Two brothers, Edward and Roderick King, were awarded almost $700,000 by a Birmingham arbitration panel of the Financial Industry Regulatory Authority (FINRA) for their claims involving a group of collapsed Regions Morgan Keegan mutual funds. One of the brothers, Edward, had once been a local president in Florida for Regions Bank. Regions now owns Morgan Keegan.

According to their complaint, the Kings accused Morgan Keegan of the following violations in connection to certain RMK funds: misrepresentations and omissions, violation of the Alabama Securities Act, breach of fiduciary duty, fraudulent misrepresentation and breach of contract.

The funds cited in the Kings’ FINRA claim include the Regions Morgan Keegan High Income Fund, Regions Morgan Keegan Advantage Income Fund, Regions Morgan Keegan Multi-Sector High Income Fund, Regions Morgan Keegan Strategic Income Fund, Regions Morgan Keegan Select Intermediate Bond Fund, and Regions Morgan Keegan Select High Income Fund.

Morgan Keegan is the subject of numerous arbitration cases across the country for investor losses related to proprietary bond mutual funds that were once managed by former Morgan Keegan employee James Kelsoe. The funds, which had been marketed and sold as low to moderate risk funds, collectively lost more than $2 billion in 2007 and 2008 because of risky investments in low-tier and illiquid tranches of asset backed securities.

FINRA’s decision in the King brothers case follows other recent FINRA awards against Morgan Keegan, including $285,000 to a Jackson, Mississippi, investor (FINRA #08-00574), $950,000 to an NFL football player Jerome Woods (FINRA #07-03570) and $431,000 to Philip Richardson of Boca Raton, Florida (FINRA #08-01333).

The concept behind target-date mutual funds is simple: Investors place their money in a fund that is managed around the holder’s intended retirement age. Over the years, target-date funds grew increasingly popular as a safe, conservative investment choice, becoming a staple in many 401K plans. 

Enter the financial crisis of 2008. As the stock market plummeted, older investors with 2010 target-date mutual funds found themselves facing losses of 40% or more.

The Securities and Exchange Commission (SEC) is now taking a hard look at target-date mutual funds and whether some companies and financial advisors misled investors about the risks associated with the investments.

As reported June 25 in the New York Times, disclosure policies and regulations overseeing target-date mutual funds are opaque at best. Investment risks vary widely from fund to fund. Adding to the confusion for investors is the fact that mutual fund companies often create target-date funds by bundling them together with existing mutual funds. In doing so, companies or financial advisors are able to collect more assets and fees, while investors are left to figure out what the funds actually contain and exactly how much they are being charged.

 “At the end of the day, consumers need to know what they’re getting into,” said Senator Herb Kohl, Democrat (Wisconsin) and chairman of the Special Committee on Aging, in the New York Times article. “We’d like to see regulation, whether it’s a standardization of target-date composition, or increased clarification of information made available about the plans.”

If you are an individual or institutional investor and have concerns about your investments, contact Maddox Hargett & Caruso at 800.505.5515. We can evaluate your situation to determine if you have a claim.

A group for attorneys representing individual and institutional investors in securities arbitration disputes has formally petitioned the Securities and Exchange Commission (SEC) to remove a requirement that allows representatives from the securities industry to serve as arbitrators on Financial Industry Regulatory Association (FINRA) panels. 

The Public Investors Arbitration Bar Association, or PIABA, filed its petition with the SEC on June 11. 

Currently, FINRA rules mandate that any investor case involving $100,000 or more in damages must be heard by a three-person FINRA arbitration panel, with one of the panelists affiliated with the securities industry. PIABA wants investors to have the right to strike industry representatives from hearing their cases. 

“Requiring customers who believe they have been wronged by the securities industry to have claims decided by panels that must include a representative of that securities industry creates at the least the appearance of bias, if not outright bias,” said PIABA in its petition to the SEC.

