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Category Archives: Bond Losses

Investor Wins FINRA Award In Schwab YieldPlus Claim

On June 26, 2009, a Washington, D.C., arbitration panel of the Financial Industry Regulatory Authority (FINRA) ruled in favor of investor David Cutler and his claim (FINRA No. 09-00300) against Charles Schwab & Company and its Schwab YieldPlus Fund.

The panel awarded Cutler $11,400.

Cutler’s complaint against San Francisco-based Charles Schwab is similar to hundreds of other arbitration claims filed with FINRA by investors who allege that Charles Schwab misrepresented the risks of the Schwab YieldPlus fund by failing to disclose important information about the risky securities it held.

Specifically, the Schwab YieldPlus fund was marketed and sold as a safe and conservative alternative investment to money market funds. Later, investors learned the YieldPlus fund was heavily concentrated in high risk and toxic subprime mortgage-backed securities and in even more risky collateral debt obligations (CDOs). Ultimately, Schwab’s failure to diversify the fund’s portfolio caused investors to collectively lose approximately $1.3 billion in 2008.

In 2008, approximately 74% of customer claimant cases filed with FINRA resulted in monetary settlements or awards for the investor.

Morgan Keegan Losses Keep Growing In FINRA Rulings

More investors are scoring legal victories in their claims against Morgan Keegan & Company and a group of proprietary mutual funds. As reported June 7, 2009, by The Birmingham News, 16 of investors’ 20 wins came in the past 25 arbitration hearings with the Financial Industry Regulatory Authority (FINRA). In April, the Memphis-based investment firm suffered six consecutive losses in arbitration negotiations with investors.

Many investors who have filed claims with FINRA lost up to 95% of their money the Morgan Keegan mutual funds.

The claims against Morgan Keegan involve several collapsed bond funds that plummeted in value following the onset of the mortgage loan crisis. The common theme in the majority of investors’ claims is that Morgan Keegan misrepresented the mutual funds as corporate bonds and preferred stocks, giving the illusion of diversification and low risk levels.

Later, losses in the funds – which entailed more than $2 billion between March 31, 2007, and March 31, 2008 – were traced back to the underlying investments made by Morgan Keegan. The investments included risky and untested types of subprime mortgage securities, collateral debt obligations (CDOs) and other debt instruments.

Hyperion Brookfield Asset Management now manages the funds at the center of the ongoing litigation.

FINRA Finds Morgan Keegan Liable

A Birmingham arbitration panel (FINRA Case Number 08-00926) ruled against Morgan Keegan & Company in a claim involving the RMK Select High Income-C Bond Fund. 

In March 2008, investors Richard and Carolyn Bland filed their claim with the Financial Industry Regulatory Authority (FINRA), charging Morgan Keegan of failing to disclose certain risks about the Select High Income-C Bond Fund, unsuitability, failure to supervise and breach of fiduciary duty.

On June 10, 2009, a FINRA panel awarded the Blands $21,000 plus interest, deciding Morgan Keegan failed to properly supervise trading activity in the claimants’ account, allowing all of their assets to be deposited into the Morgan Keegan Select High Income-C Bond Fund to the exclusion of other investments.

More Investors Prevail In Cases Over Toxic RMK Funds

The arbitration scorecard keeps getting bigger for investors and their arbitration cases against Memphis-based Morgan Keegan & Co. At the heart of the legal disputes: Seven mutual bond funds that aggrieved investors say Morgan Keegan and fund managers led them to believe were invested in conservative preferred stocks and corporate bonds. Instead, the funds, collectively known as the RMK Funds, took high-risk bets on speculative and toxic financial products such as collateralized debt obligations and derivatives.

Other troubled RMK funds at the center of the ongoing litigation were tied to the credit default swaps business, an investing strategy that essentially entails a “bet” between two parties on the likelihood a bond or similar type of investment will default. When the housing market crashed and burned in the summer of 2007, that’s exactly what happened, and certain RMK funds subsequently were forced to pay off huge losses.

Ultimately, Morgan Keegan’s investing gambles, along with the company’s alleged deception to keep the credit risks of the funds’ investments a secret, would cost investors dearly. Some of the RMK funds lost more than 90% of their value following the collapse of the housing market. In turn, investors suffered more than $2 billion in losses in just 2007 alone.

