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Case 8:09-cv-01267-DOC-RNB Document 1 Filed 11/02/2009 of 38

1 TABLE OF CONTENTS

2 Page

3 NATURE OF THE ACTION 1

4 JURISDICTION AND VENUE 3

5 PARTIES 3

6 Plaintiff 3

7 Defendant Trustees 3

8 Non-Parties 4

9 STATEMENT OF FACTS 6

10 MCHI’s Business 6

11 MCHI Sells $2.2 Billion Worth of Notes 8

12 Defendant Trustees Served as the Fiduciaries for Investors 10

13 Defendant Trustees Acted Negligently In Breach of Their Fiduciary

14Obligations 15

15The Non-Parties Allegedly Violated Federal SecuritiesLaws and

Misappropriated Investor Funds 17

16 Various SPCs Defaulted Due to Malfeasance by Certain Non-Parties 23

17 MCHI, MCC and Certain Non-Parties Inflated Collateral Reports 24

18 DAMAGES 26

19 CLASS ACTION ALLEGATIONS 27

20 COUNT I (By Plaintiff Individuall and on Behalf of All Class Members

21for Breach of Fiduciary Duty 29

22 COUNT II (By Plaintiff, Individually and on Behalf of the Class Membersfor Negligence) 30

23 COUNT III (By Plaintiff, Individually and on Behalf of All Class Members

24for Unjust Enrichment) 31

25 PRAYER FOR RELIEF 31

26 JURY TRIAL DEMANDED 31

27

28

CLASS ACTION COMPLAINT - i - CASE NO. DOCS\489020v6


1 Plaintiff Michel Rapoport, individually and on behalf of all others similarly

2 situated, by their undersigned counsel, allege the following upon personal

3 knowledge as to their own acts and upon information and belief as to all other

4 matters, which is likely to have evidentiary support after the opportunity for further

5 investigation and discovery. This action is related to the action entitled, Securities

6 and Exchange Commission v. Medical Capital Holdings, Inc., Case No. SA CV09-

7 08 18 (DOC) (RNBx), pending in this District before the Honorable David O.

8 Carter. Pursuant to Section IX of the Court’s Preliminary Injunction Order in the

9 SEC action, Plaintiff is presently enjoined from asserting claims, without

10 permission from that Court, against Medical Capital Holdings, Inc. (“MCHI”),

11 Medical Capital Corporation (“MCC”), its subsidiaries and affiliates, including

12 their officers and directors Sidney Field and Joseph Lampariello.

13 NATURE OF THE ACTION

14 1. Plaintiff brings this action against Defendants Wells Fargo Bank,

15 National Association (“Wells Fargo”) and Bank of New York Mellon (“BNYM”)

16 (collectively, “Defendant Trustees”), on behalf of a Class of persons comprised of

17 holders (the “Investors”) of secured promissory notes issued by Special Purpose

18 Corporations (“SPCs”), which include Medical Provider Funding Corporation II

19 (“MP II”), Medical Provider Funding Corporation III (“MP III”), Medical Provider

20 Funding Corporation IV (“MP IV”), Medical Provider Funding Corporation V

21 (“MP V”), and Medical Provider Funding Corporation VI (“MP VI”) (collectively,

22 the “SPCs”) that suffered damages.

23 2. The SPCs, created by MCHI and administered by MCHI’s wholly-

24 owned operating subsidiary MCC, were created to: (a) maintain investor funds in

25 trust; (b) invest such funds in healthcare accounts receivable financing and related

26 investments; (c) pay principal and interest to investors according to the terms of the

27 notes; and (d) pay MCC Administrative Fees based on guidelines established in the

28

CLASS ACTION COMPLAINT - 1 - CASE NO. DOCS\489020v6


1 trust agreement between the SPCs and the trustees and the offering memoranda

2 provided to Investors.

3 3. This action arises from a breach of fiduciary duties by the Defendant

4 Trustees, which were the gatekeepers of the money in the SPCs, specifically

5 charged with representing and protecting the financial interests of the Investors.

6 The Defendant Trustees’ role was to stand between the MCHI entities and the

7 Investors to prevent the SPC administrators from treating Investor funds as their

8 own. The Defendant Trustees were to ensure that SPC funds were paid to MCHI

9 entities only for authorized purposes and in authorized amounts. The Defendant

10 Trustees were paid substantial fees to perform these services.

11 4. Instead of safeguarding investor assets, however, the Defendant

12 Trustees, at least negligently, breached their duties to the Investors by rubber-

13 stamping MCC’s grossly excessive fee requests and failing to properly monitor the

14 use of investor funds, which were diverted to an array of nonmedical investments,

15 improperly commingled and transferred amongst the funds, and used by newer

16 SPCs to pay principal and interest to earlier SPC investors in a ponzi-like scheme.

17 In total, Defendant Trustees allowed MCC to collect $324.5 million in fees.

18 5. Only in 2009, sometime after the U.S. Securities and Exchange

19 Commission (“SEC”) initiated its investigation into the improper use of investor

20 funds by MCHI and related entities, did the Defendant Trustees take belated action

21 in an effort to protect investor assets.

22 6. Due to the Defendant Trustees’ failures, five SPCs are now in default

23 to investors having failed to make interest and principal payments on

24 approximately $1 billion worth of notes. Plaintiff and the Class have suffered and

25 will continue to suffer substantial losses. Plaintiff seeks to recover damages for

26 such losses on behalf of himself and the Class.

27

28

CLASS ACTION COMPLAINT - 2 - CASE NO.

DOCS\489020v6


1 JURISDICTION AND VENUE

2 7. The Court has jurisdiction over this action pursuant to 28 U.S.C.

3 §§ 1332(d) and 1367(a). The aggregate claims of Plaintiff and the members of the

4 Class exceed the sum or value of $5,000,000, exclusive of interest and costs, and

5 there is diversity of citizenship between at least one member of the proposed Class

6 and each of the Defendants.

7 8. Venue is proper in this District under 28 U.S.C. § 1391(a)(1) and (2).

8 At all relevant times, Defendant Trustees maintained offices in this District and

9 conducted substantial business and/or committed violations of United States law

10 by acts committed in this District. MCHI and MCC, which operated the SPCs,

11 maintained their principal places of business in this District and conducted

12 substantial business in this District. Additionally, the related SEC action is

13 pending in this District. Moreover, a substantial part of the events, acts, omissions

14 and transactions complained of herein occurred in this District.

15 PARTIES

16 Plaintiff

17 9. Plaintiff Michel Rapoport is a U.S. citizen and a resident of Sarasota,

18 Florida. Plaintiff Rapoport purchased an interest in the subject notes, and, due to

19 defaults on the notes, has been damaged.

20 Defendant Trustees

21 10. Defendant Wells Fargo, a national banking association, has its

22 principal executive offices located at Sixth Street and Marquette Avenue,

23 Minneapolis, Minnesota, and other affiliate offices in San Francisco and Los

24 Angeles, California. Wells Fargo, among other services, provides corporate trust

25 fiduciary and agency services.

26 11. Defendant BNYM, an asset management and securities services

27 company, is a Delaware corporation with its principal executive offices located in

28 New York, New York, and other affiliate offices in Los Angeles, California.

BNYM, among other services, provides corporate trust and agency services. BNY


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1 Mellon Corporate Trust services nearly $12 trillion in outstanding debt from 58

2 locations in 20 countries.

3 Non-Parties

4 12. MCHI, a Nevada corporation with its executive offices located in Las

5 Vegas, Nevada and its principal place of business in Tustin, California, is a

6 medical receivables financing company. MCHI and its affiliated entities provide

7 financing to healthcare providers by purchasing their accounts receivables at a

8 discount and making secured loans to the healthcare providers. MCHI’s affiliates

9 manage the collection of such receivables, loans and investments.

10 13. MCC, a Nevada corporation and wholly owned subsidiary of MCHI,

11 with its principal place of business in Tustin, California, serves as the administrator

12 for MCHI and each of MCHI’s Special Purpose Corporations, which include MP I

13 through MP VI. MCC manages the day to day operations and underwrites and

14 originates the healthcare accounts receivable purchases and performs accounting,

15 marketing, sales and client support functions. For example, MCC determines

16 which affiliate will fund the purchase or financing of accounts receivable and other

17 assets from a given seller or borrower based on various factors including

18 transaction size relative to size of the purchasing or financing affiliate and amounts

19 currently committed by each affiliate versus each affiliate’s funds available for the

20 purchase or financing of accounts receivable and other assets. MCC’s primary

21 source of revenue was the Administrative Fees paid through the various SPCs and

22 authorized by the Defendant Trustees.

23 14. Medical Tracking Services, Inc. (“MediTrak” or “MTS”), a wholly

24 owned subsidiary of MCHI and Nevada Corporation, acts as the servicer for all of

25 the MCHI and MP accounts receivable transaction data. MTS monitors, tracks,

26 and posts all asset purchases and collections.