As reported June 21 by Investment News, PIABA essentially is asking FINRA to expand a two-year pilot program that it launched in October 2008. The program entails 11 major brokerage firms that agreed to allow up to 276 investor plaintiffs a year choose all-public arbitration panels. 

Year-to-date through May 2009, 3,163 arbitration cases have been filed with FINRA. That is up 85% from the same period last year.

If you are an individual or institutional investor and have concerns about your investments, contact Maddox Hargett & Caruso at 800-505.5515. We can evaluate your situation to determine if you have a claim.

The June 2007 meltdown of Brookstreet Securities may finally produce some justice for more than 750 clients who were left with questions and massive financial losses because of bad bets placed by the Irvine, California-based brokerage on risky collateral mortgage obligations (CMOs).

On May 28, 2009, the Securities and Exchange Commission (SEC) filed fraud charges against 10 former Brookstreet brokers for allegedly disguising the risks of the CMOs and portraying them as conservative, fixed-income investments. The investments were later heavily margined, which ultimately caused Brookstreet’s clients to suffer millions of dollars in losses. Meanwhile, the SEC contends the brokers who sold the risky investments as conservative products pocketed millions of dollars in commissions and salaries.

Seven other brokers from the now-defunct Brookstreet firm face similar charges by the Financial Industry Regulatory Authority (FINRA). 

Before it was forced to close its doors two years ago, Brookstreet Securities touted itself as a new kind brokerage firm dedicated to personalized service and innovative technology – a place where clients would find virtually unlimited investment choices designed to grow and protect their savings.

Far from growing or protecting their savings, many clients discovered an altogether different scenario in 2007 after the value of their investments in collateral mortgage obligations was heavily marked down, leaving them with little recourse. They either had to meet immediate and large margin calls or lose their entire investments.

As reported May 28, 2009, by the Registered Rep, the SEC complaint alleges that the 10 brokers named in its case earned $18 million in commissions and salaries from CMO sales while investors suffered more than $36 million in losses on their investments. 

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.

Facing hundreds of arbitration claims and class-action lawsuits over huge losses in two ultra-short bond funds known as the Schwab YieldPlus Fund (SWYPX) and the Schwab YieldPlus Select Fund (SWYSX), Charles Schwab & Co. may want to rethink its “Talk to Chuck” advertising slogan. The funds have become a financial disaster for investors, who say the San Francisco-based investment firm marketed and sold the YieldPlus funds as relatively conservative investments whose risk levels were on par to that of money-market funds.

Instead, the funds (collectively referred to as the Schwab YieldPlus Fund) were over-concentrated in high-risk, illiquid mortgage-backed securities. Following the collapse of the subprime mortgage market, this overconcentration in speculative investments resulted in massive losses of more than $1.3 billion. In total, the Schwab YieldPlus Fund lost a staggering 33.7% of its value last year. By comparison, the average ultra-short bond fund fell 1.9%.

To no one’s surprise, the Schwab YieldPlus Fund ranked dead last out of 50 ultra-short bond funds tracked by Morningstar, Inc. in 2008.

YieldPlus investors across the country have since filed hundreds of arbitration complaints with the Financial Industry Regulatory Authority against Charles Schwab, charging the company of intentionally withholding important details about the portfolio diversification of the Schwab YieldPlus Fund and the fact that a large portion of the fund’s assets had been placed in high-risk subprime mortgage holdings.

Investors also claim Charles Schwab created misleading marketing materials to falsely tout the supposed investing safety of the YieldPlus Fund – information that was reiterated in public statements made fund managers.  Financial prospectuses give further credence to investors’ claims, with information stating the fund’s investing objective as one of seeking high current income with minimal changes in share price. 

FINRA arbitration panels continue to review claims against Charles Schwab for investors’ losses in the Schwab YieldPlus Fund. In one decision, FINRA awarded more than $500,000, or about 81%, of the investor’s claimed damages. Other FINRA claims have yielded awards totaling 100% of the damages claimed by investors.

