CHICAGO The group of bondholders suing to recoup its investment in a failed artificial sweetener plant has added as a defendant Raymond James Financial Inc., the firm that acquired the bond deal's underwriter.
Morgan Keegan underwrote the bonds issued in 2010 by the Moberly Industrial Development Authority.
The state court lawsuit led by Shelter Insurance Cos. previously named Morgan Keegan & Co. LLC and underwriters' counsel Armstrong Teasdale LLP. Raymond James acquired Morgan Keegan in 2012. After the deal, Morgan Keegan amended its corporate charter to change from a corporation to a limited liability company.
A city appropriation pledge backed the bonds that helped finance construction of the sucralose production plant.
Plant developer Mamtek US Inc. in August 2011 defaulted on a payment to Moberly needed for debt service, and the city refused to make good on its appropriation pledge. The company then abandoned the half-built plant.
Shelter's lawsuit and others filed by bondholders accuse Morgan Keegan of securities violations for allegedly misleading potential investors about the viability of the plant and city pledge.
The bondholders decided to add the corporate parent as a named defendant over fears that Morgan Keegan no longer has assets, only liabilities, and wouldn't be able to make good on a judgment should investors prevail.
"Here, If RJF is the parent and successor to Morgan Keegan's liabilities as plaintiffs have alleged, plaintiffs have a claim against RJF by piercing its corporate veil to hold it liable for the debts of Morgan Keegan," the investors argue in recent court documents.
Raymond James is fighting the move, arguing Morgan Keegan is solely responsible for any liability and there is no need to add it as a defendant because Morgan Keegan remains a company. Raymond James has said that Morgan Keegan's former owner, Regions Bank, would be responsible for any legal liabilities.
Investor attorney Joseph Kronawitter of Horn, Aylward & Bandy LLC declined to comment, saying the court filings outline his clients' position. Raymond James declined to comment.
The investors have also broadened their list of alleged violations, adding fraud and fraud by silence to accusations that included negligent misrepresentation.
They allege that Morgan Keegan portrayed Mamtek as a viable company with operations in China but did little to investigate the company's assertions. Mamtek had exaggerated its existing operations.
"Morgan Keegan knew Mamtek was important and started to investigate Mamtek, but halted that effort before the investigation was complete, despite its obligation to do due diligence, simply because some other party allegedly told it to stop raising concerns about Mamtek," the complaint reads.
The lawsuit also accuses Morgan Keegan of misleading investors about the ability of Moberly to cover payments.
"Morgan Keegan knew, however, that Moberly did not have the ability to pay the bond debt without revenue payments from Mamtek's sale of sucralose made at the plant," the lawsuit charges.
At a hearing this week on the litigation, Cole County Circuit Court Judge Jon Beetem pushed back the trial date on the case by a few months. It was slated to begin in January but it unlikely to now begin until spring. Beetem was recently assigned to the case after defendants requested a new judge.
The Missouri Secretary of State last year filed a civil enforcement action against Morgan Keegan accusing the firm of securities fraud. It accuses the firm of defrauding clients by misrepresenting material facts about the offering. A separate bondholder lawsuit is also pending in federal court with a decision expected soon on class action status.
Morgan Keegan has denied any wrongdoing or responsibility for investor losses, saying it did its job on the sale and that ultimately the bonds were guaranteed by the city.
The bonds carried an A rating from Standard & Poor's based upon the city's pledge. Moberly lost its investment-grade rating after it declined to make good on its pledge. The sucralose plant bonds are rated D.
The trustee and other creditors forced Mamtek into involuntary bankruptcy.
The Missouri attorney general and local prosecutors in 2012 filed criminal charges alleging securities fraud and stealing against former Mamtek executive Bruce Cole and the Securities and Exchange Commission filed a civil complaint accusing Cole of scheming to defraud potential investors.
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