27 15. National Health Benefits Corporation (“NHBC”) provides medical

28 healthcare claims processing, preferred provider organization re-pricing and


DOCS\489020v6


1 negotiated claims settlement services to insurance companies, third-party medical

2 claims administrators and to companies that self-insure their medical claims.

3 16. Healthcare Financial Management and Acquisitions, Inc. (“HCFMA”)

4 collects and liquidates portfolios of accounts receivables for MCC as well as

5 outside, unrelated clients, such as financial asset-based lenders.

6 17. A common management group directs the activities of the above

7 companies in the affiliated group that provides services related to MCHI and the

8 MPs.

9 18. Sidney M. Field, a resident of Villa Park, California, served as the

10 Chief Executive Officer and a director of MCHI and its affiliates during the

11 relevant period.

12 19. Joseph J. Lampariello, a resident of Newport Beach, California,

13 served as the President and Chief Operating Officer and was a director of MCH

14 and its affiliates.

15 20. In addition to the CEO Field and the President and COO Lampariello,

16 other key employees include: Alan Meister (Treasure and Chief Financial Officer)

17 and Thomas Fazio (General Counsel).

18 21. MP II, a Nevada corporation and wholly-owned SPC of MCHI

19 formed in October 2003, is an SPC that conducted two series of note offerings and

20 raised approximately $251.7 million from investors. As of June 30, 2009, MP II

21 had $88 million in outstanding notes and is in default.

22 22. MP III, a Nevada corporation and wholly-owned SPC of MCH

23 formed in February 2005, conducted two series of note offerings and raised

24 approximately $552 million from investors. As of June 30, 2009, MP III had

25 $109.4 million in outstanding notes and is in default.

26 23. MP IV, a Nevada corporation and wholly-owned SPC of MCH

27 formed in July 2005 and commenced business in October 2006, conducted two

28 series of note offerings and raised approximately $401.3 million from investors.


DOCS\489020v6


1 As of June 30, 200, MP IV had approximately $401 million in outstanding notes

2 and is in default.

3 24. MP V, a Nevada corporation and wholly-owned SPC of MCH formed

4 in September 2007, raised approximately $401.8 million form investors. As of

5 June 30, 200, MP V had approximately $401.1 million in outstanding notes and is

6 in default.

7 25. MP VI, a Nevada corporation and wholly-owned SPC of MCH

8 formed in April 2008, raised approximately $76.9 million from investors and is in

9 default.

10 STATEMENT OF FACTS

11 MCHI’s Business

12 26. MCHI and its affiliated entities were formed primarily to acquire

13 healthcare receivable and other assets related to the healthcare industry. MCHI

14 and its affiliates acquire these healthcare receivables at a discount to the face

15 amount of the receivable, that is, an amount less than MCHI and its affiliates

16 believe to be the fully collectible amount of the receivable. MCHI and its affiliates

17 then attempt to collect the full face amount of the receivable and retain any profit

18 resulting from the difference. MCHI securitizes the receivables selling the

19 securities to investors.

20 27. According to the Subscription Agreements and Private Placement

21 Memoranda (“PPM”) that accompanied each SPC note offering, the proceeds from

22 the sale of notes would be used to: (1) purchase healthcare receivables; (2) make

23 loans secured by assets; (3) purchase businesses and interests in businesses; (4)

24 provide funds for general operating purposes, including paying the fees of the

25 trustee and fees associated with maintaining the lock box accounts; and (5) pay

26 principal and interest on the notes.

27

28


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1 28. The PPM stated that the objective of MCHI and its affiliates was to

2 operate a healthcare financing business for profit allowing it to pay principal and

3 interest income to Investors.

4 29. According to the PPMs, MCHI’s and the MP’s investments outside of

5 healthcare financing would be limited to complementary lines of business within

6 the healthcare industry or healthcare financing business.

7 30. The PPMs further provided that MCHI and its affiliated entities would

8 not use any proceeds from the sales of notes to pay administrative fees to MCC for

9 the services it provides as administrator or to pay servicing fees to MediTrak as the

10 servicer of receivables. The fees relating to those services are governed by the

11 administrative services agreement and the master servicer agreement and were to

12 be paid out of amounts collected from healthcare receivables.

13 31. The PPM provided that MCHI and its related entities would limit their

14 investments in assets other than healthcare accounts receivable to not more than

15 40% of their assets, and within that 40%, they would invest less than half of that

16 amount, or not more than 20% of their total assets, in direct investments in

17 businesses.

18 32. MCHI funds its healthcare financing business through debt offerings

19 made to investors issued by SPCs in the form of notes.

20 33. MCHI’s wholly-owned SPC subsidiaries included MP II, MP III, MP

21 IV, MP V and MP VI (collectively, the “SPCs” or “MPs”). The SPCs were created

22 to purchase, hold and collect healthcare receivables and other financial assets.

23 34. MCHI and the MPs utilize the operating subsidiaries, including MCC

24 and MTS, to provide them with the services required for the assessment, valuation,

25 purchase, monitoring and administration of the accounts receivable, marketing,

26 origination, underwriting, monitoring and servicing of the purchased and financed

27 accounts receivable.

28


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1 35. MCC, MCHI’s wholly-owned subsidiary and chief operating

2 company, served as the administrator for each SPC pursuant to an Administrative

3 Service Agreement.

4 36. MTS served as the Servicer for each SPC pursuant to a Master

5 Servicing Agreement. Among other tasks, MTS provided data entry of receivables

6 and receivable payments for the SPCs.

7 37. MCC and MTS were responsible for collections on accounts

8 receivable and collateral on behalf of the Defendant Trustees and for the benefit of

9 Investors.

10 38. Defendants Wells Fargo and BNYM (“Defendant Trustees”) served as

11 Trustees for the holders of SPC notes pursuant to Note Issuance and Security

12 Agreements (the “Security Agreements”) between the MPs and the Trustees.

13 Defendant BNYM served as the Trustee for MP I, II, IV and VI. Defendant Wells

14 Fargo served as the Trustee for MP III and V.

15 39. According to an June 9, 2008, press release issued by Bank of New

16 York Mellon, “[c]orporate trust providers are appointed by corporations, municipal

17 governments and other entities issuing debt to perform a variety of duties,

18 including servicing and maintaining the debt issue, processing principal and

19 interest payments for investors, representing investors in defaults, and providing

20 value-added services for complex debt structures.”

21 40. The Defendant Trustees served as fiduciaries for investors in the SPC

22 funds.

23 MCHI Sells $2.2 Billion Worth of Notes

24 41. Between December 2003 and 2009, MCHI and the SPCs raised

25 approximately $2.2 billion through registered broker-dealers that sold the SPC

26 notes to more than 20,000 investors.

27 42. Details of the respective SPC note offerings were set forth in the PPM

28 and Subscription Agreements.


DOCS\489020v6


1 43. The notes sold to investors by MCHI and the SPCs had various

2 maturities ranging between one and seven years and interest rates between 8.5%

3 and 10.5%.

4 44. As of March 31, 2009, as Administrator of the SPCs, MCC controlled

5 receivables, loans, or investments owned by the SPCs with a purported value of

6 more than $1.2 billion.

7 45. The Subscription Agreements, entered into between the respective MP

8 and the investor, provided that the “Subscription Agreements shall be enforced,

9 governed and construed in all respects in accordance with the laws of the State of

10 California, as such laws are applied by California courts to agreements entered into

11 and to be performed in California by and between residents of California.”

12 46. The PPMs described, among other things, the terms of the notes, the

13 nature of and limitations on the loans and investments that will be made with the

14 proceeds, and the policies and procedures for the payment of fees to the Trustees,

15 MCC, and MTS.

16 47. The PPMs also contained representations, among others, to investors

17 that the SPCs: (1) net offering proceeds (proceeds after the deduction of offering

18 commissions and expenses of between 4% to 8%) would be used only to purchase

19 healthcare account receivables, make secured loans and investments in other

20 businesses; (2) MCC would receive a fee for its services as administrator with the

21 fee to be approved and authorized by one of the Defendants Trustees based on

22 reports and certifications provided to the Defendant Trustees by MCC, but that

23 such Administrative Fees would be paid out of amounts collected from the

24 accounts receivable and other investment proceeds, not from offering proceeds

25 and, only if, the Net Collateral Coverage Ratio exceeded 100%; and (3) MCC’s

26 fees for service as Administrator were comparable to those that non-affiliated third

27 parties would charge for providing these same services.

28


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1 48. According to the PPMs, the Defendant Trustees were charged with,

2 among other tasks: (1) representing the interests of Investors; (2) communicating

3 with MCHI and MCC; (3) receiving reports; (4) maintaining Investor funds used to

4 make investments; and (5) releasing funds to the SPCs for appropriate and

5 permitted purposes, including payment of interest and principal to Investors and

6 payment of appropriate Administrative Fees, including fees paid to MCC.

