Archive for March, 2009

Promises of unrealistic returns and unsuitable investment strategies ultimately will cost Morgan Stanley $7.2 million. The Financial Industry Regulatory Authority (FINRA) announced the multimillion-dollar decision on March 25,when it ruled in favor of 90 Rochester, New York-area retirees from Eastman Kodak and Xerox Corp. who said the brokerage firm had encouraged them to take early retirement and open accounts that ultimately wiped out much of their life savings. 

FINRA’s decision includes a $3 million fine, plus $4.2 million in restitution. In addition, the regulatory agency permanently barred former Morgan Stanley broker Michael Kazacos from doing business in the securities industry, as well as charged former Morgan Stanley broker David Isabella with misconduct. Ira. S. Miller, who managed Isabella and Kazacos, was suspended from acting in a principal capacity for one year and fined $50,000.  

According to a statement by FINRA, from 1998 through 2003, Kazacos was able to persuade dozens of Kodak and Xerox retirees and potential retirees to invest their retirement assets with him by promising 10% annual returns and the ability for investors to satisfy their income needs by withdrawing a similar percentage for living expenses each year without reducing their principal. Kazacos’ statements not only encouraged individuals to move their retirement accounts to Morgan Stanley, but also caused some to retire sooner than they might have otherwise. 

FINRA also found that once Kazacos did begin to service the retirement accounts, he implemented unsuitable investment strategies that exposed investors to greater risks, especially in a market downturn. As a result, the principal in many accounts was significantly reduced. Specifically, Kazacos put many clients into mutual funds, with an unsuitably high concentration in equity funds. The broker also recommended unsuitable variable annuity transactions, according to FINRA’s formal disciplinary complaint. 

During the period that the misconduct allegedly occurred, Kazacos and Isabella generated about $15.4 million in gross commissions from soliciting investments with Morgan Stanley, FINRA said. 

To read FINRA’s press release on the Morgan Stanley ruling, go to: http://www.finra.org/Newsroom/NewsReleases/2009/P118270. 

Our affiliation of 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. 

On the heels of several arbitration awards by Financial Industry Regulatory Authority (FINRA) panels, more investors who lost money in a group of Regions Morgan Keegan bond funds are prepping for legal action. The common denominator in their claims: Memphis-based Regions Morgan Keegan (RMK) and its managers allegedly hid the credit risks of various RMK bond funds. It wasn’t until after the funds plummeted in value that the brokerage firm finally came clean with investors.

Some of the RMK funds at the center of investors’ claims have seen their value fall by more than 90% because of ties to high risk and toxic collateral debt obligations (CDOs). Ultimately, investors suffered losses of more than $2 billion.

At issue is the alleged deception displayed by Regions Morgan Keegan and its management. According to investor complaints, Regions Morgan Keegan marketed and sold the bond funds as “relatively conservative” investments. Investors never knew about the hidden risks of the funds or the fact that mortgage-backed securities and collateralized debt obligations comprised more than 50% of each fund’s portfolio.

So far, FINRA has returned awards totaling more than $600,000 for investor claims over losses suffered in the RMK bond funds. The most recent awards were decided in March 2009 by FINRA arbitration panels in Indiana and Alabama.

Our affiliation of 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. 

U.S. pensions are encroaching upon dangerous territory these days, with the amount of under funded plans nearly doubling to $373 billion from just five months ago. For many already financially strapped companies, this means they must somehow come up with even more dollars for contributions if they hope to close pension funding gaps in the future.

As reported March 23 by Bloomberg, the dramatic plunge of U.S. stock prices will saddle 53% of companies in the Standard & Poor’s 1500 Index with defined-benefit plans with about $70 billion in pension expenses this year. That’s a sevenfold increase from 2008.

Dow Chemical and Sears Holdings Corporation are among the companies facing under funded pension plans. Dow, whose pension plan was under funded by $4 billion at the end of 2008, expects to more than double pension contributions to $376 million from $185 million last year, according to the Bloomberg article.

As for Sears, it may need to nearly triple pension contributions to $500 million next year if pension reforms aren’t enacted and the financial markets fail to rebound.

Meanwhile, the state of New Jersey is suing former executives of Lehman Brothers, charging fraud and misrepresentation caused New Jersey’s public pension fund to suffer more than $118 million in losses.

