Category Archives: Morgan Keegan

In May and June, investors prevailed in five out of six arbitration claims against Memphis brokerage firm Morgan Keegan. Meanwhile, hundreds of additional individual arbitration claims await decisions from the Financial Industry Regulatory Authority (FINRA).

Since 2008, thousands of investors have suffered more than $1 billion in losses from a group of mortgage-related Morgan Keegan bond funds. The funds, whose investments were tied to the real estate market, plummeted by as much as 80% following the burst of the housing bubble.

In the lawsuits and arbitration claims that have followed, investors accuse Morgan Keegan of misrepresenting or failing to disclose certain facts about their investments.

In April 2010, regulators charged Morgan Keegan and two employees with fraud for inflating the value of mortgage securities and other risky debt held in the bond funds at the center of the ongoing litigation. The complaint – which was filed by the Securities and Exchange Commission (SEC), FINRA and various state securities regulators – also charged Morgan Keegan portfolio manager James Kelsoe of improperly directing his accounting department to make repeated, arbitrary “price adjustments” that boosted the fair values of securities.

Morgan Keegan’s Joseph Thompson Weller, who led the accounting department, is named in the complaint, as well.

Morgan Keegan’s legal problems show no signs of letting up. The latest troubles facing the Memphis-based investment firm include federal and state charges alleging Morgan Keegan and two employees – James Kelsoe and Thomas Weller – committed fraud when pricing several proprietary bond funds.

As reported April 12 by the Wall Street Journal, the federal and state charges are in addition to a slew of arbitration claims filed by investors who allegedly lost approximately $2 billion through fraudulent and reckless business practices on the part of Morgan Keegan. Class-action lawsuits also have been leveled against the company.

Mississippi, Alabama, Kentucky and South Carolina regulators joined the Financial Industry Regulatory Authority (FINRA) in filing fraud charges on April 7. The Securities and Exchange Commission (SEC) filed similar charges that same day.

The fraud charges are “a serious event,” said Chris Marinac, managing principal at FIG Partners, in the Wall Street Journal story. “The exposure” to eventual costs “could be all over the map,” he said. “There’s no telling what a judge and jury will do.”

Morgan Keegan may also have another legal problem on its plate. The SEC reportedly could force the company to buy back nearly $200 million in auction-rate securities – investments that became frozen when the credit markets seized up in February 2008.

Several Regions Morgan Keegan bond funds that lost more than $1 billion of investor assets have resulted in enforcement actions against Morgan Keegan & Co. and its asset management unit, Morgan Asset Management Inc., by the Securities and Exchange Commission (SEC), four states and the Financial Industry Regulatory Authority (FINRA).

Among the allegations, federal and state regulators say that Morgan Keegan mismanaged and misrepresented the funds to both investors and brokers, as well as manipulated the net asset value of the funds.

As reported April 7 by Investment News, regulators say they have evidence showing that James Kelsoe, the former portfolio manager of the Morgan Keegan funds, was allowed to work with little or no supervision.

“The actions taken by regulators today are long overdue,” said Scott Shewan, president of the Public Investors Arbitration Bar Association, in the Investment News story.

The Morgan Keegan funds in question invested in risky mortgage-backed securities. As a result, the value of the funds plummeted in 2007 and 2008 following the collapse of the housing market.

The states that joined the SEC to bring actions against Morgan Keegan include Alabama, Kentucky, Mississippi and South Carolina.

In addition to Morgan Keegan and Morgan Asset Management, regulators also are targeting Joseph Weller, head of the Morgan Keegan fund accounting department; Brian Sullivan, president and chief investment officer of Morgan Asset Management; Gary Stringer, director of investments for Morgan Keegan’s Wealth Management Services division; and Michele Wood, chief compliance officer of the Morgan Keegan funds.

The latest charges by the SEC and state regulators could serve as further evidence to help thousands of investors who have filed lawsuits and arbitration claims against Morgan Keegan with FINRA. For instance, regulators claim that the president of Morgan Asset Management, Carter Anthony, was told by Morgan Keegan president Doug Edwards and former president Allen Morgan not to supervise Kelsoe. The time period involved was from 2001 through 2006,

In an October 2009 deposition, attached to the states’ complaint, Anthony stated the following:

“Time and time again I was told by [Mr.] Morgan and [Mr.] Edwards [to] leave [Mr.] Kelsoe alone, he’s doing what we want him to do, he’s also a little bit strange, he gets mad easy, leave him alone; and I left him alone. I did what I was told to do.”

Another potentially damning piece of evidence is a May 2007 email sent by Gary Stringer, who headed Morgan Keegan’s Wealth Management Services division. That e-mail reads:

“What worries me about this [Regions Morgan Keegan Select Intermediate] bond fund is the tracking error and the potential risks associated with all that asset-backed exposure. Mr. & Mrs. Jones don’t expect that kind of risk from their bond funds. The bond exposure is not supposed to be where you take risks. I’d bet that most of the people who hold that fund have no idea what’s [sic] it’s actually invested in. I’m just as sure that most of our FAs have no idea what’s in that fund either.”