Credit default swaps (CDS) may be described as insurance-like contracts designed to hedge against default on loans or bonds, but they are far from ordinary insurance. Created in the early 1990s by JPMorgan Chase & Co., credit default swaps belong in a derivatives class all by themselves. Some call them ticking bombs; others – most notably billionaire investor Warren Buffett – refer to credit default swaps as financial weapons of mass destruction, carrying dangers that are potentially lethal and deadly.

Now matter how you characterize them, most financial experts now agree that credit default swaps are, in large, responsible for the upheaval in the stock and credit markets and the resulting financial crisis happening around the world.

A credit default swap essentially is an obscure and complex derivative instrument that takes the form of a private contract between a buyer and a seller. The buyer (investor) of a credit default swap pays an upfront fee plus annual premiums to a seller, which typically is a bank or hedge fund, to cover potential loss on the investment outlined in the contract.

The underlying caveat to a credit default swap is the counterparty risk involved in the contract. The credit default swaps market – estimated at $62 trillion in 2007 – is unregulated, with swaps sold over the counter. With no regulation, there’s no entity overseeing the trades to ensure a purchaser of a credit default swap has the financial resources to make good on a swaps contract if it is called in.

Think Bear Stearns. American International Group (AIG). Lehman Brothers Holdings. Lehman Brothers was deeply entrenched in the credit default swaps market. When the company filed for bankruptcy on Sept. 15, 2008, sellers of its credit default swaps contracts found themselves on the hook for billions and billions of dollars.

As for AIG, its involvement in credit-default swaps reportedly pushed the financially troubled firm to the brink of bankruptcy in September before the federal government stepped in with a bailout that now totals more than $182 billion.

And then there’s Bear Stearns. It, too, became crushed under the weight credit default swaps. Its fate was finally sealed when JP Morgan – ironically the inventor of the derivative instruments – purchased the 85-year-old investment firm in March 2008 for the fire-sale price of $2 a share. Under pressure from shareholders, the deal was later revised to $10 a share.

State Street Corp., the Boston-based financial services firm that has made more than $4oo million in settlements and other payments for problems related to its fixed-income funds, is once again in hot water. This time, Massachusetts Secretary of State William Galvin is investigating whether State Street intentionally misled pension funds and other institutional investors about a bond fund that invested in high-risk derivatives, swaps and subprime-mortgage securities.

As reported April 30 by the Boston Globe, the State Street Limited Duration Bond Fund was supposed to be a way for investors to generate better returns than ultra-safe money market funds, but with only slightly more risk. Instead, the fund invested heavily in risky mortgage-related products, which later plummeted in value when the subprime mortgage market collapsed.

Making matters worse: The State Street Limited Duration Bond Fund was highly leveraged, borrowing money as it made continued investments in mortgage-backed securities. Eventually the strategy created even bigger financial losses for the fund.

State Street is the target of several lawsuits by investors who say the company hid the risks associated with the Limited Duration Bond Fund. On April 8, the Sisters of Charity of the Blessed Virgin Mary, based in Dubuque, Iowa, sued State Street, accusing it of putting their money in subprime mortgage products instead of the more conservative investments State Street’s financial advisors initially had promised. 

The nuns say they have lost more than $1 million of their retirement fund in the Limited Duration Bond Fund.

The Limited Duration Bond Fund is managed by State Street Global Advisors, State Street’s investment arm.

State Street also is at the center of a 2007 lawsuit filed by Prudential Financial, which claims the firm deceived the insurer by investing in products whose returns were linked to high-risk subprime mortgage pools.

William Hunt, CEO of State Street Global Advisors, abruptly resigned from his post in early 2008, just as the company began to face a slew of investor lawsuits relating to State Street’s subprime losses.

Oppenheimer Funds, one of the bigger players of 529 college savings plans with $4 billion under management, has been sued by the state of Oregon for gambling on exotic derivatives in the Oregon 529 College Savings Network. Oppenheimer’s ill-fated bets eventually resulted in $36 million in losses. 

