Morgan Keegan Report Confirms Investors’ Claims: Six RMK Funds Were Extraordinarily Risky
For two years, Regions Morgan Keegan (RMK) has been at the center of legal controversy, with numerous arbitration claims and class-action lawsuits filed on behalf of investors who say the investment firm marketed six of its mutual funds as low-risk and conservative when in actuality they were tied to toxic subprime mortgage securities and other risky debt.
Backing up investors’ claims is a new study paper issued by the Securities Litigation and Consulting Group (SLCG). The document, titled Regions Morgan Keegan: The Abuse of Structured Finance, details how Regions Morgan Keegan misrepresented hundreds of millions of dollars of high-risk mortgage-backed securities as corporate bonds and preferred stocks.
The six funds in question were open-end and closed-end funds. All contained over-the-top concentrations of low-priority tranches in structured finance products backed by risky debt. That means the tranches RMK purchased significantly increased investors’ exposure to the credit risk of the subprime mortgages, loans and bonds backing the tranches.
At the same time, the funds’ prospectuses failed to disclose the high levels of credit risk in which fund shareholders were being exposed to as a result of the low-priority tranches the funds’ portfolio manager had purchased.
In the end, the six RMK funds plummeted 62% on average in value, with investors losing $2 billion from March 31, 2007 to March 31, 2008. By comparison, similar bond funds posted positive returns or only modest losses.
The six RMK bond funds include: the Regions Morgan Keegan Select Intermediate Bond Fund A (MKIBX); Regions Morgan Keegan Select Intermediate Bond Fund C (RIBCX); Regions Morgan Keegan Select Intermediate Bond Fund I (RIBIX); Regions Morgan Keegan Select High Income Fund A (MKHIX); Regions Morgan Keegan Select High Income Fund C (RHICX); and the Regions Morgan Keegan Select High Income Fund I (RHIIX).
According to SLCG’s findings, the catastrophic losses experienced by the RMK funds were not, as Regions Morgan Keegan contends, the result of a “flight to quality” or a “mortgage meltdown.” Rather, the losses are attributed to the high-risk nature of the collateralized debt obligations (CDOs), collateralized mortgage obligations (CMOs), and asset-backed securities (ABS) held in the funds’ portfolios.
Investors, of course, had no way of knowing about the risks they were taking on. RMK never disclosed the risk factor until after the funds experienced outrageous losses.
Even more disturbing: Information in the SLCG study paper contends that four of the RMK closed-end funds actually were substantially more risky than their benchmark even prior to the sharp declines of 2007. From April 2006 to September 2006, the RMK funds were three times as volatile as their benchmark, and six times as volatile between October 2006 and March 2007 (even before the dramatic losses in the summer of 2007). From April 2007 to September 2007, the RMK funds were 12 times as volatile as their benchmark.
Additional findings from the Securities Litigation and Consulting Group document also suggest that fund managers at Regions Morgan Keegan were “smoothing” the NAV (net asset value) of the six funds by failing to use reasonable estimates of market prices in their NAV calculations.
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.
