Vertex colors are part of the mesh. You create them with a modelling tool. I'm not sure if MED can do this, but I expect that mdl supports vertex colors. An example of how to use a vertex color:

http://stackoverflow.com/questions/11856547/getting-the-color-of-a-vertex-in-hlsl

This should get you started. I haven't done anything in hlsl since I departed from 3dgs, but it should be fairly simple.