Category Archives: Morgan Keegan

Already facing hundreds of arbitration claims and lawsuits over a group of collapsed mutual bond funds, Morgan Keegan & Company is now the subject of Well Notice by the Securities and Exchange Commission (SEC). The notice typically signals the likelihood that the SEC could file civil charges in the near future for possible violations of federal securities laws. 

As reported July 16 by the Memphis Daily News, Morgan Keegan’s parent company, Regions Financial Corp., disclosed in a regulatory filing on July 15 that its investment subsidiary, Morgan Asset Management and three unidentified employees received a Wells Notice from the SEC last week.

“We knew it was just a matter of time before the SEC and probably other state regulators (brought) the hammer down,” said Indianapolis attorney Mark Maddox, in the Memphis Daily News article. Maddox is one of dozens of attorneys across the country who has won arbitration cases against Morgan Keegan in the past year for investor losses connected to the mutual funds.

The claims against Morgan Keegan involve at least seven bond funds (collectively known as the “RMK Funds”) that the Memphis-based company formerly managed and which plummeted in value because of the underlying investments made by Morgan Keegan. The investments included untested types of subprime mortgage securities, collateral debt obligations (CDOs) and other risky debt instruments. Losses in the funds entailed more than $2 billion between March 31, 2007, and March 31, 2008.

Meanwhile, investors in the RMK funds say Morgan Keegan misrepresented the funds as corporate bonds and preferred stocks, giving them the illusion of diversification and low risk levels. 

Tumultuous upheaval in the financial markets has led to a rash of arbitration claims from retail and institutional investors on charges their financial advisors and brokerages misrepresented the risk levels of certain investment products. Some of the central players in these claims: Morgan Keegan & Company and Charles Schwab.

In the case of Memphis-based brokerage Morgan Keegan, investor complaints involve a group high-yield bond funds that the company allegedly marketed and sold as conservative investment options – products designed to provide high yields without excessive credit risks. Instead, the RMK funds made large investments in illiquid and toxic securities, including asset- and mortgage-backed securities and collateral debt obligations (CDOs).

Other funds responsible for the influx of arbitration claims include Charles Schwab & Co.’s YieldPlus funds. 

For more than a year now, investors nationwide have complained to the Financial Industry Regulatory Authority (FINRA), as well as the Securities and Exchange Commission (SEC), that Charles Schwab represented the YieldPlus funds as investments similar to money-market funds, while failing to disclose the fact they held large concentrations of toxic products like mortgage-backed securities. Ultimately, these holdings caused the YieldPlus funds to lose up to 80% of their value.

As reported July 6 by the Wall Street Journal, aggrieved individuals who do file claims with FINRA for their investment losses are likely to experience a more “investor-friendly” process than in the past because of recent changes to how an arbitration hearing is conducted and the composition of the arbitration panel.

Specifically, FINRA launched a pilot program in October 2008 that allows 276 cases against 11 participating brokerage firms to be heard annually by an all-public, three-person panel versus having one of the panel members associated with the securities industry. The program is a win for investor advocates, who contend having an industry-affiliated arbitrator reside on an arbitration panel not only can create bias but also sway other panel members against the investor.

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.

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.

Two brothers, Edward and Roderick King, were awarded almost $700,000 by a Birmingham arbitration panel of the Financial Industry Regulatory Authority (FINRA) for their claims involving a group of collapsed Regions Morgan Keegan mutual funds. One of the brothers, Edward, had once been a local president in Florida for Regions Bank. Regions now owns Morgan Keegan.

According to their complaint, the Kings accused Morgan Keegan of the following violations in connection to certain RMK funds: misrepresentations and omissions, violation of the Alabama Securities Act, breach of fiduciary duty, fraudulent misrepresentation and breach of contract.

The funds cited in the Kings’ FINRA claim include the Regions Morgan Keegan High Income Fund, Regions Morgan Keegan Advantage Income Fund, Regions Morgan Keegan Multi-Sector High Income Fund, Regions Morgan Keegan Strategic Income Fund, Regions Morgan Keegan Select Intermediate Bond Fund, and Regions Morgan Keegan Select High Income Fund.

Morgan Keegan is the subject of numerous arbitration cases across the country for investor losses related to proprietary bond mutual funds that were once managed by former Morgan Keegan employee James Kelsoe. The funds, which had been marketed and sold as low to moderate risk funds, collectively lost more than $2 billion in 2007 and 2008 because of risky investments in low-tier and illiquid tranches of asset backed securities.

FINRA’s decision in the King brothers case follows other recent FINRA awards against Morgan Keegan, including $285,000 to a Jackson, Mississippi, investor (FINRA #08-00574), $950,000 to an NFL football player Jerome Woods (FINRA #07-03570) and $431,000 to Philip Richardson of Boca Raton, Florida (FINRA #08-01333).

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.

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?” 

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.

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.