Monthly Archives: August 2008

Regulators in five states are investigating whether Morgan Keegan, a Memphis-based brokerage firm, failed to disclose the risks associated with seven of its mutual funds.  These funds were loaded with debt positions that some have labeled “toxic.”

A number of lawsuits have been filed regarding these Morgan Keegan mutual funds.  In addition to the lawsuits, dozens of individual investors have filed FINRA arbitration claims against Morgan Keegan and its portfolio manger, James C. Kelsoe.

Morgan Keegan promoted Mr. Kelsoe’s funds as a stable source of income.  Sales materials for the High Income fund noted its “relative conservative credit posture” without “excessive credit risk.”  In reality the funds were loaded with risky asset-backed subprime mortgages securities and other questionable debt obligations.

One particularily troubling aspect of these cases is the apparent targeting of these funds to seniors and small, inexperienced investors. 

These people are exactly the type of investors who were seeking income and stability for their hard-earned savings and who could not afford to be exposed to risk.  In addition, these investors were least likely to be able to understand the complexities of the investments they held.

Business Week recently reported the story of Katherine and Lester Poer.  Mr. Poer is 81 years old.  The couple, on the advice and recommendation of a Morgan Keegan broker, took the $250,000 they received from a land sale and purchased the RMK Select Intermediate Bond fund. 

The RMK Intermediate fund has lost over 86% of its value in the last year and the Poers  have lost over $200,000 in their investment.

Unfortunately, their story is not unique.  Many other investors have found themselves in a similar situation.  Some are now retaining counsel to help them recover some of their losses.         

Massachusetts Secretary of State William Galvin is coming down on Merrill Lynch, one of the largest securities firms in the U.S., for not disclosing to its investors the volatility of the auction-rate market.

Galvin claims that Merrill sold auction-rate securities to investors, even though it was aware that the market was collapsing. Galvin asserts that Merrill profited by $90 million over the past two years because of its program to sell auction-rate securities.  

Merrill’s research analysts were censored from disclosing the high risk of the market, which failed in mid-February this year and left many investors with illiquid holdings.  Galvin’s complaint also claims that Merrill pressured and often evaluated its analysts based on how they projected positive messages about auction-rate securities.

Galvin filed a complaint against UBS AG in late June for similar deceptive actions by the bank to sell auction-rate securities as money-market funds.  

This is not the first time Merrill Lynch has been accused of using questionable research to attract buyers. In 2000, Merrill was found to have published misleading research that encouraged investors to invest in two Internet companies, Interliant Inc. and 24/7 Real Media Inc., both of which held shares that plummeted in value over the course of one to two years. The SEC accused Merrill, along with nine other firms, in 2002 with using biased research to attract investors, which resulted in a $1.4 billion settlement.

The claim against Merrill Lynch urges the firm to compensate its investors for their investment losses and potentially pay a fine.  However, investors generally do not see any recovery from regulator actions.  The best (and often only) way for investors to seek redress is through an individual arbitration action.