Monthly Archives: August 2009

Regions Financial Corp., whose brokerage arm is Morgan Keegan & Company, has revealed in its Aug. 5 10-Q filing with the Securities and Exchange Commission (SEC) that Morgan Keegan, Morgan Asset Management Company and three employees each received a Wells notice in July from the SEC’s office in Atlanta, alerting them to prepare for future enforcement actions for possible violations of the federal securities laws. 

A 10-Q is a quarterly report required by the SEC for publicly traded companies. Generally, firms file a 10-Q 45 days after the end of a quarter. The document itself contains similar information found in a company’s annual 10-K filing, but the 10-Q information usually is less detailed; moreover, in most cases, the financial statements in a 10-Q are based on assumptions, which typically require revisions in future accounting periods.

In addition to the SEC’s notice, Morgan Keegan received a second Wells notice in July – this one from the Financial Industry Regulatory Authority (FINRA). According to that notice, a preliminary determination had been made by FINRA, recommending discipline actions against Morgan Keegan for violating various NASD rules in connection to sales of certain investment products.

In both the SEC and FINRA notices, the “products” in question include a group of seven proprietary mutual funds that are facing a slew of arbitration claims by investors who suffered sizable losses in 2007 and 2008 because of investing gambles made by Morgan Keegan in risky debt and other mortgage-related holdings. 

In their claims, investors allege that Morgan Keegan misrepresented the funds as low-risk and high-yield products, when in reality the funds were tied to the most volatile components of the mortgage loan industry.

When that industry ultimately collapsed, investors lost 90% and more of their money in the RMK funds. According to the pending arbitration cases against Morgan Keegan, investor losses related to the RMK mutual funds total more than $2 billion.

Morgan Keegan & Co., the Memphis-based brokerage firm owned by Regions Financial Corp., is facing hundreds of arbitration claims by investors who lost billions of dollars in seven RMK mutual funds that made risky investments in mortgage-related securities. Now Morgan Keegan is asking a Birmingham court to overturn several recent arbitration awards that ruled in favor of investors and their claims against the troubled brokerage.

Morgan Keegan filed its most recent motion to vacate on July 22 over a $220,000 award. According to an Aug. 4 story in the Wall Street Journal, Morgan Keegan is basing its appeal on the fact that the arbitration panel chairman should have been removed from the panel because he resided on a prior arbitration panel that also ruled against Morgan Keegan. 

In another appeal filed in May, Morgan Keegan asked the court to vacate a $628,000-plus award. In that appeal, Morgan Keegan accuses arbitrators of misconduct for not postponing a hearing during which the investors presented suitability claims. The investors, Morgan Keegan says, had “disavowed” such claims. 

A third motion to vacate also was filed in May in which Morgan Keegan accused an arbitration panel of exceeding its authority by awarding more than $187,000 in damages, attorneys fees and costs. Steven B. Caruso, a New York attorney with Maddox Hargett & Caruso, represents the investor in that case.

Arbitration appeals are considered unusual and difficult to win. Moreover, the strategy always comes with a price tag.

“Who pays for it?,” asks Caruso in the Wall Street Journal article. “The shareholders of Regions Financial.”

The Securities and Exchange Commission (SEC) has charged Bank of America (BofA) of lying to investors and misleading them about billions of dollars in bonuses being paid to Merrill Lynch executives at the time of its acquisition of the firm. Bank of America, which bought Merrill earlier this year, agreed to settle the SEC’s charges and pay a penalty of $33 million.

According to the SEC’s complaint, Bank of America was in violation of securities laws when it allegedly told shareholders in November 2008 that year-end bonuses would not be paid without its consent.

“In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008,” the SEC said in a statement. “The disclosures in the proxy statement were rendered materially false and misleading by the existence of the prior undisclosed agreement allowing Merrill to pay billions of dollars in bonuses for 2008.”

As reported Aug. 3 by the Washington Post, New York Attorney General Andrew Cuomo and Bank of America have been at odds with each over the bonus payments. In February, Cuomo subpoenaed the bank to obtain the names of all bonus recipients, contending that Merrill Lynch accelerated the payments before the announcement of a $9.8 billion fourth-quarter loss.

Citigroup did it, followed by Morgan Stanley, UBS, Merrill Lynch, Wachovia, Bank of America (BofA) and, most recently, Morgan Keegan and Ameritrade. The “it” concerns settlement agreements with the Securities and Exchange Commission (SEC) to repurchase billions of dollars worth of auction-rate securities from retail investors. Scores of Wall Street firms agreed to the deals with regulators, with only a few holdouts. One of those holdouts: Raymond James Financial. 

Raymond James Financial is the subject of Gretchen Morgenson’s Aug. 1 column in the New York Times. In the article, she writes that clients of the Tampa-based brokerage currently hold some $800 million of illiquid auction-rate securities, down from $1 billion earlier this year.

The decline is tied to redemptions by issuers of auction-rate securities, such as closed-end funds and municipalities. So far, Raymond James has shown no interest in redeeming customers’ holdings. Its reasoning? Buying back $800 million of auction-rate securities at par is equal to more than 4% of the company’s total assets and 42% of its shareholder equity. 

On the other hand, Raymond James apparently had the financial stability last year, at the height of the credit crisis, to raise its dividend 10%. The move proved especially beneficial for Thomas James, CEO of Raymond James Financial. James owns 12.2% the company shares outstanding. Dividends on those shares generated a handsome profit totaling about $6 million for James and another total another $6.5 million this year if the company continues to pay the current rate of 44 cents a share.

The payments are in addition to James’ salary and pay package, which is valued at $3.55 million, according to the New York Times story.

Then there’s the money Raymond James came up with to fund its corporate branding campaign. In 2008 and 2009, the company spent $6.3 million to acquire the naming rights to the stadium where the Tampa Bay Buccaneers play. The contract runs until 2016, and the costs rise 4% every year.

Meanwhile, as the “financially strapped” Raymond James funds million-dollar salaries, raises its dividend and outlays millions of dollars on corporate advertising and marketing efforts, its clients remain permanently caught in an auction-rate securities nightmare.