Since then, hundreds of arbitration cases have been filed by investors against Morgan Keegan for losses in the funds. Now, after months of waiting to tell their story, it appears momentum is building on the side of investors.  As reported June 7, 2009, by The Birmingham News, 16 of investors’ 20 wins came in the last 25 hearings with the Financial Industry Regulatory Authority (FINRA). In just the month of May 2009, FINRA announced eight arbitration decisions in favor of investors.

As for Morgan Keegan, the legal battle over its collapsed bond funds has played havoc with its stock price. The company’s shares plummeted more than 70% in the past year.

In 2008, management responsibilities for the seven RMK funds were handed off to Hyperion Brookfield Asset Management. Meanwhile, the former Morgan Keegan manager of the funds, Jim Kelsoe, no longer manages any Morgan Keegan funds, according to The Birmingham News article, and has been “reassigned” to an unspecified role within the company.

Schwab YieldPlus Funds: An Invitation To Investment Disaster

Facing hundreds of arbitration claims and class-action lawsuits over huge losses in two ultra-short bond funds known as the Schwab YieldPlus Fund (SWYPX) and the Schwab YieldPlus Select Fund (SWYSX), Charles Schwab & Co. may want to rethink its “Talk to Chuck” advertising slogan. The funds have become a financial disaster for investors, who say the San Francisco-based investment firm marketed and sold the YieldPlus funds as relatively conservative investments whose risk levels were on par to that of money-market funds.

Instead, the funds (collectively referred to as the Schwab YieldPlus Fund) were over-concentrated in high-risk, illiquid mortgage-backed securities. Following the collapse of the subprime mortgage market, this overconcentration in speculative investments resulted in massive losses of more than $1.3 billion. In total, the Schwab YieldPlus Fund lost a staggering 33.7% of its value last year. By comparison, the average ultra-short bond fund fell 1.9%.

To no one’s surprise, the Schwab YieldPlus Fund ranked dead last out of 50 ultra-short bond funds tracked by Morningstar, Inc. in 2008.

YieldPlus investors across the country have since filed hundreds of arbitration complaints with the Financial Industry Regulatory Authority against Charles Schwab, charging the company of intentionally withholding important details about the portfolio diversification of the Schwab YieldPlus Fund and the fact that a large portion of the fund’s assets had been placed in high-risk subprime mortgage holdings.

Investors also claim Charles Schwab created misleading marketing materials to falsely tout the supposed investing safety of the YieldPlus Fund – information that was reiterated in public statements made fund managers.  Financial prospectuses give further credence to investors’ claims, with information stating the fund’s investing objective as one of seeking high current income with minimal changes in share price. 

FINRA arbitration panels continue to review claims against Charles Schwab for investors’ losses in the Schwab YieldPlus Fund. In one decision, FINRA awarded more than $500,000, or about 81%, of the investor’s claimed damages. Other FINRA claims have yielded awards totaling 100% of the damages claimed by investors.

Massachusetts Regulator Probes State Street Bond Fund

State Street Corp., the Boston-based financial services firm that has made more than $4oo million in settlements and other payments for problems related to its fixed-income funds, is once again in hot water. This time, Massachusetts Secretary of State William Galvin is investigating whether State Street intentionally misled pension funds and other institutional investors about a bond fund that invested in high-risk derivatives, swaps and subprime-mortgage securities.

As reported April 30 by the Boston Globe, the State Street Limited Duration Bond Fund was supposed to be a way for investors to generate better returns than ultra-safe money market funds, but with only slightly more risk. Instead, the fund invested heavily in risky mortgage-related products, which later plummeted in value when the subprime mortgage market collapsed.

Making matters worse: The State Street Limited Duration Bond Fund was highly leveraged, borrowing money as it made continued investments in mortgage-backed securities. Eventually the strategy created even bigger financial losses for the fund.

State Street is the target of several lawsuits by investors who say the company hid the risks associated with the Limited Duration Bond Fund. On April 8, the Sisters of Charity of the Blessed Virgin Mary, based in Dubuque, Iowa, sued State Street, accusing it of putting their money in subprime mortgage products instead of the more conservative investments State Street’s financial advisors initially had promised. 

The nuns say they have lost more than $1 million of their retirement fund in the Limited Duration Bond Fund.

The Limited Duration Bond Fund is managed by State Street Global Advisors, State Street’s investment arm.

