Category Archives: Bond Losses

In a page out of David and Goliath, a church secretary from Whitestown, Indiana, emerged victorious in her FINRA arbitration claim that investment firm Morgan Keegan failed to disclose the risks of a certain bond fund that was heavily invested toxic collateralized debt obligations (CDOs) and other asset-backed securities. Ultimately, fallout from the collapse of the subprime mortgage market caused the fund to plummet in value.

As reported in a March 19 story in the Indianapolis Star, Jo L. Wright was awarded $18,000 on March 12 by a Financial Industry Regulatory Authority (FINRA) panel for her losses in the Morgan Keegan Select Intermediate Bond Fund.

Wright initially got into the Morgan Keegan fund because of a recommendation from her local Indiana Regions bank branch manager. Before moving her money, Wright’s investments had been in a certificate of deposit (CD) and a savings account.

When she transferred her money into the Morgan Keegan Select Intermediate Bond, she says the fund was described as a “safe, conservative but higher-yielding investment.”

According to the Wright’s complaint with FINRA, representatives of Morgan Keegan never told her about the risks of the fund nor did they reveal the high concentration of asset-backed securities that it contained. Because she never received a prospectus about the fund, she had no way to determine its asset make-up or the risks it presented.

Memphis based Morgan Keegan continues to be the subject of ongoing investor complaints and investigations for its management of a group of open end and closed end bond funds that collapsed in value because of their massive investments in risky asset-backed securities.  So far, investors have sustained more than $2 billion in losses from the funds.

Wright, who lost $11,000 in the Morgan Keegan Select Intermediate Bond, is the first Indiana case to go to an arbitration hearing over the Morgan Keegan bond funds, said her lawyer, Mark E. Maddox of Maddox Hargett & Caruso, in the Indianapolis Star article.

Yet another investor has found justice over losses caused by the collapse in value of several Morgan Keegan bond funds that owned securities backed by risky subprime mortgages. On March 12, the Financial Industry Regulatory Authority (FINRA) ruled in favor of Alabama investor Philip Willingham, awarding him $187,000.

“It is becoming apparent that the evidence investors are now able to present about the scope of Morgan Keegan’s misconduct is allowing arbitrators to better understand it,” said Indiana lawyer Mark Maddox, who handled the recent case, in a March 13 article in the Birmingham News. Maddox is the founding partner of the law firm Maddox Hargett & Caruso, P.C.

The legal issues surrounding Morgan Keegan focus on a group of open-end and closed-end bond funds. They are: Regions Morgan Keegan Select High Income-A (MKHIX); Regions Morgan Keegan Select High Income-C (RHICX); Regions Morgan Keegan Select High Income-I (RHIIX); RMK High Income Fund (RMH); RMK Strategic Income Fund (RSF); Regions Morgan Keegan Select Intermediate Bond Fund-A (MKIBX); Regions Morgan Keegan Select Intermediate Bond Fund-C (RIBCX); Regions Morgan Keegan Select Intermediate Bond Fund-I (RIBIX); and RMK Multi-Sector High Income (RHY).

Because of their exposure to high-risk mortgage-backed securities, some of the RMK funds have fallen in value by more than 90%. In total, investors in the funds have faced more than $2 billion in losses.

When investors initially placed their money in the RMK bond funds, they were told by the funds’ management, including former Morgan Keegan manager Jim Kelsoe, they had invested in a diversified portfolio composed of relatively conservative corporate bonds and preferred stocks. As it turns out, the bond funds invested in high-risk, low-priority tranches of collateralized debt obligations (CDOs).

“This [recent] arbitration award affirms our view that Morgan Keegan engaged in a massive scheme to defraud many investors, including Philip Willingham, in the sale of its bond funds,” says Maddox.

Public officials of financially strapped states like California, Florida, Nevada, Ohio, Wisconsin and Michigan are outraged at New York-based securities firm Goldman Sachs for advising some of its biggest institutional clients to bet against state municipal bonds by purchasing credit default swaps. Meanwhile, Goldman has collected millions of dollars in fees to help those states sell some of the very same bonds.