According to the lawsuit filed March 17, “thirst for profit” and “simple greed” on the part of Lehman’s top executives, including former embattled CEO Richard Fuld, were behind the investment firm misstating its financial position when New Jersey bought more than $180 million worth of Lehman shares in April and June 2008.

The lawsuit also contends that Lehman executives provided false and misleading statements about the firm’s liquidity, the value of its assets and its ability to hedge against risk.

As reported in a March 17 article in the New York Times, this is the second lawsuit filed by a government entity that names former Lehman executives as defendants. In November 2008, San Mateo County, Calif., accused Fuld and other Lehman executives of making false statements that ultimately led to a $150 million loss in the county’s investment pool.

Our affiliation of 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. 

They’ve been called everything from weapons of mass destruction to a company’s worst investment nightmare. Now hospitals and nonprofits from California to Indiana are getting an unwelcome lesson on the financial consequences of what can go wrong when interest rate rate swaps meet an economic downturn.

South County Hospital in Wakefield, Rhode Island is a prime example. As reported March 18 by Bloomberg, in just one year the interest rate on the hospital’s $52 million of debt has doubled to 12%. On top of that, the facility has turned over nearly $13 million in “collateral postings” to Merrill Lynch, money that could have been used to make up for a reduction in state aid for treating uninsured patients or buy four years’ worth of orthopedic supplies, according to the Bloomberg article.

Interest rate swaps have become an increasingly popular mechanism with hospitals, nonprofits and other tax exempt entities to hedge against changes in interest rates. There is a downside, however. The value of the swaps is tied to the contract’s underlying assets, as well as larger trends in the lending markets.

In the case of South County Hospital, fallout from the credit crunch and the collapse of the auction rate securities market caused its interest rate swaps to backfire, which in turn contributed to a $1.5 million operating loss for the hospital and a need to lay off employees and reduce pay for others.

South County is far from alone. Countless other hospitals and nonprofits face a similar plight after having entered into these complex derivative deals with Wall Street. Instead of the savings they were promised by bankers, the instruments have become a big liability.

And the news couldn’t come at a more inappropriate time. According to the Bloomberg article, the investment income that nonprofits use to support their operations fell more than $830 million in the third quarter of 2008, while unemployment rose and more patients without insurance sought medical care.

When South County initially entered into its interest rate swap arrangement with Merrill Lynch, it agreed to pay an annual fixed rate of 3.5% for 30 years after selling $52 million in auction-rate securities. At the time, the average rate for a comparable fixed rate hospital bond was 4.5%, according to Bloomberg data.

In February 2008, however, everything changed for the $330 billion auction-rate securities market. Wall Street banks suddenly stopped serving as buyers of last resort, which led to the market’s collapse. As a result, investors had no buyers for their investments, while issuers like South County faced penalties of double digit interest rates on their auction bonds.

Our affiliation of 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. 

In a deal struck March 17 with Texas Securities Commissioner Denise Voight Crawford, Wachovia Securities will pay a $4 million fine in connection to claims that it misled Texas investors about the safety of auction rate securities.

As part of the agreement, Wachovia is required to complete its repurchase of auction rate securities from Texas clients by June 30, 2009. Last August, Wachovia joined a number of investment firms and banks that reached settlements with securities regulators when it agreed to buy back $9 billion of auction-rates securities previously sold to some 40,000 investors and pay a $50 million fine.

According to the Texas commissioner’s order, Wachovia Securities “fostered the misconception” that auction rate securities were “cash like, conservative instruments.” In reality, the securities are dependent on the viability of a successful auction. If an auction fails, which happened when the ARS market collapsed in February 2008, investors are unable to access their money.

The ARS ruling in Texas follows a similar judgment in Missouri where Secretary of State Robin Carnahan sued Stifel, Nicolaus & Co. to force the St. Louis brokerage firm to step up its plans to buy back nearly $200 million in frozen auction rate securities from investors.

Our affiliation of 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. 

Last year’s death of the auction rate securities market creating a ticking time bomb for individual and institutional investors. Finally, in August 2008, after months of holding illiquid investments that had been touted “as good as cash,” some retail investors found relief when major Wall Street firms made a pact with state and federal regulators to buy back more than $50 billion of the securities. 

But for many auction rate securities investors, the deals failed to make them whole again. In particular, institutional investors, including charitable foundations and educational endowments, are still waiting on Wall Street to come up with a resolution for the carnage created by auction rate securities and other exotic investments.

