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More Investors Prevail In Cases Over Toxic RMK Funds

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.

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