According to a Dec. 10 story by Bloomberg, in the three months since Goldman recommended shorting municipal credit, the value of the Markit MCDX index of the derivatives’ price more than tripled – from 87.75 to as high as 278.33 basis points.

Goldman’s strategy of shorting municipal bonds of fiscally depressed states could ultimately result in even more problems for taxpayers. Concerns about a state’s credit quality often means bond prices go down. In turn, that can drive up the interest rate states and municipalities must pay to borrow money. And it all affects taxpayers. An increase of one percentage point on a $1 billion bond issue translates into a cost to taxpayers of an additional $10 million a year in interest. 

The added financial worries couldn’t come at a worst time. States, which already have closed $40 billion in fiscal year 2009 budget gaps, face at least an additional $97 billion that they must close over the next 18 to 24 months, according to a just-released national report by the National Conference of State Legislatures.

In a September presentation to institutional investors on “Best Long and Short Risk Strategies,” Goldman apparently advised buying credit-default swaps on “a basket of liquid State General Obligation credits with current and worsening fiscal outlooks, according to the Bloomberg article. The firm went on to recommend the derivatives in states with heavily unfunded pensions and other retiree obligations.

Goldman is one of the top five municipal bond underwriters in the United States. Its latest trading strategy of betting against its own clients is a bad way to conduct business – period. In this case, Goldman is baking its cake and eating it, too, while states in which Goldman served as the underwriter of their securities can look forward to an even more troubled fiscal outlook in the months ahead.

Our securities lawyers are actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

With the abrupt liquidation of the widely held short-term investment fund managed by Connecticut-based Commonfund, more than 1,000 colleges across the country suddenly confront serious financial problems. With Wachovia Corp. as trustee, the $9.3 billion Commonfund for Short Term Investments Fund basically provided colleges with a “checking account” out of which they could pay for salaries, supplies and other expenses.

Without any prior warning, Wachovia sent an e-mail to schools on September 29 explaining that ongoing market turmoil forced the firm to give up its role as trustee of the Commonfund. Approximately 20% of the fund’s mortgage and asset-backed securities suffered because of market conditions.

According to the terms of the liquidation, participants could withdraw approximately 34% of their funds as of October 1. The amount grows to as much as 57% by the end of the year. Any remaining funds can be withdrawn as other securities mature.

Unfortunately, as of September 29, hardly any of the fund’s non-government securities could be sold at par.

How will colleges cope? The University of Vermont, just one participant in the Commonfund, invested almost $80 million. Right now, the school can only withdraw $16 million. The withdrawals allowed over the next few months won’t provide enough cash to pay the school’s operating costs for the rest of this year, according to the Burlington Free Press in an October 2 article. Because of Wachovia’s decision to liquidate, administrators at the University of Vermont and many other schools now must scramble to find other financing sources.

The PIMCO High Income Fund (NYSE:PHK) has lost 55% of it value in one very turbulent month.  On September 10 this Fund closed at $11.49.  By October 10 its value had plummeted to $5.07.  

According to its disclosures, the PIMCO High Income Fund operates as a closed-end management investment company. It primarily invests in the U.S. dollar-denominated corporate debt obligations and other income-producing securities. The fund primarily invests in various companies operating in the areas of energy, real estate, telecommunications, manufacturing, and utilities, as well as invests in various foreign investments. Allianz Global Investors Fund Management LLC serves as the investment manager of the fund. PIMCO High Income Fund was founded in 2003 and is based in New York City.

The Fund’s Market Cap is currently 850.64M.

We are investigating the way this Fund was marketed and sold to investors. If you are an investor in the PIMCO High Income Fund and have suffered losses, we would like to speak with you.

The John Hancock High Yield Bond Fund has made the list. Just not the list its fund managers would like.

On September 8, 2008, the Wall Street Journal listed its Leaders and Laggards. The Hancock Fund ranks near the top in the worst-performing bond fund category. It shares this distinction with three Morgan Keegan bond funds and Charles Schwab’s YieldPlus fund.

The Hancock High Yield fund (JHHBX) holds $644.7 million in assets. In the past year, the fund has lost 17.8% of its value. For typical bond fund investors seeking income, these returns are tremendously shocking and unacceptable.