7 49. The SPCs had no employees or offices. As such, MCC and MTS

8 performed several functions of the SPCs, including: (a) negotiating, executing and

9 issuing notes, (b) identifying and evaluating potential receivable purchase

10 transactions, loans and other investments, (c) producing reports and statements to

11 the Trustees for the release of monies for the funding of receivable purchases,

12 loans and other investments, (d) handling healthcare provider and Investor

13 relations, (e) processing receivable payments and other loan investment payments

14 through lockbox accounts to the Defendant Trustees, and (f) providing periodic

15 reports to the Defendant Trustees.

16 50. SPC operations were governed by the Security Agreements between

17 the SPCs and the Defendant Trustees. The Security Agreements include a

18 provision that the agreements would be governed by California law and that the

19 Defendant Trustees would serve as trustees “for the benefit of [Investors].”

20 51. Under the terms of the Security Agreements, each series of notes

21 issued by the SPCs were represented to be secured by the SPCs own assets, which

22 include specific account receivables and all collections relating to the account

23 receivables. MCC and MTS, after collecting amounts related to the account

24 receivables, were required to transfer the funds to the Defendant Trustees for

25 deposit in the respective trust accounts.

26 Defendant Trustees Served as the Fiduciaries for Investors

27 52. The Defendant Trustees serve as trustees to the MPs under the Note

28 Issuance and Security Agreements (the “Security Agreements”).


DOCS\489020v6


1 53. According to the PPMs, the Defendant Trustees held the MP collateral

2 in trust for the benefit of investors. Specifically, the PPMs provided that MCHI’s

3 obligation to pay principal and interest on the notes was secured by a pledge to the

4 Defendant Trustees comprised of: (1) the accounts receivable, moneys, rights and

5 properties related to the healthcare industry, including HMOs, PPCs, and third-

6 party administrators, that may be purchased by MCHI from time to time from

7 funds disbursed from the trust account; (2) amounts as from time to time may be

8 held in the trust account created under the note agreement; (3) MCHI’s rights

9 under the lock box agreements for collections on the receivables and the servicing

10 and administration agreements; (4) MCHI’s rights under the various receivables

11 purchase agreements; and (5) any and all proceeds of the foregoing.

12 54. The SPCs and MCHI irrevocably appointed Defendant Trustees as

13 trustees for the benefit of the Investors and were vested with the powers to, among

14 others: (1) enforce, collect and dispose of collateral; (2) enforce transaction

15 documents; (3) file claims for the collection of collateral or enforce the rights of

16 the trustee for the benefit of Investors with respect to collateral; (4) appoint a

17 successor Servicer selected by the Investors; and (5) make distributions of SPC

18 funds.

19 55. Investor funds and collateral were placed under the control of the two

20 Defendant Trustees. Based on certifications and documents provided to them by

21 MCHI and related entities, Defendant Trustees authorized the use of trust account

22 funds, including the investment of investor funds and the payment of

23 Administrative Fees.

24 56. The Defendant Trustees were required to maintain separate trust

25 accounts for each series of notes for the benefit of the respective Investors.

26 Amounts relating to collateral or proceeds of collateral for a series of notes were to

27 be deposited into the appropriate trust account. MCC, MTS and the SPCs lacked

28 the authority granted to the Defendant Trustees to make distributions from the trust


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1 account funds. Pursuant to the terms of the Security Agreements, the Defendant

2 Trustees had exclusive authority to make distributions.

3 57. Defendant Trustees were entrusted to protect the Investors’ “first and

4 prior security interest in,” among other assets of each respective SPC, all of the

5 respective SPC’s receivables, collections with respect to such receivables, cash and

6 other assets, and trust accounts and subscription accounts.

7 58. In the PPMs and under the definition of “Administrative Fee” and

8 sections governing “Accounts; Payments on Notes,” the Security Agreements

9 established a priority of payments to be followed by the Defendant Trustees: (1)

10 payment of trustee fees; (2) payment of Investor principal and interest; (3)

11 payment, when allowed under the Security Agreement pursuant to the calculation

12 of the Net Collateral Coverage Ratio, of Administrative Fees to MCC; and (4)

13 payment of distributions to the MP after all notes have been paid in full.

14 Defendant Trustees were not permitted to approve or disburse funds for

15 Administrative Fees without MCC first certifying that all conditions had been

16 satisfied. According to the PPMs, even after MCC’s certification and written

17 request, the Defendant Trustees could not pay fees directly from investor funds.

18 59. Pursuant to the Security Agreements and Administrative Service

19 Agreements, MCC was entitled to request payment of an Administrative Fee.

20 Administrative Fee Requests were to be based on a written certifications prepared

21 by MCC on behalf of an MP or SPC and were submitted to Defendant Trustee

22 Wells Fargo (for MP III and MP V) or Defendant Trustee BNYM (for MP I, MP

23 II, MP IV, and MP VI). Specifically, according the Security Agreements:

24 The Debtor shall provide, or cause the Administrator [MCC] to

25 provide, on the 15th day of each month, a written certification to the

26 Trustee, in such forms at the Trustee and the Debtor shall agree upon,

27 which sets forth the calculation of the Net Collateral Coverage Ratio

28 and whether or not the Collateral Coverage Requirement is satisfied as


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1 of the last day of the month prior to the sate of such certificate. In

2 addition, whenever the Administrator shall request disbursement of

3 the Administrative Fee by the Trustee, the Debtor shall provide, or

4 cause the Administrator to provide, a certification to the Trustee with

5 its request, to the effect that the Collateral Coverage Requirement is

6 satisfied (after giving effect to the requested disbursement) on the

7 basis of the Net Collateral Coverage Ratio calculated and provided by

8 the Debtor to the Trustee as of the last day of the month preceding the

9 month in which such request is made.

10 60. As such, the written certifications accompanying the Administrative

11 Fee Requests were required to include the calculation of the Net Collateral

12 Coverage Ratio, which must remain in excess of 100% in order for the Defendant

13 Trustees to authorize the payment of Administrative Fees to MCC.

14 61. Under the terms of the various Security Agreements and PPMs, the

15 Net Collateral Coverage Ratio was derived by adding the value of all cash,

16 “eligible” accounts receivables and collateral portfolio (the “Expected Net

17 Receivable Amount”) to calculate the total assets in the respective fund, then

18 dividing the total assets by total liabilities (existing interest and principal

19 repayment obligations). Accounts receivable were only “eligible” for inclusion in

20 the calculation if purchased by an MP within 180 days of the date the claim was

21 submitted to the payor. Additionally, loans made by the MPs were required to be

22 valued using the lesser of the principal and interest due from the borrower or the

23 value of the property securing the loan.

24 62. According to the Security Agreements, the MP (through MCC as

25 administrator) was required to have all real and personal property securing loans

26 and investments appraised annually by an independent appraiser. The MP was

27 then required to certify each year that the required valuations had been completed.

28


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1 Each certification of the Net Collateral Coverage Ratio was to be based on the

2 most recent valuations. Specifically, according the Security Agreements:

3 The Debtor shall cause all real property included in securing any

4 portion of the Collateral to be appraised at least once every year by an

5 independent appraiser. The Debtor shall re-evaluate the Value of the

6 personal property included in or securing any portion of the Collateral

7 at least annually, which valuation process shall include an on-site

8 audit of such personal property. The Debtor shall cause each acquired

9 portfolio of Receivables that is a static pool (as opposed to a revolving

10 arrangement with a Seller) and that is included in the Collateral to be

11 re-evaluated by the Administrator’s employee responsible for

12 collections and liquidations, in light of performance since the date of

13 acquisition. The Debtor shall annually, not later than January 31 of

14 each year certify to the Trustee that these valuations have been

15 completed during the preceding calendar year, in accordance with this

16 Note Agreement and specifying the outstanding loan amount owed

17 with respect to such Non-Receivable Asset and the current Value

18 based on such valuations as of their respective dates during the

19 preceding calendar year. Calculations of the Net Collateral Coverage

20 Ratio, and certification given pursuant to Section 2.05(h) shall be

21 based on the most recently completed valuations of the types

22 described in this Section 3.05(i).

23 63. The Administrative Fee consisted of any amount in the trust account

24 that exceeded the amount needed for the collateral coverage ratio to equal 100%,

25 after all of the required payments of trustee, servicer and lockbox fees and all

26 principal and interest due on the notes.

27 64. Additionally, under the Security Agreement, “[i]n the case of an Event

28 of Default has occurred and is continuing, the [Defendant Trustees], in exercising


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1 the rights and powers vested in it by [the] Note Agreement[s], shall use the same

2 degree of care and skill in their exercise as a prudent person would exercise or use

3 under the circumstances in the conduct of his or her own affairs.”

4 65. It was an event of default if the Collateral Coverage Ratio was less

5 than 10% of the outstanding principal amount of the notes as of the beginning of

6 the month, and continued to be below 100% for a period of five consecutive days

7 following the report to the Defendant Trustees that the ratio was below this level.

