It’s been a tough few weeks for Morgan Keegan.
The Memphis-Tenn.-based brokerage unit of Regions Financial (RF) recently lost big in two arbitration cases and failed to get a court order blocking discovery in a state court case brought by the retirement system for Louisiana’s firefighters, which allegedly lost nearly $50 million by investing in Morgan Keegan bond funds.
First, a FINRA arbitration panel awarded $2.5 million to one investor, Andrew M. Stein. The panel found Morgan Keegan liable for unsuitability, negligence and failure to supervise.
In another defeat a few days later, an 89-year-old, highly decorated World War II veteran won an arbitration award of $1.1 million. In that case, the FINRA panel found that Morgan Keegan misrepresented and failed to disclose the true nature of the RMK funds to companies owned by General Henry Cobb Jr.
In his initial complaint, Cobb said that the firm took his “hard earned, conservative, low-risk money and went ‘where no man has gone before.’ They went to a place of untested, unstable, illiquid and unjustifiable risk and deposited [Cobb’s companies’] money into the black hole of subprime debt and its progeny.”
Cobb's lawyer, Jeffrey Erez said that his firm, Sonn & Erez, and the lawyer who tried the arbitration dispute, Richard Frankowski, of Birmingham based law firm, Burke, Harvey & Frankowski, has filed a motion to confirm the award in federal court. Erez’s firm has tried seven arbitration disputes, winning four, losing one and settling two cases. The firm has another two-dozen arbitrations pending and picks up one or two more complaints a week, Erez said. “This is the biggest dollar award,” he said. “In two of them we recovered more than the out-of-pocket losses,” he said. His law firm has approximately 25 cases pending with FINRA arbitration panels.
At issue in the Cobb case were the RMK Select High Income Fund; RMK High Income Fund; RMK Strategic Income Funds; RMK Advantage Income Fund and RMK Multi-Sector High Income Fund.
In the Cobb case, the complaint stated: “Despite the fact the Morgan Keegan bond funds were promoted as safe, conservative, income-producing investments, these funds have suffered losses between 50% and 67% in 2007.” And, even though all fixed income funds were affected by the awful market conditions there was a “far greater detrimental effect on the Morgan Keegan funds,” the complaint went on to say.
In this case and many others, seven Morgan Keegan bond funds have been the focus of investor complaints. Other arbitrations that Morgan Keegan have lost include such high-profile personalities such as former Chicago Bulls player Horace Grant, who was awarded $1.4 million and former major league baseball player and sportscaster Tim McCarver, who was awarded $100,000.
Morgan Keegan is facing legal challenges in state and federal court as well as a slew of remaining arbitration claims before FINRA. And, last year, Region’s, the parent company, said it received a Wells notice from the Securities and Exchange Commission, saying that it was looking into the funds and might bring a civil action against the firm.
But Morgan Keegan isn’t rolling over. In an email, the firm said: “As of March 1, 2010, 81 cases have been heard by arbitration panels with 39 resulting in an outright dismissal of the claims. Overall in the 81 cases tried, claimants have sought approximately $49 million in compensatory damages and have received overly $10.3 million in awards. Additionally, 118 cases seeking more then $25 million in damages have been abandoned by claimants.”
A FINRA spokesman said he couldn’t comment on the number of arbitration cases concerning the RMK funds; nor could he comment on the disposition of those disputes. However, he said that FINRA contacted arbitrators in other cities, asking if they would be willing to serve in a number of cities in the southeast. “This increased the pool of arbitrators significantly,” the spokesman replied in an email.
The management of seven RMK Select fixed income funds were transferred to Hyperion Brookfield Asset Management in July 2008, the firm said. The three open-end funds were closed and the four closed-end funds have been renamed. The former portfolio manager of the bond funds is employed by Morgan Keegan but no longer manages any funds, the firm said.
In addition, the firm said: “At this point, there has been no further action from the SEC with regard to the Wells notice.”
“The regulators are moving at a snail’s pace,” Erez complained. “I’m not waiting for them.”
Nor are many other claimants. But in many cases, investors only want to hold Morgan Keegan liable and not the financial advisors. However, the advisors are still being called in to testify about how safe they thought the funds were and what they told their clients.
“We believe the brokers were deceived along with the clients,” Erez said. “When you scratch below the surface [the advisors] were buying it for themselves and their families.” The broker in the Cobb case even invested in some of the funds for his own mother, Erez said.
Still, the arbitration awards against Morgan Keegan should make advisors more careful about the advice they give, Erez said. “I think this case puts them on notice,” Erez said. “You need to do your own due diligence. You better know the products. And, if you’re not satisfied, then don’t sell the product.”