An obscure hedge fund called Magnetar offers new details into the world of collateralized debt obligations (CDOs) and how the instruments cost investors billions while yielding a payday bonanza for Magnetar. And that’s the irony. What Magnetar did appears to be legal.

Magnetar and the toxic deals it created and then bet against are the subject of an investigative story by ProPublica and co-produced with Chicago Public Radio’s This American Life and NPR’s Planet Money.

The short version of Magnetar – which was started up by former Citadel trader Alec Litowitz – begins with the Chicago hedge fund buying up the riskiest portion of CDOs. At the same time, Magnetar placed bets that portions of its own deals would fail. Meanwhile, Magnetar ended up reaping a massive fortune.

Magnetar worked with most of Wall Street’s top banks in its deals – deals that ultimately produced $40 billion worth of extremely toxic, high-risk CDOs. Among the banks that helped sell those toxic assets to investors: Merrill Lynch, Lehman Brothers, Citigroup, UBS and JPMorgan Chase.

“Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.”

ProPublica offers an excellent slideshow of how Magnetar orchestrated its CDO deals. Entitled The Anatomy of the Magnetar Trade, the slides provide a straightforward and simple account of the players involved in the CDO market and how when the instruments ultimately collapsed, Magnetar profited.

The complete (5,900 words) story on Magnetar is well worth the read. You can view the story in its entirety here.

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.

LPL Financial, the nation’s largest independent-contractor broker/dealer, is once again in the news over technology mistakes that could put private client information at risk. The story was first reported April 6 by Investment News.

According to the article, an “unencrypted portable hard drive” was stolen from an LPL representative sometime in late February. The representative, Christian D’Urso, was based in Beaverton, Oregon. It’s unclear exactly how many LPL clients could be affected by the theft.

This isn’t LPL’s first run-in with potential breach of customer information. In 2008, the Securities and Exchange Commission (SEC) issued a cease and desist order against LPL for its failure to implement adequate controls to protect access to customer accounts.

According to the SEC, between mid-July 2007 and February 2008, LPL was subject to hacking incidents in which customer accounts were accessed and the perpetrator placed or attempted to place 209 unauthorized trades in 68 accounts for more than $700,000. Without admitting or denying the SEC’s charges, LPL paid a fine of $275,000 to settle the matter.

LPL Financial has 12,000 representatives and advisers.

Some Wall Street executives still don’t get it. Credit Suisse Group AG’s CEO Brady Dougan took home nearly $18 million in 2009 – more than six times what he received in 2008. And the 2009 payout occurred during a time when the nation experienced a financial meltdown, bank bailouts courtesy of the Troubled Asset Relief Program and mounting public criticism over Wall Street bonuses and compensation levels.

As reported March 25, 2010, by the Wall Street Journal, Dougan’s 2009 annual pay, which includes a cash bonus, salary and stock, was nearly twice the $9.6 million that Goldman Sachs paid CEO Lloyd Blankfein. And, to top it off, Goldman made 40% more in net income in 2009 than Credit Suisse.

In a letter to Credit Suisse shareholders, Dougan and Chairman Hans-Ulrich Doerig justified the 2009 payout, stating that “a skilled workforce is key to maintaining high levels of client satisfaction … which is why we will continue to attract … talented people while remaining sensitive to the public debate about compensation.”

Perhaps a better way to “remain sensitive” might be to roll back the bonuses and excessive compensation packages for some of Wall Street’s top earners.

Rhonda Breard, the former Seattle broker for ING Financial who made a name for herself by dispensing investment advice via television infomercials and seminars, will plead guilty to mail fraud. Breard is accused of stealing $9.4 million from her clients.

As reported April 2 by the Associated Press, prosecutors are seeking to have Breard forfeit several properties, cars, boats, watercraft and jewelry.

Breard has a shady past when it comes to her professional conduct. In 1991, she resigned from Smith Barney over allegations of unauthorized trading in clients’ accounts. One year later, she faced similar claims, according to records with the Financial Industry Regulatory Authority (FINRA), and eventually paid a $15,000 fine. In 1993, Breard settled an investor complaint for $74,493 while employed at Prudential Securities,

The Washington State Department of Financial Institutions, the Washington State Office of the Insurance Commissioner, and the FBI continue to investigate Breard’s alleged fraud.