8 66. In sum, MCC was only entitled to an Administrative Fee if, based on

9 recent independent valuations and a proper calculation of “eligible” accounts

10 receivables, the Net Collateral Coverage Ratio was at least 100%.

11 67. According to the Administrative Services Agreement, Administrative

12 Fees were to be paid only upon the approval of one of the Defendant Trustees.

13 68. As would be revealed by the SEC and a report by a Court-appointed

14 receiver, the SPCs were a scam and notes were sold using misleading prospectuses.

15 Furthermore, MCHI and its affiliates treated the SPCs as their own private bank by

16 improperly commingling funds between trusts, presenting grossly inflated

17 collateral reports to secure excessive administrative fees, and diverting investor

18 funds for an array of nonmedical investments. The Defendant Trustees rubber-

19 stamped all of MCHI’s requests even in the face of the multiple red flags which

20 were revealed in the SEC action. Only after the SEC began its investigation of

21 Medical Capital did the Defendant Trustees take any action to protect investor

22 monies. By that point, however, investor funds had already been misappropriated

23 under the Defendant Trustees’ watch. The Defendant Trustees failures in this

24 regard were in breach of their fiduciary obligations to Investors and amount to at

25 least negligent conduct.

26 Defendant Trustees Acted Negligently In Breach of Their Fiduciary

27 Obligations

2869. The Defendant Trustees at least negligently permitted the payment of

exorbitant Administrative Fees even though, based on a prudent review of the


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1 documentation the Defendants Trustees received and/or had ready access to, it

2 would be obvious that: (1) the Administrative Fees would have to be paid from

3 investor funds, not from accounts receivable collections, because the collection

4 amounts were grossly inadequate to cover the requested fees; (2) the Collateral

5 Reports and calculations of the Net Collateral Coverage Ratio were materially

6 inflated; and (3) the payment of Administrative Fees exceeded amounts allowed

7 under the terms of the Security Agreement, Administrative Services Agreement,

8 and/or Master Servicing Agreement. As such, Defendants Trustees’ authorizations

9 for the requested payments were facially improper.

10 70. In fact, the Defendant Trustees appear to have been suspicious of the

11 Non-Parties fee and other distribution requests. Defendant Trustee Wells Fargo

12 reported to the SEC that MCC employees failed to provide accurate information

13 during an investigation by the SEC into MCC’s business methods and processes,

14 including that MCC’s employees were instructed to delete emails containing

15 certain reports. Nonetheless, Defendant Trustee Wells Fargo continued to

16 authorize distributions based on the Non-Parties misrepresentations and false

17 certifications despite suspicions that the Non-Parties may be misappropriating

18 investor funds.

19 71. Only in 2009, after the commencement of the SEC investigation, did

20 Defendant Trustees’ refuse to honor MCC’s request for the payment of

21 Administrative Fees. In 2009, Defendant Trustees wrote to Investors highlighting

22 their recent efforts to monitor the SPCs’ accounts receivable, including the

23 engagement of independent third parties to value the underlying collateral.

24 Defendant Trustees were obligated to do these things all along, but negligently

25 failed to. The Defendant Trustees further noted that, in certain circumstances, they

26 refused requests by MCC to release funds from trust accounts to pay for accounts

27 receivable because MCC failed to provide sufficient information to make a

28 reasonable determination about whether any funds should be returned.


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1 72. Defendant Trustees also notified Investors that the Defendant Trustees

2 have incurred substantial professional fees and expenses to be paid from SPC

3 funds as part of their efforts to determine the true scope of the SPCs’ business and

4 the true value of their assets, work they should have performed years ago.

5 Defendant Trustees further exacerbated Plaintiff’s damages and constitute further

6 breaches of their fiduciary duties to Plaintiff.

7 73. In April 2009, Defendant Trustee Wells Fargo negotiated a

8 “Forbearance Agreement” on behalf of MP III Investors whereby it agreed not to

9 take action to enforce the rights of MP III Investors, but preserved its ability to

10 recover fees and expenses. Defendant Trustee Wells Fargo’s “Summary of

11 Significant Terms” of the Forbearance Agreement sent to Investors failed to

12 mention that Defendant Trustee Wells Fargo had self-servingly negotiated its own

13 release from claims made by MP III, as well as a mutual waiver of the right to jury

14 trial between Wells Fargo, MCC, MTT and MP III covering all claims arising from

15 the Forbearance Agreement, as well as the underlying “Note Agreements.”

16 The Non-Parties Allegedly Violated Federal SecuritiesLaws and

17 Misappropriated Investor Funds

1874. On July 16, 2009, the SEC filed a complaint in the United States

19 District Court for the Central District of California (Southern Division) alleging

20 that defendants in that action (the “SEC Action”) – MCHI, MCC, MP VI, Field,

21 and Lampariello (the “SEC Defendants”) – committed fraud in the offer and sale of

22 MP VI notes and violated or aided and abetted the antifraud provisions of the

23 federal securities laws, specifically Section 17(a) of the Securities Act of 1933

24 (“Securities Act”), 15 U.S.C. § 77q(a), and Section 10(b) of the Securities

25 Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C.§ 78j(b), and Rule 10b-5

thereunder, 17 C.F.R. § 240.10b-5.26

2775. The crux of the SEC’s complaint is that the SEC Defendants

28 misrepresented the use of the offering proceeds to investors in the MP VI PPM and

violated these representations by misappropriating millions of dollars in investor


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1 funds by paying themselves excessive Administrative Fees and higher than

2 disclosed offering fees and expenses directly from investor proceeds.

3 76. As described in the SEC complaint, although MCC was entitled to a

4 fee for its services, the PPMs highlighted, under the heading “Restrictions on Use

5 of Proceeds,” that the SPCs would not use “any proceeds from the sales of notes to

6 pay Administrative Fees to [MCC] for the services it provides as administrator”

7 and that such fees would rather be “paid out of amounts collected from the

8 accounts receivables and proceeds from other investments.” The PPMs further

9 represented that the SPCs believed that the Administrative Fees paid to MCC

10 would be “no greater than those an independent third-party would charge for

11 providing similar services.”

12 77. Specifically, the SEC alleged that the SEC Defendants: (1)

13 misappropriated approximately $18.5 million of the $76.9 million raised through

14 the sale of MP VI notes to pay Administrative Fees to MCC; (2) misrepresented in

15 the May 27, 2009, Supplemental MP VI PPM that less than $4 million of offering

16 proceeds had been used for commissions and expenses, when in fact, the SEC

17 Defendants had paid themselves a total of $21.7 million in Administrative Fees,

18 $16.9 million of which was paid from offering proceeds; (3) misrepresented that in

19 a supplemental PPM that more than $65.6 million of investor funds had been used

20 to purchase receivables when in fact only $48.8 million of the offering proceeds

21 were used in that manner; and (4) misrepresented to investors, in the PPM, that

22 SPCs affiliated with MP VI which had conducted similar offerings had not

23 defaulted on, or been late in making payments of principal and/or interest when in

24 fact two MP VI affiliated SPCs began defaulting on interest and/or principal

25 payments in the same month that Defendants began the MP VI offering.

26 78. MCHI and MCC misappropriated as Administrative Fees

27 approximately 24% of the amount raised from investors, far in excess of the

28 collections on receivables, in MP VI. These fees were distributed by the


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1 Defendant Trustee BNYM from investor funds, even though collections from

2 accounts receivable were obviously insufficient to justify any such payments.

3 79. The Court further reported that allegedly at least two other affiliated

4 SPCs have made interest payments belatedly and despite these defaults, the SEC

5 Defendants continued to solicit investors using the false MP VI PPM through at

6 least May 2009.

7 80. According to the SEC, MCHI’s CEO (Field) and COO (Lampariello),

8 who were senior officers and directors of MCHI and its subsidiaries and directly or

9 indirectly supervised MP VI’s and MCC’s chief financial officer and capital

10 markets department, knew or acted recklessly in not knowing: (1) about the

11 representations made in the MP VI PPM that investor funds would not be used to

12 pay fees to MCC; (2) about the representations made in the MP VI PPM that MP

13 VI had never defaulted on interest and principal payments to their investors; (3)

14 that MP VI and its affiliates had defaulted on interest and principal payments to

15 their investors; (4) that MP VI wrongfully used millions of dollars of investor

16 funds, in violation of the MP VI PPM, to pay excessive Administrative Fees and

17 offering commissions and expenses. Furthermore, Lampariello determined the

18 amount of Administrative Fees that MCC withdrew from each MP entity and

19 signed at least one document authorizing the transfer of Administrative Fees from

20 MP VI to MCC.

21 81. The SEC also alleged that the SEC Defendants did not maintain the

22 SPCs financial statements in accordance with Generally Accepted Accounting

23 Principals (“GAAP”) and failed to maintain accounting records in a manner that

24 would permit GAAP financial statements to be generated. For example, when the

25 SPCs purchased accounts receivables, the SPCs violated GAAP by recording the

26 expected collections in excess of the accounts receivable purchase price as revenue

27 and failing to reconcile the expected collections with actual collection.