Memphis broker Morgan Keegan & Co. faces fraud charges by the Securities and Exchange Commission (SEC). The SEC announced the charges on April 7, accusing Morgan Keegan and two employees of defrauding investors by deliberately inflating the value of risky mortgage securities that cost investors more than $2 billion.

According to the SEC’s complaint, Morgan Keegan allegedly failed to employ reasonable procedures to “internally price the portfolio securities in five funds managed by Morgan Asset and, consequently, did not calculate accurate net asset values (NAVs) for the funds.” Morgan Keegan recklessly published these inaccurate daily NAVs and sold shares to investors based on the inflated prices, the SEC said.

“This scheme had two architects – a portfolio manager responsible for lies to investors about the true value of the assets in his funds, and a head of fund accounting who turned a blind eye to the fund’s bogus valuation process,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, in a statement.

The portfolio manager cited by the SEC is James C. Kelsoe Jr., who the SEC says manipulated prices of low-quality investments to make his funds appear more appealing to investors. The complaint further alleges that Kelsoe convinced staff members in Morgan Keegan’s fund accounting department to accept 262 “price adjustments” during the first seven months of 2007 that hid the deteriorating value of Morgan Keegan’s ill-fated bets on mortgage-backed securities and other toxic structured products.

Joseph Thompson also was named in the SEC’s complaint. The SEC accuses Thompson, who was in charge of reviewing prices within the Morgan Keegan funds, of failing to ensure that the securities in the funds were properly priced.

The Financial Industry Regulatory Authority (FINRA) also filed a complaint against Morgan Keegan on April 7, alleging that the firm misled customers about the risks of the bond funds and used false and misleading sales materials to market the funds. FINRA is seeking an unspecified fine and restitution for affected investors.

“This was a slick operation, it was devastating,” said the Rev. Richard Bland in an April 7 story by the Dow Jones Newswires. According to the story, Bland’s Alabama-based United Prison Ministries International lost more than $200,000 in the Morgan Keegan bond funds. “They took all that money from us,” Bland said.

Inland American Real Estate Trust is among several unlisted real estate investment trusts (REITs) to face a wave of backlash from investors lately. Why? Because many independent broker/dealers and their financial advisers misrepresented the risks and characteristics of unlisted REITs like the Inland American Real Estate Trust. Only now are many retail investors coming to terms with the collateral damage that has taken place in their portfolios.

To be sure, sales of unlisted (also known as non-traded) REITs are booming. Unlisted REITs raised more than $10 billion in 2008.

Sold through broker/dealers, shares in unlisted REITs do not trade on national stock exchanges. Redemptions are limited and usually include a minimum holding period. If an investor does decide to get out of the trust entirely, he or she can usually only do so on a specified date.

There are several other caveats associated with unlisted REITs, not the least of which is an exorbitant fee of up to 15% to get in. And that’s in addition to ongoing management fees and other expenses. Even more important: Unlisted REITs often offer no independent source of performance data. They also fail to offer investors a guarantee that their dividend payments will continue throughout their planned investment period in the REIT. 

Non-Traded REITs: Considerations for Hotel Investors by John B. Corgel and Scott Gibson provides an in-depth look at unlisted REITs and the unintended consequences that the products may create for individual investors who do not conduct their own due diligence.

Specifically, the study – which claims to be the first professional and academic report to analyze the structure of non-traded REITs – shows that investors who purchased hospitality REITs early in the investment cycle saw a diminished return as a result of subsequent sales. In other words, the early investors subsidize the commissions paid to the dealers who sell to late-term investors, the report says. 

One of the criticisms cited in the report – and one which has been touted in general by critics of unlisted REITs – is the vague prospectus language regarding exit strategies.

The fixed share prices of non-traded REITs are another bone of contention with naysayers of the products. Often marketed to investors as a selling point, the fixed share price can actually become an unwanted feature. Says Non-Traded REITs: Considerations for Hotel Investors: 

“ . . . this policy of maintaining fixed share prices in companies that continually offer shares at the same or similar fixed prices throughout the investment cycle will have adverse consequences to investors who buy into programs early in the cycle.” 

To their detriment, investors throughout the country may have purchased shares in non-traded REITs like the Inland American Real Estate Trust based on misrepresentations by their brokerage firm. That advice has now proven to financially disastrous. Instead of access to their cash, investors are finding themselves left out in the cold – their money locked up for an undetermined period of time in these illiquid, high-commission products. 

Maddox Hargett & Caruso continues to investigate the selling practices of brokerage firms such as UBS, Merrill Lynch, Citigroup, LPL Linsco, Morgan Keegan & Company, as well as others that may have recommended unsuitable investments in non-traded REITs to their clients. If you have a story to tell about your investment losses in non-traded REITs, contact us. 