State Street also is at the center of a 2007 lawsuit filed by Prudential Financial, which claims the firm deceived the insurer by investing in products whose returns were linked to high-risk subprime mortgage pools.

William Hunt, CEO of State Street Global Advisors, abruptly resigned from his post in early 2008, just as the company began to face a slew of investor lawsuits relating to State Street’s subprime losses.

Oppenheimer Funds Sued By Oregon 529 College Savings Plan

Oppenheimer Funds, one of the bigger players of 529 college savings plans with $4 billion under management, has been sued by the state of Oregon for gambling on exotic derivatives in the Oregon 529 College Savings Network. Oppenheimer’s ill-fated bets eventually resulted in $36 million in losses. 

In the complaint filed April 13, Oregon contends that Oppenheimer Funds made aggressive and inappropriate investments with the Oppenheimer Core Bond, yet described the fund as a “conservative” and “ultraconservative” plan. In filing the lawsuit against Oppenheimer, Oregon becomes the first state in the nation to sue the money manager on behalf of investors in its 529 college savings plan.

According to an April 14 article in the Wall Street Journal, the Oppenheimer Core Bond fund made significantly riskier investments beginning in late 2007 or early 2008. Ultimately, those risks translated into the fund losing more than 35% of its value in 2008, plus another 10% in the first three months of 2009. By comparison, the fund’s benchmark, the Barclays Capital Aggregate Bond Index, gained 5% in 2008 and has held even this year, according to the complaint.

The investments that Oppenheimer Funds gambled on included exotic instruments and high risk debt, all of which would be considered unsuitable for individuals saving for college, says the complaint.

Total return swaps and credit default swaps further added to the massive financial losses experienced by the Oppenheimer Core Bond Fund. Specifically, the Core Bond Fund entered into agreements with companies such as Lehman Brothers, American Insurance Group (AIG), Merrill Lynch, Citigroup and General Motors, agreeing to cover losses if they defaulted on their bonds. When those companies began to experience financial difficulties, with some, like Lehman Brothers, forced to file bankruptcy, the Oppenheimer Core Fund’s liability, and losses, became huge.

Four other states: Illinois, Texas, New Mexico and Maine, have sustained similar losses in their Oppenheimer Funds managed college savings plans. They also are considering lawsuits.

Morgan Keegan’s Bond Derivative Deals Backfire For Many Municipalities

When the small town of Lewisburg, Tennessee, needed help paying the interest on a bond for new sewers, officials thought investment firm Morgan Keegan had the answers. Little did they know that the advice and the poorly conceived municipal bond derivative deal Morgan Keegan came up with eventually would mean millions of dollars in unanticipated costs, leaving Lewisburg and other municipalities like it financially devastated. 

Lewisburg is just one of a number of cities in Tennessee that has found itself burned by municipal bond derivatives and the advice of Memphis-based Morgan Keegan. Today, instead of lower interest rates on its sewer bond, Lewisburg is looking at annual interest payments that have quadrupled to $1 million, according to an April 7 article in the New York Times.

Officials in Lewisburg say when they first entered into the transaction with Morgan Keegan, they never realized the possible ramifications of municipal bond derivatives and the fact that interest rates could skyrocket depending on economic conditions. When the inevitable happened and the economy went south, Lewisburg quickly got a dose of its new reality.

According to the New York Times story, at the time Lewisburg sought the advice of Morgan Keegan, regulations in the municipal bond marketplace were so lax that in Tennessee the investment bank dominated virtually every component of the derivative business. Since 2001, the firm has sold $2 billion worth of municipal bond derivatives to 38 cities and counties.

The predicament facing cities like Lewisburg has led federal regulators to now consider restricting the use of municipal bond derivatives altogether. That news is of little comfort, however, to Lewisburg or Claiborne County, Tennessee, which has been trying to get out of its municipal derivative contract with Morgan Keegan for months. The cost to do so: $3 million, a sum that the already financially strapped county cannot afford.

As for Morgan Keegan, acting in the dual role of investment adviser and underwriter for transactions involving municipal bond derivatives has served it extremely well in Tennessee, with the investment bank raking in millions and millions of dollars in fees.

Municipal bond experts say there is an obvious bias when an investment firm like Morgan Keegan gives advice to municipalities regarding derivatives and then turns around to underwrite the deal itself. Several states, in fact, prohibit a single firm from acting in the role of both adviser and underwriter.