28


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1 82. On the same day on which it filed the Complaint, the SEC filed an Ex

2 Parte Application for Temporary Restraining Orders and Orders: (1) freezing

3 assets; (2) appointing a temporary receiver; (3) prohibiting the destruction of

4 documents; (4) granting expedited discovery; and (5) requiring accountings. The

5 SEC also requested in its Ex Parte Application that the Court grant preliminary and

6 permanent injunctions and the appointment of a permanent receiver. In addition to

7 the aforementioned injunction relief, in its Complaint, the SEC also requests

8 disgorgement with prejudgment interest, and civil penalties.

9 83. On July 20, 2009, the Court entered a Temporary Restraining Order

10 granting substantially all of the injunctive relief requested by the SEC in their Ex

11 Parte Application and appointed Thomas A. Seaman as temporary receiver for

12 MCHI, MCC, MP VI, and their subsidiaries and affiliates (the “Receivership

13 Entities”). At the request of the SEC Defendants, the July 20, 2009, Order was

14 vacated.

15 84. On August 3, 2009, following briefing on the Ex Parte Application

16 issues, the Court entered a TRO granting the SEC’s requested relief and appointed

17 Thomas A. Seaman as temporary receiver for (the “Receivership Entities”). The

18 Court further enjoined any interested parties from commencing, prosecuting,

19 continuing or enforcing any suit or proceeding (other than the present action by the

20 Commission or any other action by the government) against any of the Non-

21 Parties.

22 85. Shortly after been appointed, the Receiver: (1) secured the physical

23 operations and properties of the Non-Parties; (2) called a meeting of employees;

24 (3) secured the assets of the SPCs; (4) provided notice of the TRO and

25 appointment of the Receiver and stay of all creditor actions against the

26 Receivership Entities to as many interested parties as possible; (5) advised

27 insurance companies and healthcare providers regarding the possible diversion by

28 healthcare providers of medical receivable payments owed to the MP funds in


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1 breach of relevant receivable purchase agreements and in violation of the TRO; (6)

2 established a public website with information about the case the receivership for

3 interested parties; and (7) initiated an investigation, which included interviewing

4 former MCC employees and counsel (Fazio and various outside counsel) regarding

5 the operations and assets of the SPCs, pending litigation and transactions, and the

6 flow of funds into and out of the companies; and locating and reviewing company

7 documents pertaining to key non-receivable assets, pending litigation and various

8 transactions.

9 86. Following his initial investigation, the Receiver filed three reports to

10 the Court, one on August 12, 2009, one on September 8, 2009, and one on October

11 9, 2009. The Receiver’s reports confirm many of the SEC’s original allegations

12 regarding MP VI, as well as a much wider-scope of improprieties affecting MP II,

13 III, IV and V, which had virtually identical restrictions on the payment

14 Administrative Fees and use of investor funds.

15 87. According to the Receiver, MCC collected Administrative Fees in the

16 amount of approximately $324 million from the various SPCs as set forth in the

17 following table:

18MP Fund Administrative Fees Paid to

19 MCC

20 MP I $91,030,000

21 MP II $55,659,000

22 MP III $48,650,00023

MP IV $56,565,00024

MP V $48,030,00025

26MP VI $24,615,000

27 TOTAL $324,899,000

28


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1 88. In addition to the information regarding the Administrative Fees paid

2 to MCC, the Receiver, in his August 12, 2009, Report, noted that “MCC appears to

3 have strayed from its core competency of purchasing and collecting medical

4 receivables, and began using investor funds to make direct loans to healthcare

5 providers [and that] MCC used a significant percentage of investor funds to make

6 investments unrelated to the healthcare industry, including real estate, advertising,

7 mobile phone technology and even a feature film.” Examples of the Non-Parties’

8 diversion of investor funds to an array of non-medical investment that fell outside

9 the scope of the PPM’s representations include:

10 89. The Perfect Game, LLC (“TPG”): The Receiver indicated that MP

11 IV owns a 39.3% economic interest in TPG and made loans to TPG of more than

12 $18 million. TGP’s primary asset is the rights to a feature relating to a Little

13 League team from Mexico that won the Little League World Series in 1957. Even

14 though the film has never even been shown and all efforts to distribute the film

15 have failed, MCC valued the combined TGP-related collateral at approximately

16 $24 million.

17 90. Vivavision, Inc. (“VVI”): MCHI or MP III.2 own 99.4% of VVI, a

18 California corporation whose primary business is marketing content for mobile

19 phone applications. According to the Receiver’s interview of Fazio, the initial

20 content being marketed by VVI was a live video feed of a hamster in a cage. VVI

21 was also provided with a line of credit and, as of June 30, 2009, MCC claimed an

22 account receivable collateral due from VVI of approximately $6.9 million.

23 According to the Receiver, VVI defaulted on its line of credit and MCC or MCHI

24 has not taken steps to execute on any collateral. The Receiver further reported that

25 Fazio stated that this account was handled personally by Lampariello and that

26 Fazio was not permitted to undertake collection activities.

27 91. Single Touch Interactive, Inc. (“STI”): MCHI and MCC made

28 loans to STI, a provider of mobile phone applications such as “shortcuts” dialing


DOCS\489020v6


1 and ringtones, and its former majority shareholder, Anthony Macaluso. The loans

2 were secured by shares of STI stock. The Receiver stated that this account was

3 handled personally by Lampariello and that, after loan defaults occurred, there was

4 a consensual foreclosure on the STI shares. MCC listed STI-related accounts

5 receivable collateral of approximately $15.9 million.

6 92. The Home Stretch: The Home Stretch is a 118-foot luxury yacht

7 located in Newport Beach, California. The yacht was acquired by Corporate

8 Impressions, LLC (“CI”), a wholly owned subsidiary of MCHI, through a series of

9 transactions and loans involving Edge Capital, Inc. The Receiver reports that

10 Medical Capital invested $4.5 million in the vessel and made loans to Edge Capital

11 with a present outstanding balance of approximately $23 million.

12 93. Emark: According to the Receiver’s September 8, 2009, Report, MP

13 VI made a loan to Emark, a company that specializes in pornographic website

14 advertising. MCHI holds at least a 50 percent ownership interest in this internet

15 advertising company.

16 Various SPCs Defaulted Due to Malfeasance by Certain Non-Parties

17 94. The Receiver, in the August 12, 2009, Report, also noted that,

18 beginning in August 2008 through the present, MP II through MP VI defaulted on

19 obligations to make payments of interest and/or principal to Investors and that the

20 defaults appear to be the result of a number of factors, including but not limited to:

21 (1) certain non-accounts receivable loans and investments that are in default and/or

22 have generated little or no returns; (2) interfund transfers of accounts receivables at

23 inflated prices; (3) failure to foreclose on collateral or exercise other rights under

24 governing agreements; (4) the diversion by healthcare provider clients of payments

25 on receivables purchased by the MPs; and (5) the misappropriation of investor

26 funds for investments in non-medical investments and loans.

27 95. The August 12, 2009, Receiver’s Report also states that the flow of

28 funds into the Receivership Entities from the collection of accounts receivable had


DOCS\489020v6


1 “slowed to a trickle.” As of June 30, 2009, MCC reported collateral securing

2 obligations to Investors with an aggregate value of more than $1.1 billion, but in

3 July 2009 collected only approximately $317,000.

4 MCHI, MCC and Certain Non-Parties Inflated Collateral Reports

5 96. The August 12, 2009, Receiver’s Report also indicates that, with

6 respect to MP II through MP VI, the valuations of the collateral securing the

7 obligation to investors are unreliable and likely overstated. For example, MCC

8 reported: (1) MP II collateral valued at $122 million including $30 million from a

9 facility that is the subject of a proposed sale at a proposed purchase price of $14.4

10 million; (2) MP III collateral valued at $153 million, including $30 million from a

11 facility that is not operating, is unable to pay its bills, and appears to have made no

12 interest payments on the pertinent loan; (3) MP IV collateral valued at $425

13 million, including $40 million from a facility that has been foreclosed and is not

14 operating; (4) MP V collateral of $407 million, including $20 million in medical

15 accounts receivable from a facility that was foreclosed and not operating; and (5)

16 MP VI collateral of $80 million, which includes millions of dollars of listed

17 medical receivables that appear to be dated and uncollectible and which have been

18 systematically sold from MP to MP.