These are scary times for investors. Stories of stockbroker negligence, record Ponzi schemes, investment fraud, and client misrepresentation have become an everyday occurrence. It’s no wonder investors – seasoned pros and novices alike – are increasingly wary when it comes to seeking advice from an investment advisor or financial representative, questioning if anyone associated with Wall Street can be trusted nowadays. I’m reminded of a scene from the 1976 film Network in which fictitious newsman Howard Beale (played by the late actor Peter Finch) delivers his “mad as hell and I’m not going to take this anymore” speech.

Jo L. Wright no doubt felt the way of Finch’s character. Wright, a church secretary from Whitestown, Indiana, lost thousands of dollars in a bond fund formerly managed by Morgan Keegan & Company. Wright’s initial introduction to the Memphis-based brokerage was through her local Indiana Regions bank branch manager. At the time of the referral, Wright had her money in what she deemed “safe” and “secure” investments: a certificate of deposit and a savings account.

That all changed based on the recommendation of the bank manager and Morgan Keegan. Wright transferred her money into the Morgan Keegan Select Intermediate Bond Fund. Relying on the information provided by Morgan Keegan and her Regions Bank manager, she believed the fund was a safe, conservative investment and that any risk of principal loss was virtually non-existent.

In truth, Wright actually put her money into a high-risk and speculative financial product, one with significant ties to complex structured finance investments that included subprime mortgage securities. In no way was it the kind of investment that a conservative-minded investor like Wright should have been advised to purchase.

Wright didn’t know that, however, because her financial advisor allegedly didn’t tell her. Nor did Wright receive a prospectus about her investment before purchase.

Wright eventually filed a complaint against Morgan Keegan with the Financial Industry Regulatory Authority (FINRA), and in March 2009 was awarded $18,000 for the financial losses she suffered. Her case underscores several important issues, however, when it comes to investing your money and selecting a financial advisor.

First, it’s your money. That means investors need to do some due diligence of their own. This includes asking your financial advisor some tough questions. Chief among them: Where has your advisor worked in the past? Is there a pattern of multiple jobs in a short period of time? If the answer is yes, it could be a red flag.

Another key question concerns compensation. How is the financial advisor paid for his or her services? Is it based on an hourly rate, flat fee, or commission? In addition, find out if the advisor is given bonuses for selling certain investment products. If so, this clearly could be a conflict of interest if one of those products is pushed to become part of your investment portfolio.

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 possibility that Morgan Keegan will face civil charges from the Securities and Exchange Commission (SEC) is welcome news for thousands of investors who have filed arbitration claims against the Memphis-based brokerage for losses in a group of collapsed bond funds.  

Regions Financial Corp., the parent company of Morgan Keegan, announced in early July it had received a Wells Notice from the SEC for possible violations of securities laws involving certain mutual funds. The SEC sends a Well Notice to people or firms as a way to formally alert them to the possibility that enforcement action will be brought against them.  

For investors, the Wells Notice could be a boon to their legal cases against Morgan Keegan. According to a July 31 article in the Wall Street Journal, securities arbitrators may now be more inclined to order Morgan Keegan to provide investors with copies of certain documents that could assist in their claims. 

“That notification has to influence arbitrations when the issue of discovery of regulatory documents comes up,” said Steven Caruso, a New York-based attorney with Maddox Hargett & Caruso, in the Wall Street Journal.  

Even though the Wells Notice did not specifically name the funds in question, the SEC said they were managed by Morgan Asset Management Inc., which is part of Morgan Keegan. Seven former Morgan Keegan funds suffered massive financial losses in 2007 and 2008 because of their exposure to risky subprime securities and even more risky collateralized debt obligations. 

Between March 31, 2007, and March 31, 2008, losses in the RMK funds totaled more than $2 billion. 

In July 2008, Regions transferred management of several of the RMK funds in question to New York-based Hyperion Brookfield Asset Management.

Region Financial Corp.’s brokerage arm, Morgan Keegan, was sued on July 21 by the Securities and Exchange Commission (SEC) on charges that the Memphis-based firm left clients stranded with more than $1 billion in auction rate securities.

According to the SEC, Morgan Keegan failed to tell customers about the growing risks associated with auction rate securities. Instead, it reportedly encouraged brokers to ramp up their efforts to sell the instruments prior to the market’s collapse in February 2008.

The SEC is demanding that Morgan Keegan buy back any auction rate securities sold before March 2008 from retail investors and small businesses, as well as pay fines. In addition, the regulator wants Morgan Keegan to forfeit any proceeds from its auction-rate business. From June 2007 to February 2008, the SEC says Morgan Keegan earned more than $4 million in underwriting, brokerage and distribution fees.

 “Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms’ ARS auctions began to fail,” said SEC Enforcement Director Robert Khuzami in a statement.