For many foundations and endowments, the erosion of their investment portfolios has done far more than hinder their ability to grow and compete. It has forced some to close their doors, while others must reduce faculty and services or raise tuition during a time when students and families are hard pressed to come up with additional financial resources for college.

A study released March 2009 from the Commonfund Institute showed that endowments at colleges, universities and independent schools saw their worst six months of performance ever recorded at the end of 2008, losing an average of 24.1%.

The problem lies with portfolios of hard-to-value and difficult-to-sell assets. Among these investments are mortgage-related securities and collateralized debt obligations (CDOs), high risk products that are not trading on viable secondary markets.  

As a result, a growing number of universities, nonprofit organizations and other entities are facing a grim reality: The value of their endowments is being pulled so far down that they’re now worth less than the original donations. In other words, they’re under water. And state laws in 24 states prohibit nonprofits from tapping into their principal.

As reported March 20 in the News and Observer, neither the National Council of Nonprofits nor the Council on Foundations keeps track of how many of its members are struggling with endowments that currently are under water. According to Harvey Dale, director of the National Center on Philanthropy and the Law at New York University, however, “it is a serious problem,” one that will only get worse if the current financial downturn continues.

Our affiliation of 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.

Another victory has been scored for investors who lost money in Morgan Keegan & Co. bond funds. On March 12, a Financial Industry Regulatory Authority (FINRA) panel awarded Jo L. Wright, a church secretary from Whitestown, Indiana, $18,000 for losses she suffered in bond funds managed by Morgan Keegan.

For more than a year, Morgan Keegan has been the subject of numerous complaints and investigations regarding a group of open end and closed end bond funds that were invested heavily in high risk asset backed securities.

As reported in a March 19 article in the Indianapolis Star, during 2007, when the crash of the subprime mortgage market took hold, individuals who purchased shares of certain Morgan Keegan funds began to suffer big financial losses, losses that investors say could have been avoided if only Morgan Keegan had disclosed the inherent risks associated with their investments.

Wright, who lost $11,000 in the funds, served as the first Indiana case to go to an arbitration hearing, said her lawyer, Mark E. Maddox of Maddox Hargett & Caruso, in the Indianapolis Star article.

Memphis based Morgan Keegan is a division of Regions Financial Corp.

Wright’s introduction to Morgan Keegan occurred via her local Indiana Regions bank branch manager. At the time of the referral, Wright had her money in a certificate of deposit and a savings account.

On the recommendation of the bank manager and Morgan Keegan, Wright transferred her money into the Morgan Keegan Select Intermediate Bond Fund, which she believed was a safe, conservative but higher-yielding investment.

According to the FINRA complaint, Wright was never informed that the Morgan Keegan fund was considered a risky investment, nor did she ever receive a prospectus outlining any risks or details about the fund.

Wright is far from alone. Many investors contend Morgan Keegan intentionally withheld critical information about the Morgan Keegan Select Intermediate Bond Fund. Instead, management told them that any risk of principal loss was virtually non-existent and that investing in the Morgan Keegan Select Intermediate Bond Fund was appropriate for the “most conservative-minded investors.”

Ultimately, the Morgan Keegan Select Intermediate Bond Fund virtually collapsed in value because of its high concentration of holdings in collateralized debt obligations (CDOs) and other speculative investments. The losses in the fund, as well as other Morgan Keegan funds, have since spawned a wave of securities litigation and arbitration claims, with regulators continuing to look into the cause of the funds’ meltdown.

Our affiliation of 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.

Long before the word “subprime” became a daily utterance on Wall Street, let alone on Main Street, savvy bond fund managers had the foresight to dump their toxic subprime securities before real damage could take hold. A few funds went the opposite direction, however, betting that the market would quickly return to normal. For those managers and the millions of investors who trusted them, the gamble backfired miserably.

One of those bond fund managers who tried to use the subprime crisis to his advantage was James Kelsoe. Kelsoe once headed up a group of ill-fated Morgan Keegan bond funds that were heavily invested in collateralized debt obligations (CDOs) and other risky structured financial products. Under Kelsoe’s management, the funds experienced average losses of 70% or more, far exceeding that of similar funds.

Investors who initially purchased the RMK funds thought they were investing in safe, income-producing investments. Eventually, losses from the funds surpassed the $2 billion mark.

A June 25, 2007, BusinessWeek article hammers home the obvious: The onset of subprime crisis left plenty of time for bond fund managers to perform their due diligence and re-evaluate the asset allocation of their funds. Managers who did their homework got out, or dramatically reduced their exposure to mortgage-related securities. Others, like Kelsoe of Morgan Keegan, simply looked the other way and continued to take on even more risk. In the end, those actions would cost investors dearly.

