It's been a tough few weeks for Morgan Keegan.
The Memphis-Tenn.-based brokerage unit of Regions Financial (
) 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
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
"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,
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."