19 97. The August 12, 2009 Receiver report also states that MCC, as

20 Administrator of the SPCs, failed to conduct independent appraisals of collateral

21 on an annual basis as required under the Security Agreements and that as a result:

22 (1) MCC’s reports to the Defendant Trustees failed to include independent and up-

23 to-date appraisals; and (2) the collateral values in the reports to the Defendant

24 Trustees were likely overstated.

25 98. According to the August 12, 2009, Receiver’s Report, MCC records

26 indicate that: (1) account receivables were systematically transferred from older

27 SPCs to newer SPCs accounts; (2) 301 such transfers valued at $829.5 million

28 were made between accounts; (3) some of the receivables being purchased were


DOCS\489020v6


1 already aged when purchased by the newer SPC; (4) some of the receivables

2 purchased by newer SPCs did not actually exist at the time of the purchase; and (5)

3 the value of the accounts receivable were overstated on Collateral Reports

4 provided to the Defendant Trustees when MCC requested to be paid

5 Administrative Fees.

6 99. The Receiver’s August 12, 2009, Report noted that the “transfer of

7 receivables from one SPC to another at values that appear to be inflated strongly

8 suggests the use of new investor monies to pay older investors.” The Receiver

9 further indicated that MP VI raised approximately $75 million from investors and

10 used approximately $53 million of such funds to purchase receivables from older

11 SPCs and to pay MCC approximately $24 million in Administrative Fees.

12 100. The Receiver also identified evidence of the possible commingling of

13 funds between entities and/or the overpayment of assets.

14 101. The Receiver’s September 8, 2009, Report further indicates that: (1)

15 the medical accounts receivable were attributed to just 104 accounts; and (2) most

16 of these accounts either did not exist or did not support the collateral values

17 assigned to them. According to the Receiver, the 104 accounts total approximately

18 $625 million. However, of those 104 accounts, only 42 could be verified and

19 represent just $80 million of the total. Of the 42 verified accounts, only six

20 contained accounts receivable aged under 180 days and represent $6 million of the

21 amounts owed. The remaining verified accounts, representing $74 million of debt,

22 were aged more than 180 days (with the vast majority purchased between 2002 and

23 2006 and just two accounts showing receivables purchased in 2008). Additionally,

24 53 of the 104 accounts – representing $542 million of the $625 million total

25 medical accounts receivable – could not be verified at all, i.e., they “no longer

26 exist.” The Receiver further found that there were no MediTrak reports to support

27 such accounts and, instead, that the MediTrak reports either indicate that the

28 accounts were closed or do not list the accounts at all. The Receiver found that


DOCS\489020v6


1 there were no active UCC-1 filings for the accounts and that there were no

2 collections or advances on the accounts for years.

3 102. Based on the aforementioned SEC Complaint and Receiver’s Reports,

4 the Collateral Reports submitted by MCC to Defendant Trustees to justify the

5 payment of Administrative Fees falsely certified the accuracy of the information

6 contained therein and wrongfully included, among other patent misrepresentations:

7 (1) assets that were incapable of valuation; (2) loan collateral assets valued far in

8 excess of their market value; (3) medical accounts receivable that had simply been

9 transferred between various SPC accounts managed by Defendants; and (4)

10 medical accounts receivable from accounts that were obviously inflated and, in the

11 majority of cases, no longer even exist. Additionally, MCC failed to conduct

12 annual independent appraisals of collateral underlying its loans and investments

13 and improperly inflated its Collateral Reports to reflect a Net Collateral Coverage

14 Ratio in excess of 100% which would permit the Defendant Trustees to authorize

15 the payment MCC Administrative Fees. Despite these glaring irregularities, the

16 Defendant Trustees signed off on MCC’s reports for fees.

17 DAMAGES

18 103. Beginning in August 2008 and continuing through the present, MP II

19 through VI defaulted on their obligations to make payments of interest and/or

20 principal to Investors. According to the Receiver, more than $1 billion in principal

21 is still owed to Investors and “it appears that [Investors] will almost certainly suffer

22 significant losses on their investments.”

23 104. The Receiver detailed the fees paid by, and the amounts owed to,

24 Investors for each of the SPCs, as follows:

25 Investor OutstandingAdministrative26 ($ in Funds Fees Paid Principal Owed (as

millions) Received (Est.) of June 30, 2009)27 (Est.) (Est.

28MP II $251.0 $55.6 $88.0

MP III $354.0 $48.6 $109.0


DOCS\489020v6


1 Investor OutstandingAdministrative($ in Funds Principal Owed (as2 millions) Received F

(Est. Paid of June 30, 2009)3 (Est.)(Est.

MP IV $407.0 $56.6 $401.04

MP V $403.0 $48.0 $401.0

5 MP VI $75.0 $24.6 $74.06

7 CLASS ACTION ALLEGATIONS

8 105. Plaintiff bring this class action pursuant to Rule 23 of the Federal

9 Rules of Civil Procedure on their own behalf and on behalf of all others who

10 purchased notes in MP II, III, IV, V and VI and have suffered damages (the

11 “Class”). Excluded from the Class are Defendants, the subsidiaries, parents,

12 affiliates, or controlled persons or entities of these Defendants, any entity that has a

13 controlling interest in Defendants, Defendants’ current or former directors, officers

14 and counsel as well as their family members, employees, or representatives. Also

15 excluded from the Class are Medical Capital Holdings, Inc., Medical Tracking

16 Services, Inc., Medical Capital Corporation, Medical Provider Funding

17 Corporation I, Medical Provider Funding Corporation II, Medical Provider

18 Funding Corporation III, Medical Provider Funding Corporation IV, Medical

19 Provider Funding Corporation V, Medical Provider Funding Corporation VI, and

20 the subsidiaries, parents, affiliates, or controlling persons of these entities, as well

21 as their family members, employees or representatives.

22 106. Plaintiff meet the prerequisites to bring this action on behalf of the

23 Class because:

24 (a) Numerosity: The Class is so numerous that joinder of all

25 members as individual plaintiff is impracticable. While the exact number of Class

26 members is unknown and can only be ascertained via discovery, Plaintiff believes

27 that there are hundreds if not thousands of Class members. Plaintiff is informed

28 and believes that the MP notes were sold to approximately 20,000 Class members.


DOCS\489020v6


1 The names and address of the Class members are available from the business

2 records of Defendants or from the various SPCs. Notice can be provided to the

3 Class members by first class mail and by using other techniques customarily used

4 in class actions.

5 (b) Commonality: There are questions of law and fact common to

6 the Class, including:

7 (i) Whether Defendants breached their fiduciary duties;

8 (ii) Whether Defendants committed negligence;

9 (iii) Whether Defendants were unjustly enriched;

10 (iv) Whether, because of Defendants’ misconduct, Plaintiff

11 and the Class are entitled to damages, restitution, equitable relief, and the amount

12 and nature of such relief.

13 (c) Typicality: Plaintiff’s claims are typical of the claims of the

14 Class because Defendants served as Trustees over MP II, III, IV, V and VI and

15 Plaintiff and members of the Class each sustained damages arising out of

16 Defendants’ wrongful conduct as complained of herein and the claims are based

17 upon similar conduct affecting all Class members.

18 (d) Adequacy: Plaintiff will fairly and adequately protect the

19 interests of the Class. Plaintiff has no interests that are antagonistic to, or in

20 conflict with, the interests of the Class as a whole, and have engaged competent

21 counsel, highly experienced in class actions and complex litigation.

22 107. A class action is superior to all other available methods for this

23 controversy because: (a) the prosecution of separate actions by the members of the

24 Class would create a risk of adjudications with respect to individual members of

25 the Class that would, as a practical matter, be dispositive of the interests of the

26 other members not parties to the adjudications, or substantially impair or impede

27 their ability to protect their interests; (b) the prosecution of separate actions by the

28 members of the Class would create a risk of inconsistent or varying adjudications


DOCS\489020v6


1 with respect to the individual members of the Class, which would establish

2 incompatible standards of conduct for Defendants; (c) Defendants acted or refused

3 to act on grounds generally applicable to the Class; and (d) questions of law and

4 fact common to members of the Class predominate over any questions affecting

5 only individual members, and a class action is manageable and superior to other

6 available methods for the fair and efficient adjudication of the controversy.

7 COUNT I

B8

Cla Plaintiff, Individuallyfor Breach

and onof Fiduciary Duty)

9 108. Plaintiff hereby incorporates all the above allegations by reference as

10 if fully set forth herein.

11 109. By virtue of Defendants as Trustees of the various SPCs or MPs,

12 Defendant Trustees established and are in a fiduciary relationship with Plaintiff

13 and the Class, and owe to Plaintiff and the Class duties, among others, of the

14 highest care, good faith, fair dealing, loyalty, and candid and adequate disclosure.

15 A fiduciary relationship existed at all times herein.

16 110. Defendant Trustees, separately and together, violated the fiduciary

17 duties owed to Plaintiff and the Class by, among other things: (1) failing to

18 properly represent and protect the interests of Investors; (2) failing to properly

19 maintain, segregate, protect and disburse Investor funds placed in their trust; (3)

20 authorizing the payment of excessive Administrative Fees in violation of PPM

21 representations and in the face of unverified and patently false collateral reports;

22 and (4) authorizing the diversion of investor funds for an array of non-medical

23 investments and loans.

