When stock markets plunged to their lowest level in four years in October, it quickly became news that margin calls were a key culprit to the problem. In the weeks since, the volume of margin calls has steadily increased, exacerbating issues for investors and adding turmoil to an already battered financial environment.

Investors who buy stock on margin - meaning the money is borrowed from a brokerage or lender - stand to reap big returns if their bets turn out positive. On the downside, if the value of a stock plummets, as they have recently, investor losses can grow fast and furious.

Margin calls affect more than just the wealthy. When the stock market is overloaded with sell orders, stock prices often fall further in value, thereby causing additional financial losses for ordinary retail investors who sell their shares at deflated prices. 

Hedge funds also are feeling the effects of margin calls these days, particularly funds with billions of dollars worth of positions in Lehman Brothers Holdings. Despite the fact the funds cannot touch their assets at Lehman, which are frozen because of the firm’s Sept. 15 bankruptcy, they nonetheless may be forced to meet margin calls on their positions. 

PricewaterhouseCoopers, which is handling Lehman’s bankruptcy and liquidation, confirmed in mid-October that it would not rule out demanding additional collateral via margin calls on some $60 billion in frozen Lehman assets if the value of those securities falls.

Making a bad situation even worse is it may take months, or even years, for PricewaterhouseCoopers to determine which assets clients actually are entitled to and which they are not.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The downturn in the economy is shedding new light on two dreaded and unwanted words no investor wants to hear: margin calls. Recent margin calls - in which shares of stock are bought using borrowed money - have created a margin blowout lately, sounding the alarm for CEOs and fund managers at companies from Chesapeake Energy to Williams-Sonoma and forcing them to sell billions of dollars worth of stock in order to make good on their loans with lenders.

Meanwhile, investors in companies whose executives must meet margin calls often learn after the fact about the selling sprees and ultimately bear repercussions of their own. Why? Because a margin call can subsequently mean investors are forced into liquidating their portfolios at a time when a company’s stock is at its worst possible low.

Moreover, when CEOs or other senior-level management borrow heavily against their portfolios to buy large amounts of stock, it can send a false message to other investors, who may believe the buying is reflective of a company’s financial position or future performance potential. Should a margin call arise, the investors are at risk when the stock price plummets.

An Oct. 23 article in Forbes reports on how margin calls sealed the fate recently for some of the world’s richest people - and the not-so-rich people who invested in their companies. On Oct. 8, Aubrey McClendon, CEO of Chesapeake Energy, owned more than 32 million shares in the nation’s largest natural gas producer. Forty-eight hours later, most of it was gone.

McClendon had bought a majority of his Chesapeake Energy shares on margin. When the stock began to tank in value, he was forced to meet margin calls. According to the Forbes article, “McClendon sold 1.8 million shares of Chesapeake for $12.65 per share in one of his Oct. 10 transactions. Just four months earlier, those shares traded as high as $74 each.”

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Over the past several months, both with the election and the credit crisis, much has been written and spoken about Wall Street vs. Main Street. But what has been largely overlooked is how the current financial crisis is affecting the individual, small investors on Elm Street.

Everyday it seems the headlines highlight the poor economic conditions in this country and the previous day’s new record Wall Street losses.  We read ample coverage of what the Treasury and Fed are doing (or going to do) to fix the problems. We read what policies President-elect Obama is likely to enact. We read about the Big Three and more financial institutions than you can name facing bankruptcy.  But there has been a noticeable lack of coverage on the pain being felt by the millions of individual investors suffering through these unprecedented times.

The financial services industry has spent tremendous amounts of money over the last two decades convincing all Americans that they need to invest in the markets.  The expansion of investing through 401(k)s and IRAs has paralleled these marketing efforts.  Today, unlike during the Crash of 1987, investors are not only the rich and sophisticated.  Investors are grandmothers, college students, single mothers and blue collar workers.  It is these individuals who truly suffer when the market losses 50 percent of its value in a year.

Too many of these small investors do not fully understand the markets and are confused by what is going on currently.  In response, most place all their trust (and their life savings) with the “professionals” they hire to assist and guide them. Unfortunately, all too often, these investors are not given suitable advice, are sold products they do not comprehend and are in many instances simply overlooked. They are told to “hold tight” even as they tell their advisors they cannot take any more losses. These small, individual investors are not likely to question or challenge the people deemed to be the experts. 