Once again three Morgan Keegan Bond Funds top the list of Wall Street’s worst-performing bond funds.  The RMK Select Intermediate Bond Fund, High Income Fund and Short Term Bond Fund share this distinction for yet another time.

These funds have lost 84.5%, 77.6% and 50.8% respectively in the last year.

On July 29, 2008, Hyperion Brookfield Asset Management assumed the duties as asset manager of these funds. Hyperion took over for Morgan Asset Management and manager James Kelsoe.

Under the management of Kelsoe, these funds saw losses far exceeding the losses of other similar funds. The primary reason for the incredible losses was the over-exposure of the RMK funds to the subprime mortgage market.  

Many investors purchased the RMK funds as safe, income-producing investments. Certainly losses of up to 84% do not constitute safe, income-producing investments.

Even with the change in management, it may take some time before the RMK bond funds loose their hold at the top of the worst-performing list.

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.         

Over the past few weeks, some of the largest closed-end fund companies, including Eaton Vance Corp. and Nuveen Investments Inc., have disclosed plans to redeem their auction-rate preferred securities. This solution may allow some irritated investors to cash out quickly.   

However, many other closed-end fund companies have yet to announce plans to redeem their auction-rate preferred securities.  The reason given is to protect their common shareholders.  

Companies are worried cashing out preferreds right now will hurt their common shareholders. Therefore, the preferred holders may have to wait months or even years before they are able to cash in.   

Prominent closed-end operations that have not publicized a redemption plan include; Allianz SE’s Pimco and Nicholas-Applegate funds, Lehman Brothers Holdings Inc.’s Neuberger Berman funds, Bank of New York Mellon Corp.’s Dreyfus funds, and Pioneer Investments. Together they have totaled $7.6 billion of auction-rate preferred. 

Auction-rate preferreds are long-term securities that functioned like short-term investments. But, when the market stopped functioning like normal, buyers for these securities vanished in auctions. Holders have been stuck in a slump by fund companies since the credit crunch weakened in February.

Ed Dowling owns preferreds issued by five different companies, including $300,000 in Neuberger Berman, which is the only one yet to redeem any his securities. He is questioning the future of his funds and is even considering selling on the secondary market at a loss.   

The problem fund managers are struggling with is whether replacing the auction-rate debt with other leverage would be more expensive and would consume fund earnings. Action-rate financing has the benefit of longer maturities than bank loans and bonds typically have. Funds that replaced the preferreds with bank borrowings run a risk that the bank may charge a higher rate to extend the loan, or not extended it at all. 

According to the Wall Street Journal, when the market started declining there were about $64 billion of these securities issued by closed-end funds. Now, just 31 percent has been redeemed, or plan to be shortly.

According to reports, Wachovia’s money-management unit, Evergreen Investments, will be liquidating $403 million from its Ultra-Short Opportunities Fund. The fund, which is primarily backed by mortgage securities, has lost 20% this year alone and has dropped 18% just this month.  

The failure of this fund highlights the ongoing problem brokerage firms are having in pricing the value of their investors’ illiquid investments. Bond-fund managers are being pressed to ensure their holdings are valued correctly so investors receive the correct amount of liquid funds from their shares.  

As of March, two thirds of Ultra-Short Opportunities assets consisted of home-loan securities that were not backed by government entities. The fund also carried only 70% ($9.1 million) of the original value of Novastar ABS CDO I Ltd. because it was created from low-rated subprime-mortgage bonds.  

Wachovia wrote down the value of its bank-owned insurance policies this spring, which resulted in a loss of $708 million on May 6th. The bank also paid a $144 million settlement over complaints of telemarketers and payment processors stealing from customer accounts under the supervision of former Chief Executive Kennedy Thompson.  

Although debt-pricing companies such as Interactive Data Corp. and Street Software Technology, Inc. are making strong efforts to place correct valuations on securities, difficulties arise in getting an accurate price when high-yield or non-investment-grade bonds aren’t trading in high volumes.  

Other firms such as Charles Schwab and Fidelity Investments are facing lawsuits from investors who have suffered substantial losses due to the sub-prime mortgage crisis.