24 111. Defendant Trustees’ breaches of their fiduciary duties were a

25 substantial factor in causing Plaintiff and Class members harm.

26 112. Defendant Trustees acted at least negligently or in bad faith in their

27 performance of their duties.

28


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1 113. As a result of the wrongful conduct of Defendant Trustees and their

2 breaches of fiduciary duty, Plaintiff and the Class have suffered and will continue

3 to suffer economic losses and other general and specific damages and are entitled

4 to actual, direct, incidental, consequential, statutory and exemplary damages in an

5 amount to be determined at trial.

6 COUNyT II(By Plaintiff,

Class Members for and on

Negligence) lf of the

8 114. Plaintiff hereby incorporate all the above allegations by reference as if

9 fully set forth herein.

10 115. Defendant Trustees and their agents and employees were at all times

11 under a duty to perform their work with due care and without negligence, and to

12 act in such a manner as a reasonably prudent person would act under similar

13 circumstances. Defendants further owed professional duties under applicable state

14 and federal laws, industry standards, and professional codes of ethics.

15 116. In performing the acts and omissions outlined above, Defendants

16 breached their duty of care to Plaintiff and to the Class. Among other things, and

17 without limiting the generality of the foregoing, Defendants: (a) failed to

18 competently monitor and supervise their agents and employees; (b) failed to ensure

19 that Investor funds held in trust for the benefit of Investors were appropriately

20 maintained, segregated, protected and disbursed; and (c) placed their own financial

21 interests above those of the Plaintiff and the Class.

22 117. Defendant Trustees’ negligence was a substantial factor in causing

23 Plaintiff and Class members harm.

24 118. As a result of the wrongful conduct of Defendants, Plaintiff and the

25 Class have suffered and will continue to suffer economic losses and other general

26 and specific damages, and are entitled to actual, direct, incidental, consequential,

27 statutory and exemplary damages in an amount to be determined at trial.

28


DOCS\489020v6


1 COUNT III(By Plaintiff, Individually and on Behalf of

2 All Class Members for Unjust Enrichment)

3 119. Plaintiff hereby incorporate all the above allegations by reference as if

4 fully set forth herein.

5 120. As a direct and proximate result of the misconduct as set forth above,

6 Defendant Trustees, by virtue of the fees and expenses paid to them by MCHI,

7 MCC or its affiliate SPCs, have been unjustly enriched and any fees and expenses

g paid to the Defendant Trustees should be returned to Plaintiff and the Class.

9 PRAYER FOR RELIEF

10 WHEREFORE, Plaintiff and all Class members pray that this Court:

11 A. Declare this action to be a proper class action pursuant to Rule 23 of

12 the Federal Rules of Civil Procedure on behalf of the Class defined herein, and

13 declare Plaintiff to be proper a Class representative and Plaintiffs counsel as

14 counsel for the Class;

15 B. Certify this action as a Class Action under Rule 23;

16 C. Order Defendant to pay Plaintiff and Class members an amount of

17 actual, direct, incidental, consequential, statutory and exemplary damages to be

18 determined at trial;

19 D. Award Plaintiff and members of the Class pre- and post judgment

20 interest, as well as reasonable attorneys' fees and costs of suit pursuant to, inter

21 alia, Cal. Code of Civ. Pro. § 1021.5 and 15 U.S.C. §§ 2301 et seq.;

22 E. Award such other relief as this Court may deem just and proper.

23 JURY TRIAL DEMANDED

24 Plaintiff demands a jury trial on all issues so triable.

25 DATED: November 2, 2009 MILBERG LLPJEFF S. WESTERMAN

26

27

28 / l JEFF S. WES E ̂


DOCS\489020v6


1 One California Plaza300 S. Grand Avenue Suite 3900

2 Los Angeles CA 90671Telephone: 0213) 617-1200

3 Facsimile: 213) 617-1975

4Email: [email protected]

MILBERG LLP

5 BENJAMIN Y. [email protected]

6 ANDREI [email protected]

7 TED J. [email protected]

8 One Pennsylvania Plaza, 49th FloorNew York, NY 10119

9 Telephone: (212) 594-5300

10Facsimile: (212) 868-1229

11Attorney for Plaintiff and the Class

12

13

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DOCS\489020v6


UNITED STATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA

NOTICE OF ASSIGNMENT TO UNITED STATES MAGISTRATE JUDGE FOR DISCOVERY

This case has been assigned to District Judge David O. Carter and the assigneddiscovery Magistrate Judge is Marc Goldman.

The case number on all documents filed with the Court should read as follows:

SACV09- 1267 DOC (MLGx)

Pursuant to General Order 05-07 of the United States District Court for the CentralDistrict of California, the Magistrate Judge has been designated to hear discovery relatedmotions.

All discovery related motions should be noticed on the calendar of the Magistrate Judge

NOTICE TO COUNSEL

A copy of this notice must be served with the summons and complaint on all defendants (if a removal action istiled, a copy of this notice must be served on all plaintiffs).

Subsequent documents must be filed at the following location:

Western Division [X] Southern Division U Eastern Division312 N. Spring St., Rm. G-8 411 West Fourth St., Rm. 1-053 3470 Twelfth St., Rm. 134Los Angeles, CA 90012 Santa Ana, CA 92701-4516 Riverside, CA 92501

Failure to file at the proper location will result in your documents being returned to you.

CV-18 (03106) NOTICE OF ASSIGNMENT TO UNITED STATES MAGISTRATE JUDGE FOR DISCOVERY


MILBERG LLPJEFF WESTERMAN (SBN 94559)[email protected] S. Grand Ave., Suite 3900Los Angeles, CA 90071Tel: (213) 617-1200 Fax: (213) 617-1975

UNITED STATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA

MICHEL RAPOPORT, Individually and on Behalf of CASE NUMBER

All Others Similarly Situated,SACV09 -1267 DOC (MLGx)

PLAINTIFF(S)

V.

WELLS FARGO BANK, NATIONALASSOCIATION and BANK OF NEW YORKMELLON, SUMMONS

DEFENDANT(S).

TO: DEFENDANT(S):

A lawsuit has been filed against you.

Within 20 days after service of this summons on you (not counting the day you received it), youmust serve on the plaintiff an answer to the attached Cdcornplaint q amended complaintq counterclaim q cross-claim or a motion under Rule 12 of the Federal Rules of Civil Procedure. The answeror motion must be served on the plaintiff's attorney, Jeff Westerman , whose address isMilberg LLP, 300 South Grand Avenue, Suite 3900, Los Angeles, CA 90071 If you fail to do so,

judgment by default will be entered against you for the relief demanded in the complaint. You also must fileyour answer or motion with the court.

Clerk, U.S. District Court

Dated: My Ali By: DODJIE GARGA TO& ► LDeputy Clerk

(Seal of the Court)

(Use 60 days if the defendant is the United States or a United States agency, or is an officer or employee of the United States. Allowed60 days by Rule 12(a)(3)J.

CV-01A (12/07) SUMMONS

Case 8:09-cv-01267-DOC-RNB Document 1 Filed 11/02/2009 of 38UNITED S'T'ATES DISTRICT COURT, CENTRAL DISTRICT OF CALIFORNIA

CIVIL COVER SHEET

I (a) PLAINTIFFS (Check box ifyou are representing yourself o) DEFENDANTSMICHEL RAPOPORT WELLS FARGO BANK, NATIONAL ASSOCIATION and BANK OF NEW

YORK MELLON

Florida Minnesota; New York

(b) Attorneys (Firm Name, Address and Telephone Number. If you are representing Attorneys (If Known) Marc T.G. Dworskyyourself, provide same.) Joel A. Feuer Lawrence C. Barth

Jeff S. Westerman, Milberg LLP Timothy W. Loose Joshua P. Groban

300 S. Grand Avenue, Suite 3900, Los Angeles, CA 90071 (213) 617-1200 Gibson, Dunn & Crutcher LLP Munger, Tolles & Olson LLP2029 Century Park East, Suite 4000 355 South Grand Avenue, 35th FloorLos Angeles, CA 90067-3026 Los Angeles, CA 90071-1560

II. BASIS OF JURISDICTION (Place an X in one box only.) III. CITIZENSHIP OF PRINCIPAL PARTIES - For Diversity Cases Only(Place an X in one box for plaintiff and one for defendant.)

q 1 U.S. Government Plaintiff q 3 Federal Question (U.S. PTF DEF PTF DEFGovernment Not a Party) Citizen of This State 01 q 1 Incorporated or Principal Place q 4 q 4

_/of Business in this State

q 2 U.S. Government Defendant l(4 Diversity (Indicate Citizenship Citizen of Another State l^J 2 q 2 Incorporated and Principal Place q 5 Z5of Parties in Item III) of Business in Another State

Citizen or Subject of a Foreign Country q 3 q 3 Foreign Nation 1716 Q 6

IV. ORIGIN (Place an X in one box only.)

5(1 Original q 2 Removed from q 3 Remanded from q 4 Reinstated or q 5 Transferred from another district (specify): q 6 Multi- q 7 Appeal to DistrictProceeding State Court Appellate Court Reopened District Judge from

Litigation Magistrate .fudge

V. REQUESTED IN COMPLAINT: JURY DEMAND: S(Yes q No (Check `Yes' only if demanded in complaint,)

CLASS ACTION under F.R.C.P. 23: a(Yes q No q MONEY DEMANDED IN COMPLAINT: S

VI. CAUSE OF ACTION (Cite the U.S. Civil Statute under which you are fling and write a brief statement of cause. Do not cite jurisdictional statutes unless diversity.)