In times like these, it is imperative that all investors pay attention to their investments and make sure that their needs, objectives and desires are being met.  Failure to do so will result in losses that many simply cannot withstand. When losses do occur, investors need to seel legal counsel to determine whether an action exists to seek to recover those losses. 

With the abrupt liquidation of the widely held short-term investment fund managed by Connecticut-based Commonfund, more than 1,000 colleges across the country suddenly confront serious financial problems. With Wachovia Corp. as trustee, the $9.3 billion Commonfund for Short Term Investments Fund basically provided colleges with a “checking account” out of which they could pay for salaries, supplies and other expenses.

Without any prior warning, Wachovia sent an e-mail to schools on September 29 explaining that ongoing market turmoil forced the firm to give up its role as trustee of the Commonfund. Approximately 20% of the fund’s mortgage and asset-backed securities suffered because of market conditions.

According to the terms of the liquidation, participants could withdraw approximately 34% of their funds as of October 1. The amount grows to as much as 57% by the end of the year. Any remaining funds can be withdrawn as other securities mature.

Unfortunately, as of September 29, hardly any of the fund’s non-government securities could be sold at par.

How will colleges cope? The University of Vermont, just one participant in the Commonfund, invested almost $80 million. Right now, the school can only withdraw $16 million. The withdrawals allowed over the next few months won’t provide enough cash to pay the school’s operating costs for the rest of this year, according to the Burlington Free Press in an October 2 article. Because of Wachovia’s decision to liquidate, administrators at the University of Vermont and many other schools now must scramble to find other financing sources.

The PIMCO High Income Fund (NYSE:PHK) has lost 55% of it value in one very turbulent month.  On September 10 this Fund closed at $11.49.  By October 10 its value had plummeted to $5.07.  

According to its disclosures, the PIMCO High Income Fund operates as a closed-end management investment company. It primarily invests in the U.S. dollar-denominated corporate debt obligations and other income-producing securities. The fund primarily invests in various companies operating in the areas of energy, real estate, telecommunications, manufacturing, and utilities, as well as invests in various foreign investments. Allianz Global Investors Fund Management LLC serves as the investment manager of the fund. PIMCO High Income Fund was founded in 2003 and is based in New York City.

The Fund’s Market Cap is currently 850.64M.

We are investigating the way this Fund was marketed and sold to investors. If you are an investor in the PIMCO High Income Fund and have suffered losses, we would like to speak with you.

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke are on the Hill trying to sell their $700 billion bailout to lawmakers. Yesterday Secretary Paulson and Chairman Bernanke testified before Congress that the bailout must be passed quickly and cleanly in order to prevent further economic crisis.  Chairman Bernanke warned that inaction by Congress would lead credit markets to continue to seize up, meaning lost jobs, higher unemployment and more foreclosures.

While most parties freely recognize that these are unprecedented times and that the economy is on the brink, not all are willing to accept the Bush Administration’s bailout proposal.  Many commentators have labeled the plan a ”knee-jerk” reaction being pushed using scare tactics.  Most in Congress want at least more time to evaluate the plan.  That certainly should be a reasonable expectation when one is talking for taxpayer money at these levels.

It is critically important that the plan be designed and implemented to succeed with its purpose-to assist in the recovery of the US economy and turn the current tide.  If the taxpayers are going to foot the bill for the mistakes and greed of Wall Street, they should be confident that whatever proposal is ultimately put in motion will have the desired effect.  This plan must benefit those on Main Street and not simply bailout the very parties responsible for the mess in the first place.

Wall Street and its executives made hundreds of millions of dollars by creating the exotic mortgage-related securities cited as the cause of the current financial crisis.  It is understandable that many in this country are suspicious of a bailout that in any way rewards the greed and bad behavior that created the mess we are in.  Unfortunately the plan as proposed does not seem to adequately address the concerns of either the common citizen or Congress. 

This plan must be properly vetted and Congress must be allowed to address its concerns before the taxpayers give the Treasury a $700 billion blank check. 

For further information relating to the bailout plan, please see: http://www.investmentfraudlawyerblog.com/2008/09/ten_reasons_that_the_700_bi

The John Hancock High Yield Bond Fund has made the list. Just not the list its fund managers would like.

