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Home > Cases > Morgan Keegan Bond Funds > Morgan Keegan Bonds: Arbitration Claims - And Investor Wins - Continue Over Losses In RMK Funds

Morgan Keegan Bonds: Arbitration Claims - And Investor Wins - Continue Over Losses In RMK Funds

A group of Morgan Keegan bonds tied to risky mortgage-related securities has ended up costing Morgan Keegan & Co. dearly. For more than two years, the funds - known collectively as the RMK Funds - have been at the center of lawsuits and arbitration claims by individual and institutional investors alleging Morgan Keegan misrepresented the risks of the products. Ultimately, it was discovered that the RMK Funds held large concentrations of high-risk and toxic collateralized-debt obligations (CDOs) and other debt instruments, which caused some of the funds to plummet by as much as 95% in value.

Between March 31, 2007, and March 31, 2008, investors collectively lost more than $2 billion in six Morgan Keegan bond funds. The funds include the Regions Morgan Keegan Select High Income Fund, the Regions Morgan Keegan Select Intermediate Bond Fund, RMK High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund and the RMK Multi-Sector Fund.

With its legal bills mounting, Morgan Keegan was ordered in February 2010 by separate panels of the Financial Industry Regulatory Authority (FINRA) to pay two of the biggest awards to date related to the bond funds. The awards included $2.5 million and $1.1 million, respectively.

The impact of the rulings against the Memphis-based broker can be seen on the company's bottom line. Bills related to legal costs equaled 12% of Morgan Keegan's total revenue in 2009 - twice as much as the previous year. According to a recent annual report of Regions Financial Corporation, which is Morgan Keegan's parent company, Morgan Keegan spent $161 million in professional and legal fees in 2009 on revenue of $1.28 billion. In 2008, the firm doled out $90 million for legal and professional services and reported $1.34 billion in revenues.

The bonds at the center of Morgan Keegan's legal issues allegedly were marketed and sold to investors as safe, conservative investments - something similar to corporate bonds or preferred stocks. New information has since come forth, however, showing that the funds were underpinned by risky mortgage-related securities. When the housing market tanked and loan defaults skyrocketed, the funds suffered catastrophic losses as a result.

In addition to investors, Morgan Keegan is facing the wrath of securities regulators. In July 2009, the Securities and Exchange Commission (SEC) filed a Wells notice against Morgan Keegan, indicating that it might bring legal action against the company for possible violations of the federal securities laws in connection to the funds. That same month, the SEC also charged Morgan Keegan for misleading thousands of investors about the liquidity risks associated with auction-rate securities.

FINRA also has issued a Wells notice to Morgan Keegan regarding the six bond funds.

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.


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