Breach of Fiduciary Duty; Negligence; Unjust Enrichment; Violations of Bus. & Prof Code §§ 17200 et. seq.

VII- NATURE OF SUIT (Place an X is one box only.)

State ReapporReapportionmentC1110a p 0 % S`Q r ^^,`, br , 1I n ; 1

q 400 S Insurance PERS©NAL Eh]II71fY ^$RSONAL ",^ PTA , _W q 710 Fair Labor Standardsq 410 Antitrust q ]20 Marine q 310 Airplane i > '1?ROpERTY 01510 Motions to Actq 430 Banks and Banking q 130 Miller Act q 315 Airplane Product q 370 Other Fraud Vacate Sentence q 720 Labor/Mgmt.q 450 Cornmerce/ICC q 140 Negotiable Instrument Liability 71 Truth in Lending Habeas Corpus Relations

Rates/etc, 0 150 Recovery of q 320 Assault, Libel & 380 Other Personal q 530 General q 730 Labor/Mgmt.q 460 Deportation Overpayment & Slander Property Damage 0535 Death Penalty Reporting &q 470 Racketeer Influenced Enforcement of q 330 Fed. Employers' q 385 Property Damage q 540 Mandamus/ Disclosure Act

Liabilityand Corrupt Judgment Product Liability Other q 740 Railway Labor ActOrganizations q 151 Medicare Act q 390 Marine. `; .o ,, *

q 345 Marine Product C7 550 Civil Rights q 790 Other Labor

[71480 Consumer Credit q 152 Recovery of DefaultedLiability

q 422 Appeal 28 USC 05 55 Prison Condition Litigationq 490 Cable/Sat TV Student Loan (Excl. 158 ^ tl (aRE E IA Q 791 Emp1. Ret. Inc.

q 350 Motor Vehicle r3,^,. dq 810 Selective Service Veterans)

q 355 Motor Vehicleq 423 Withdrawal 28 4 ^ SeeuriV Act

q 850 Securities/Commodities/ q 153 Recovery of

USC 157 q 610 Agriculture '^^^^tProduct LiabilityExchange Overpayment of q 360 Other Personal -G» ^. q 620 Other Food & q 820 Copyrights

0 875 Customer Challenge 12 Veteran's Benefits Injury q 441 Voting Drug q 830 PatentUSC 3410 q 160 Stockholders' Suits q 362 Personal Injury- q 442 Employment q 625 Drug Related q 840 Trademark

q 890 Other Statutory Actions q 190 Other Contract Med Malpractice q 443 Housing/Acco- Seizure of-W-M C7O YRjq 891 Agricultural Act q 195 Contract Product q 365 Personal Injury- mmodations Property 21 USC 13 861 HIA (1395ff)q 892 Economic Stabilization Liability Product Liability q 444 Welfare 881 q 862 Black Lung (923)

Act q 196 Franchise q 368 Asbestos Personal q 445 American with q 630 Liquor Laws q 863 DIWC/DIWWq $93 Environmental Matters $wZ

Injury Product Disabilities - q 640 R.R. & Truck (405(g))q 894 Energy llocation Act q 210 Land Condemnation Liabili Employment q 650 Airline Regs q 864 SSID Title XVI

gY tY_^.,7q 895 Freedom of Info. Act q 220 Foreclosure q 446 American with q 660 Occupational q 865 RSI 405(Qq 900 Appeal of Fee Determi- Cl 230 Rent Lease & Ejectment q 462 Naturalization Disabilities - Safety /Health vD n ^I,A3 SUIT

nation Under Equal q 240 Torts to Land Application Other q 690 Other q 870 Taxes (U.S. PlaintiffAccess to Justice q 245 Tort Product Liability E1463 Habeas Corpus- q 440 Other Civil or Defendant)

q 950 Constitutionality of q 290 All Other Real Property Alien Detainee Rights q 871 IRS-Third Party 26State Statutes 0 465 Other Immigration USC 7609

Actions

SACV09 -1267 DOU (MLGx)

FOR OFFICE USE ONLY: Case Number:

AFTER COMPLETING THE FRONT SIDE OF FORM CV-71, COMPLETE THE INFORMATION REQUESTED BELOW.

CV-71 (05/08) CIVIL COVER SHEET Page 1 of 2

Case 8:09-cv-01267-DOC-RNB Document 1 Filed 11/02/2009 of 38UNITED STATES DISTRICT COURT, CENTRAL DISTRICT OF CALIFORNIA

CIVIL COVER SHEET

VIII(a). IDENTICAL CASES: Has this action been previously filed in this court and dismissed, remanded or closed? WNo q YesIf yes, list case number(s):

JVIII(b). RELATED CASES: Have any cases been previously filed in this court that are related to the present case? q No D YesIfyes, list case number(s): SACV09-1048; SACV09-1122; SACV09-1137; SACV09-6928

Civil cases are deemed related if a previously filed case and the present case:(Check all boxes that apply) C(A. Arise from the same or closely related transactions, happenings, or events; or

VB. Call for determination of the same or substantially related or similar questions of law and fact; or

P(C. For other reasons would entail substantial duplication of labor if heard by different judges; or

q D. Involve the same patent, trademark or copyright, and one of the factors identified above in a, b or c also is present.

IX. VENUE: (When completing the following information, use an additional sheet if necessary.)

(a) List the County in this District; California County outside of this District; State if other than California; or Foreign Country, in which EACH named plaintiff resides.q Check here if the government, its agencies or employees is a named plaintiff. If this box is checked, go to item (b).

County in this District:* California County outside of this District; State, if other than California; or Foreign Country

Florida

b) List the County in this District; California County outside of this District; State if other than California; or Foreign Country, in which EACH named defendant resides.q Check here if the government, its agencies or employees is a named defendant. If this box is checked, go to item (c).


Minnesota; New York

c) List the County in this District; California County outside of this District; State if other than California; or Foreign Country, in which EACH claim arose.Note: In land condemnation cases, use the location of the tract of land involved.


Orange

* Los Angeles, Orange, San Bernardino, Riverside, Ventura, Santa Barbara, or San Luis Obispo CountiesNote: In land condemnation cases, use the location of the tract of land involved

/^jX. SIGNATURE OF ATTORNEY (OR PRO PER): V

Y V/^Qd ttiwsn / /V :S— Date November 2, 2009

Notice to Counsel/Parties: The CV-71 (JS-44) Civil Cover Sheet and the information contained herein neither replace nor supplement the filing and service of pleadingsor other papers as required by law. This form, approved by the Judicial Conference ofthe United States in September 1974, is required pursuant to Local Rule 3-1 is not filedbut is used by the Clerk of the Court for the purpose of statistics, venue and initiating the civil docket sheet. (For more detailed instructions, see separate instructions sheet.)

Key to Statistical codes relating to Social Security Cases:

Nature of Suit Code Abbreviation Substantive Statement of Cause of Action

861 HIA All claims for health insurance benefits (Medicare) under Title 18, Part A, of the Social Security Act, as amended.Also, include claims by hospitals, skilled nursing facilities, etc., for certification as providers of services under theprogram. (42 U.S.C. 1935FF(b))

862 BL All claims for "Black Lung" benefits under Title 4, Part B, of the Federal Coal Mine Health and Safety Act of 1969.(30 U.S.C. 923)

863 DIWC All claims filed by insured workers for disability insurance benefits under Title 2 of the Social Security Act, asamended; plus all claims filed for child's insurance benefits based on disability. (42 U.S.C. 405(g))

863 DIWW All claims filed for widows or widowers insurance benefits based on disability under Title 2 of the Social SecurityAct, as amended. (42 U.S.C. 405(g))

864 SSID All claims for supplemental security income payments based upon disability filed under Title 16 of the Social SecurityAct, as amended.

865 RSI All claims for retirement (old age) and survivors benefits under Title 2 of the Social Security Act, as amended. (42U.S.C. (g))

CV-71 (05/08) CIVIL COVER SHEET Page 2 of 2

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