On September 8, 2008, the Wall Street Journal listed its Leaders and Laggards. The Hancock Fund ranks near the top in the worst-performing bond fund category. It shares this distinction with three Morgan Keegan bond funds and Charles Schwab’s YieldPlus fund.

The Hancock High Yield fund (JHHBX) holds $644.7 million in assets. In the past year, the fund has lost 17.8% of its value. For typical bond fund investors seeking income, these returns are tremendously shocking and unacceptable.

Once again three Morgan Keegan Bond Funds top the list of Wall Street’s worst-performing bond funds.  The RMK Select Intermediate Bond Fund, High Income Fund and Short Term Bond Fund share this distinction for yet another time.

These funds have lost 84.5%, 77.6% and 50.8% respectively in the last year.

On July 29, 2008, Hyperion Brookfield Asset Management assumed the duties as asset manager of these funds. Hyperion took over for Morgan Asset Management and manager James Kelsoe.

Under the management of Kelsoe, these funds saw losses far exceeding the losses of other similar funds. The primary reason for the incredible losses was the over-exposure of the RMK funds to the subprime mortgage market.  

Many investors purchased the RMK funds as safe, income-producing investments. Certainly losses of up to 84% do not constitute safe, income-producing investments.

Even with the change in management, it may take some time before the RMK bond funds loose their hold at the top of the worst-performing list.

Regulators in five states are investigating whether Morgan Keegan, a Memphis-based brokerage firm, failed to disclose the risks associated with seven of its mutual funds.  These funds were loaded with debt positions that some have labeled “toxic.”

A number of lawsuits have been filed regarding these Morgan Keegan mutual funds.  In addition to the lawsuits, dozens of individual investors have filed FINRA arbitration claims against Morgan Keegan and its portfolio manger, James C. Kelsoe.

Morgan Keegan promoted Mr. Kelsoe’s funds as a stable source of income.  Sales materials for the High Income fund noted its “relative conservative credit posture” without “excessive credit risk.”  In reality the funds were loaded with risky asset-backed subprime mortgages securities and other questionable debt obligations.

One particularily troubling aspect of these cases is the apparent targeting of these funds to seniors and small, inexperienced investors. 

These people are exactly the type of investors who were seeking income and stability for their hard-earned savings and who could not afford to be exposed to risk.  In addition, these investors were least likely to be able to understand the complexities of the investments they held.

Business Week recently reported the story of Katherine and Lester Poer.  Mr. Poer is 81 years old.  The couple, on the advice and recommendation of a Morgan Keegan broker, took the $250,000 they received from a land sale and purchased the RMK Select Intermediate Bond fund. 

The RMK Intermediate fund has lost over 86% of its value in the last year and the Poers  have lost over $200,000 in their investment.

Unfortunately, their story is not unique.  Many other investors have found themselves in a similar situation.  Some are now retaining counsel to help them recover some of their losses.         

Massachusetts Secretary of State William Galvin is coming down on Merrill Lynch, one of the largest securities firms in the U.S., for not disclosing to its investors the volatility of the auction-rate market.

Galvin claims that Merrill sold auction-rate securities to investors, even though it was aware that the market was collapsing. Galvin asserts that Merrill profited by $90 million over the past two years because of its program to sell auction-rate securities.  

Merrill’s research analysts were censored from disclosing the high risk of the market, which failed in mid-February this year and left many investors with illiquid holdings.  Galvin’s complaint also claims that Merrill pressured and often evaluated its analysts based on how they projected positive messages about auction-rate securities.

Galvin filed a complaint against UBS AG in late June for similar deceptive actions by the bank to sell auction-rate securities as money-market funds.  

This is not the first time Merrill Lynch has been accused of using questionable research to attract buyers. In 2000, Merrill was found to have published misleading research that encouraged investors to invest in two Internet companies, Interliant Inc. and 24/7 Real Media Inc., both of which held shares that plummeted in value over the course of one to two years. The SEC accused Merrill, along with nine other firms, in 2002 with using biased research to attract investors, which resulted in a $1.4 billion settlement.

The claim against Merrill Lynch urges the firm to compensate its investors for their investment losses and potentially pay a fine.  However, investors generally do not see any recovery from regulator actions.  The best (and often only) way for investors to seek redress is through an individual arbitration action.