In the complaint filed April 13, Oregon contends that Oppenheimer Funds made aggressive and inappropriate investments with the Oppenheimer Core Bond, yet described the fund as a “conservative” and “ultraconservative” plan. In filing the lawsuit against Oppenheimer, Oregon becomes the first state in the nation to sue the money manager on behalf of investors in its 529 college savings plan.

According to an April 14 article in the Wall Street Journal, the Oppenheimer Core Bond fund made significantly riskier investments beginning in late 2007 or early 2008. Ultimately, those risks translated into the fund losing more than 35% of its value in 2008, plus another 10% in the first three months of 2009. By comparison, the fund’s benchmark, the Barclays Capital Aggregate Bond Index, gained 5% in 2008 and has held even this year, according to the complaint.

The investments that Oppenheimer Funds gambled on included exotic instruments and high risk debt, all of which would be considered unsuitable for individuals saving for college, says the complaint.

Total return swaps and credit default swaps further added to the massive financial losses experienced by the Oppenheimer Core Bond Fund. Specifically, the Core Bond Fund entered into agreements with companies such as Lehman Brothers, American Insurance Group (AIG), Merrill Lynch, Citigroup and General Motors, agreeing to cover losses if they defaulted on their bonds. When those companies began to experience financial difficulties, with some, like Lehman Brothers, forced to file bankruptcy, the Oppenheimer Core Fund’s liability, and losses, became huge.

Four other states: Illinois, Texas, New Mexico and Maine, have sustained similar losses in their Oppenheimer Funds managed college savings plans. They also are considering lawsuits.

When the small town of Lewisburg, Tennessee, needed help paying the interest on a bond for new sewers, officials thought investment firm Morgan Keegan had the answers. Little did they know that the advice and the poorly conceived municipal bond derivative deal Morgan Keegan came up with eventually would mean millions of dollars in unanticipated costs, leaving Lewisburg and other municipalities like it financially devastated. 

Lewisburg is just one of a number of cities in Tennessee that has found itself burned by municipal bond derivatives and the advice of Memphis-based Morgan Keegan. Today, instead of lower interest rates on its sewer bond, Lewisburg is looking at annual interest payments that have quadrupled to $1 million, according to an April 7 article in the New York Times.

Officials in Lewisburg say when they first entered into the transaction with Morgan Keegan, they never realized the possible ramifications of municipal bond derivatives and the fact that interest rates could skyrocket depending on economic conditions. When the inevitable happened and the economy went south, Lewisburg quickly got a dose of its new reality.

According to the New York Times story, at the time Lewisburg sought the advice of Morgan Keegan, regulations in the municipal bond marketplace were so lax that in Tennessee the investment bank dominated virtually every component of the derivative business. Since 2001, the firm has sold $2 billion worth of municipal bond derivatives to 38 cities and counties.

The predicament facing cities like Lewisburg has led federal regulators to now consider restricting the use of municipal bond derivatives altogether. That news is of little comfort, however, to Lewisburg or Claiborne County, Tennessee, which has been trying to get out of its municipal derivative contract with Morgan Keegan for months. The cost to do so: $3 million, a sum that the already financially strapped county cannot afford.

As for Morgan Keegan, acting in the dual role of investment adviser and underwriter for transactions involving municipal bond derivatives has served it extremely well in Tennessee, with the investment bank raking in millions and millions of dollars in fees.

Municipal bond experts say there is an obvious bias when an investment firm like Morgan Keegan gives advice to municipalities regarding derivatives and then turns around to underwrite the deal itself. Several states, in fact, prohibit a single firm from acting in the role of both adviser and underwriter.

“It’s like the lion being hired to protect the gazelle,” said Robert E. Brooks, a municipal bonds expert and a professor of financial management at the University of Alabama, in the New York Times article. “Who was looking after these little towns?”