Our affiliation of 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. 

More investors are emerging victorious in their arbitration claims against Memphis-based Morgan Keegan & Co. and the collapse in value of some of the company’s mutual funds. Six-figure awards recently were announced in two arbitration decisions by the Financial Institution Regulatory Authority (FINRA). In one of the cases, the investor was awarded more than the damages he initially claimed.

“This is believed to be the largest arbitration award against Regions Financial Corp.’s Morgan Keegan division for the sale of bond funds that cost investors more than

$2 billion,” said attorney Mark E. Maddox of Maddox Hargett & Caruso, P.C. in Indianapolis, who represented the investor Philip Willingham. “It also is the first make whole award in favor of a Morgan Keegan bond fund investor.”

“This arbitration award affirms our view that Morgan Keegan engaged in a massive scheme to defraud many investors, including Philip Willingham, in the sale of its bond funds,” Maddox added in a March 13 article in the Memphis Commercial Appeal.

In the latest decision regarding Morgan Keegan, FINRA awarded Willingham, a retired cattle farmer from York, Alabama, and Melinda Oates $187,215. They asked for actual damages of $109,881, as well as unspecified “well managed damages had the account been properly invested.”

The six funds at the center of investors’ arbitration claims include open-end and closed-end funds. Among them: 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).

Morgan Keegan is owned by Regions Financial Corp. of Birmingham, Alabama.

For more than a year, Morgan Keegan has been the subject of hundreds of arbitration claims by investors who say the brokerage firm and several of its managers intentionally hid the risks of six RMK bond funds. Only after the funds began to plummet in value did investors become aware of the high concentration of subprime mortgages, loans and other speculative debt they had been exposed to.

Many of the individuals who invested in the RMK bonds funds were like Willingham, retired and living on a fixed income. Other investors in the Morgan Keegan funds include families saving for their children’s college education, pension funds, charities, foundations, small businesses and corporations.

All of the investors thought they were putting their money into safe, conservative investments when it came to the RMK funds. Instead, they unknowingly were going down a path of financial destruction, as RMK management exposed the bond funds’ assets to risky and toxic mortgage backed securities. 

“It’s becoming apparent through the evidence investors are now able to present about the scope of Morgan Keegan’s misconduct and the significant investigations that are being conducted by the Securities and Exchange Commission and state securities that regulators are catching up with Morgan Keegan, said Maddox on FINRA’s recent decision in favor of two investors in the RMK funds.

“This, in turn, is allowing arbitrators to better understand the scope of Morgan Keegan’s misconduct,” Maddox said.

Our affiliation of 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.

Religious ties, nepotism, and the tenacity of Robert Allen Stanford himself appear to be the common theme that produced what the Securities and Exchange Commission (SEC) calls a $9 billion massive Ponzi fraud. Stanford, chairman of the Stanford Financial Group, and employees James Allen and Laura Pendergest-Holt were sued last month by the SEC for allegedly conducting the second biggest securities fraud to emerge in just three months, following the Bernard “Bernie” Madoff case. 

On Feb. 26, Pendergest-Holt was arrested and charged with obstructing a federal investigation. All three individuals, Stanford, Allen and Pendergest-Holt are accused of taking part in issuing fraudulent certificates of deposit through Stanford International Bank in Antigua, as well as a further scheme relating to $1.2 billion in sales. As in Madoff’s Ponzi scheme, Stanford’s CDs carried improbable high interest rates of return, as much as 15.7%. That is four times what banks in the United States offer on similar accounts.

As reported March 9 by Bloomberg, Stanford knew Davis, the company chief financial officer, in college. Davis then later brought in Pendergest-Holt as chief investment officer. Davis had met Pendergest-Holt at the Baptist Church in Baldwyn, Mississippi.

Employees of Stanford’s company apparently relied heavily on church and community to attract clients. Religion also was a big part of the corporate culture at Stanford’s companies. According to the Bloomberg article, employees say it was common for Davis, based in Memphis, Tennessee, to “clasp the shoulders of employees, look them in the eyes and pray for them.”

Now the prayers should be for investors. So far, only $90 million of the missing $8 billion has been found. Stanford’s assets, as well as those of his companies, have been frozen and placed into receivership by a U.S. federal judge.

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.