“It’s like the lion being hired to protect the gazelle,” said Robert E. Brooks, a municipal bonds expert and a professor of financial management at the University of Alabama, in the New York Times article. “Who was looking after these little towns?” 

Oppenheimer Funds The Subject Of Five State Probe For 529 Plan Losses

A year of financial losses and investor lawsuits is about to go from bad to worse for Oppenheimer Funds. In February 2009, the company received an “F” from a Morningstar analyst for its failure to explain investing strategy changes regarding several of its bond funds. Now those funds, some of which have lost nearly 80% of their value, are the subject of probes by attorney generals in five states, as regulators investigate whether Oppenheimer Funds violated its fiduciary duty to investors.

The focus of the inquiries apparently is on 529 college-savings plans that invested in the Oppenheimer Champion Income Fund (OPCHX), which fell nearly 80% in 2008, and the Oppenheimer Core Bond Fund (OPIGX), which lost 41% of its value. Also on the states’ investigation list: the Oppenheimer Limited Term Government Fund (OPGVX) and the U.S. Government Trust (OUSNX).

Beginning late last year, Oppenheimer Funds, which is a unit of Massachusetts Mutual Life Insurance Company, became the subject of several state investigations, including those in Illinois, Maine, New Mexico, Oregon and Texas, over huge losses in state sponsored college savings plans.

As reported April 7 by Bloomberg, investors have seen $85 million vanish in just Illinois’ state sponsored 529 college savings plan because of investments made by Oppenheimer Funds in risky mortgage linked securities. Making the situation even worse: Parents were never told by Oppenheimer management about the investments nor the added risks they were unknowingly subjected to.

Ultimately, however, it was more than just toxic securities that contributed to the financial losses in the Oppenheimer bond funds. Specifically, Oppenheimer managers also bought complex, off balance sheet swap contracts that, in turn, produced a leveraging effect on the funds. Those added risks, which again were never apparent nor communicated to investors, translated into additional financial losses for investors.

Illinois has now stopped all new bond investments with Oppenheimer Funds, according to the Bloomberg article. As for Oregon’s 529 plan, two Oppenheimer Funds’ offerings have been eliminated. Oregon also is taking steps to replace OppenheimerFunds as the plan’s manager when the firm’s contract expires on Dec. 31.

In 2008, Oppenheimer Funds’s bond funds lost an average of 29%. By comparison, the average decline for bond mutual funds was 7.9%, according to Morningstar.

Meanwhile, investors both in and outside college savings plans are taking their frustration regarding Oppenheimer Funds to court, filing class action lawsuits and arbitration claims. The common theme in their complaints: OppenheimerFunds marketed and sold several of its bond funds as conservative, relatively low risk, high income investments. In reality, that was never the case.

FINRA Panels Returning Awards For Losses In Morgan Keegan Bond Fund Investments

Stung by huge financial losses in several Regions Morgan Keegan (RMK) bond funds, investors finally are getting some welcome news. Earlier this month, three separate FINRA arbitration panels announced awards in favor of investors who lost money in RMK mutual funds. 

In each of the arbitration claims, Morgan Keegan is accused of shrouding the true risks of the bond funds from investors. Instead, investors say Morgan Keegan and its management marketed and sold certain funds as relatively conservative investments, while in fact they were heavily exposed to subprime mortgage securities, collateral debt obligations (CDOs) and other risky debt instruments.  

Ultimately, several of the Morgan Keegan funds saw their value plummet as much as 90% because of the high concentration of risky and speculative debt. 

In early March 2009, two cases decided by Financial Institution Regulatory Authority (FINRA) panels returned six-figure awards to investors for their losses in Morgan Keegan funds. In one of the cases, the investors received more than the actual damages they claimed.  

Also in March, an Indiana FINRA panel awarded $18,000 to a Whitestown, Indiana, investor for losses she suffered in a Morgan Keegan bond fund. Mark E. Maddox of Maddox Hargett & Caruso served as the investor’s legal counsel. Maddox also was the attorney for the retired cattle farmer from York, Alabama, who won an earlier award from FINRA in March for losses in Morgan Keegan funds. 

In total, FINRA panels have awarded $604,000 to investors in their claims against Morgan Keegan. The Memphis-based brokerage firm also faces several class-action lawsuits from investors who say they were never made aware about the risks of certain Morgan Keegan investments.


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