CHRIS CAREYof Share Sleuth
Federal authorities are investigating the activities of two executives at Vicis Capital LLC, a New York hedge fund operator that began last year with nearly $5 billion under management.
Vicis is the biggest investor in a pair of small public companies that have been implicated in an insurance fraud scheme. The FBI and a grand jury have been examining what role, if any, representatives of the hedge fund played in that scheme.
The investigation has focused attention on the close relationship between Vicis and Midtown Partners & Co. LLC, a Florida-based investment bank that has paired Vicis with 20 companies whose shares trade mainly on the Over the Counter Market or Pink Sheets.
Sharesleuth learned of the probe while conducting its own investigation into Vicis. Our analysis of Securities and Exchange Commission filings shows that Vicis ultimately put more than $150 million into those companies, in return for stock, warrants, and notes convertible into shares.
Midtown Partners has collected at least $5 million in cash fees in connection with those transactions. It also has received blocks of stock and warrants that were worth millions more at the time they were issued.
The shares of many of the companies have plunged in value. Even the investments showing gains for Vicis are relatively illiquid, and the purported profits may exist only on paper.
Vicis and Midtown Partners did not respond to written questions submitted by Sharesleuth. The FBI declined to comment.
AN INSURANCE FRAUD CASE
The federal investigation involves two of Vicis’ portfolio companies — Medical Solutions Management Inc. (Pink Sheets: MSMT.PK), of Marlborough, Mass., and MDwerks Inc. (OTCBB: MDWK.OB), of Deerfield Beach, Fla. Over the past five years, the hedge fund has provided roughly $30 million in equity and debt financing to those companies.
A federal grand jury in New Hampshire has been hearing evidence in the fraud case, which revolves around falsified receivables for benefits covered by workers’ compensation plans.
Medical Solutions Management spent roughly $8 million to buy insurance receivables at a discount, under a deal signed in 2007. MDwerks took over the claims processing the following year.
Authorities believe that one or both companies learned that some of the receivables were bogus. But instead of reporting the problem, MDwerks continued collecting on them.
People familiar with the investigation told Sharesleuth that certain participants in the scheme have already been charged under sealed indictments.
The Vicis executive who has been implicated in the case is Christopher D. Phillips, who has been a managing director for nearly two years. He previously headed the parent company of Midtown Partners, which is based in Tampa and has been acting as a middleman for Vicis in equity and debt placements since 2005.
Partly because of its relationship with Vicis, the company ranks among the most active firms in the country in raising capital through so-called PIPE (Private Investment in Public Equity) deals.
Phillips was the point person for dealings between Vicis and Medical Solutions Management. He also sat on MDwerk’s board of directors. Shad L. Stastney, one of the hedge fund’s three founding partners, was a director of both companies.
Medical Solutions Management’s stock ended the year at 1.5 cents a share, down from a high of $10 in the second quarter of 2006. MDWerk’s stock is trading for 0.5 cents a share. It peaked at $1.55 in July 2007. READ MORE
If this is all true, this is a very major fraud and Vicis Capital will be next to Madoff and Bayou as largest hedge fund frauds of all time. Please post more as it is available.