.S. Securities and Exchange Commission sued Medical Capital and its top executives in 2009, saying they misappropriated the funds. The company was taken over by a receiver as part of the SEC case.

Personal Spending

In a third amended complaint filed in 2011, the noteholders said Medical Capital had raised more than $2.2 billion from about 20,000 investors before the SEC sued. Executives used the trustee-controlled accounts for personal spending and paid themselves about $325 million in administrative fees, according to the complaint.

“We’re very happy to have gained this result for the noteholders,” Jeff Westerman, a lawyer for the plaintiffs, said in a phone interview. “$219 million is a healthy recovery.”

The case is In re Medical Capital Securities Litigation, 10-02145, U.S. District Court, Central District of California (Santa Ana.)

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