If you are a current or former investor with Rhonda Breard and/or Breard & Associates and Wealth Management, we encourage you to contact Maddox Hargett & Caruso P.C. Your case may be eligible for recovery.

Private placements, which have made news in connection to Medical Capital Holdings and Provident Royalties, are becoming an increasingly questionable investment for ordinary investors.

Private placements are securities in stocks, bonds or other instruments that a corporation issues to investors. The investments are riskier than traditional securities because many of the issuing companies don’t have to register their placements with the Securities and Exchange Commission (SEC).

Former schoolteacher Adrianne Cross found this out the hard way. According to a March 27 article in the Wall Street Journal, Cross, 64, invested her life savings in private placements. She thought the investments were safe. Now she’s lost everything.

According to the Wall Street Journal, Cross’ broker worked for Ameriprise Financial’s Securities America unit in Los Angeles. Cross says the broker persuaded her to invest more than $1 million in private-placement securities issued by Medical Capital Holdings and Provident Royalties LLC in 2007. The broker allegedly told Cross that the investments were a safe alternative to stocks.

The Securities America broker was wrong. Both Medical Capital and Provident Royalties, which face fraud charges by the SEC, collapsed in 2009. For Cross and thousands of other investors, it meant their investments became essentially worthless.

Cross has since filed an arbitration claim with the Financial Industry Regulatory Authority (FINRA) in an attempt to recover her losses.

In January, Massachusetts’ Secretary of State William Galvin brought the first state enforcement case against Securities America over the broker/dealer’s sales practices of Medical Capital securities. According to the complaint, Securities America’s representatives failed to disclose the risks to customers, many of whom were retirees.

If you have a story to tell involving Medical Capital Holdings, Securities America and/or Provident Royalties, please contact a member of our securities fraud team.

It’s official – former ING Financial broker Rhonda Breard has been permanently barred from the securities industry by the Financial Industry Regulatory Authority (FINRA). The Washington State investment advisor is accused of stealing $8 million from clients.

Breard neither admits nor denies the charges, but “consented to the entry of FINRA’s findings,” according to a statement by FINRA.

Breard currently is facing federal charges, as well as civil lawsuits. If convicted on the federal charges, Breard faces a sentence of up to 20 years in prison and a fine of up to $1 million.

Breard’s scheme came to light during a surprise visit from an ING auditor to her offices at Breard & Associates Wealth Management. As reported March 11 by Investment News, the auditor uncovered a locked file cabinet in the office. Contents from the cabinet purportedly revealed that Breard had misappropriated money from her clients.

Meanwhile, some of Breard’s clients have invested with Breard for more than 20 years. A few years ago, they reported that Breard began asking them to liquidate their accounts and write her checks for Breard to invest in new accounts.

Maddox Hargett & Caruso P.C. is investigating investors’ allegations against Rhonda Breard and ING Financial. If you suffered investment losses through Breard, contact us with your story. You may have a claim for recovery.

Bambi Holzer has a tainted track record filled with investor complaints. Now, Holzer is facing new complaints over risky private placements in Provident Royalties. The story was first reported March 29 by Investment News.

Last summer, the Securities and Exchange Commission (SEC) charged Provident with securities fraud involving $485 million in private securities sales. In March 2010, the Financial Industry Regulatory Authority (FINRA) expelled Provident Asset Management LLC, the broker-dealer arm of Provident.

According to the SEC’s complaint, Provident marketed a series of fraudulent private placements through Provident Royalties in an alleged Ponzi scheme.

An April 12, 2009, article by Forbes initially brought to light the fact that Holzer’s “advice” to clients while employed at UBS had resulted in $12 million in settlements.

After resigning from UBS in 2001, Holzer went to A.G. Edwards, which fired her two years later for “business practices inconsistent with the firm’s policies,” according to the Forbes article.

Holzer’s next job was with Brookstreet Securities, where she worked between 2003 and 2007. While at Brookstreet, Holzer was fined $100,000 and suspended for 21 days for “negligent misrepresentations to customers regarding certain product features in connection with the purchase and sale of variable annuities.”

In total, Holzer has worked with seven investment firms since 1983, according to FINRA’s BrokerCheck.

Holzer currently is a registered representative affiliated with two firms: Wedbush Morgan Securities and Sequoia Equities Securities Corp.