Archive for May, 2009

Despite the growing number of investor complaints and intense scrutiny by the Securities and Exchange Commission (SEC) over alleged mismanagement of certain bond funds, the CEO of Morgan Keegan & Co. continues to deny claims that the Memphis-based investment firm failed to make investors aware about the risks of various Morgan Keegan investments.   

In a May 19 interview in the Atlanta Business Chronicle, Morgan Keegan CEO John Carson took umbrage with the ongoing round of attacks against Morgan Keegan - attacks that are taking shape in the form of hundreds of arbitration claims and several class-action lawsuits by investors for losses they suffered in a group of Morgan Keegan mutual funds. In addition, the SEC recently put Morgan Keegan on notice that it plans pursue action against the firm for allegedly failing to inform clients about the risks of auction-rate securities. 

According to the Atlanta Business Chronicle article, Carson said in both instance Morgan Keegan was selling securities that had been liquid, but that their market value collapsed due to an unanticipated economic implosion in late 2007 and 2008.

Investors, however, may another opinion on the subject. Between March 31, 2007, and March 31, 2008, investors collectively lost more than $2 billion in a group of RMK bond funds. The losses in the funds were later traced to the underlying investments made by Morgan Keegan, a fact that many investors insist was never conveyed to them. The investments themselves included risky and untested types of subprime mortgage securities, collateral debt obligations (CDOs) and other debt instruments.

Hyperion Brookfield Asset Management now manages the funds.           

Meanwhile, Morgan Keegan is in legal hot water with several rural Tennessee municipalities, which contend the investment firm failed to disclose its business interest in selling bond derivatives. In addition to acting as an advisor and underwriter of the instruments, Morgan Keegan also resided over state-sponsored seminars on interest-rate swaps in which bankers from Morgan Keegan taught representatives from various Tennessee cities and counties about derivative financing

Tennessee securities regulators are investigating the matter.

Carson’s take on the Tennessee situation? According to the Atlanta Business Chronicle, he conceded only that Morgan Keegan was “guilty of political naiveté” and that the firm viewed the educational meetings as a “public service.”

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.

Following a meltdown of the nation’s financial markets and the collapse of companies like Bear Stearns and Lehman Brothers, the big question on Wall Street became, who knew what when, and what did they disclose to investors? Now it appears at least one of those players, Citigroup, Inc., may shed some light.

As reported May 28, 2009, by the Wall Street Journal, Citigroup reportedly is in early negotiation talks with the Securities and Exchange Commission (SEC) to settle an investigation over whether the bank misled investors by failing to disclose the amount of troubled mortgage assets it held when the financial markets began to plummet two years ago.

The SEC initially launched its investigation into Citigroup’s valuation and disclosure methods following the bank’s third-quarter earnings report. Specifically, two weeks prior to the actual earnings release, Citigroup had predicted a 60% decline in earnings due largely to a $1.3 billion loss on the value of its subprime-related assets and other leveraged loans.

On Oct. 15, 2007, Citigroup said its third-quarter profit fell 57%, with higher losses of $1.83 billion on the same category of mortgage assets and leveraged loans. On Nov. 4, following a second mortgage-asset downgrade by Standard & Poor’s, Citigroup revealed that it faced new fourth-quarter losses of $8 billion to $11 billion on its subprime-mortgage exposure, according to the Wall Street Journal.

Citigroup further disclosed - for the first time - that it held subprime mortgage assets totaling $55 billion, including $43 billion that had never been mentioned in the company’s Oct. 15 report. The larger-than-expected losses came as a shock to investors and Citigroup executives alike, and ultimately prompted the resignation of Citigroup’s CEO Charles Prince.

Over the course of the next five quarters, Citigroup reported about $50 billion in losses, mostly related to mortgage-related assets.

In October 2008, Citigroup received its first injection of bailout money from the federal government totaling $25 billion. In November, the bank got an additional $20 billion, bringing the total amount of funds received under the government’s Troubled Asset Relief Program to $45 billion. In February 2009, it agreed to convert a portion of the TARP investment from preferred stock to common stock.

In addition to Citigroup, the SEC has opened inquiries into the valuation and disclosure methods at Merrill Lynch and Lehman Brothers, as well as other investment firms.

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.

The market for credit default swaps - complex derivative instruments invented by JP Morgan Chase & Co. in 1992 and today believed to be a key contributor to the onset of the nation’s financial meltdown - is sorely in need of a major overhaul. The trouble is the big participants in the market, including financial institutions and other special interest groups, apparently don’t want that to happen.

Credit default swaps initially emerged as a way for financial institutions to buy insurance against defaults on their corporate debt. Similar to an insurance contract, a credit default swap involves one party paying another party to protect it from the potential risk of default on a bond, loan, or other types of debt. If the loan or bond defaults, the insurer, or seller, compensates the buyer for the loss. Sellers of credit default swaps typically are banks, hedge funds or investment firms.

The market for credit default swaps is unregulated. Contracts for the swaps trade over the counter versus through the New York Stock Exchange. Lacking any oversight or regulation, the potential for financial disaster is great. As reported May 18 by Bloomberg, lax oversight of credit derivative instruments played a leading role behind the financial failures of powerhouse firms like Lehman Brother Holdings and American International Group (AIG), not to mention the $1.4 trillion in writedowns that banks have taken in the past year.

For more than a decade, however, these same investment banks have fought tooth and nail against government regulation of OTC credit default swaps. Why? Because credit default swaps contracts translate into huge profits for them. In 2008, JPMorgan reportedly took in $5 billion in profits from trading in fixed-income over the counter derivatives, according to the Bloomberg article.

Meanwhile, the rest of us are forced to wait out what appears to be an unrelenting and merciless financial crisis - a crisis largely triggered by the ticking time bomb known as credit default swaps. Defusing this ticking bomb with improved regulation and transparency is long overdue.

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.

The Carlyle Group, one of the nation’s biggest and most prominent private equity funds, will pay $20 million to resolve accusations of pay-for-play ties to a New York state pension fund. In addition to the $20 million settlement, Carlyle employees are banned from making any campaign contributions to public officials who have clout over pension fund investment decisions.

D.C.-based Carlyle Group is one of several firms linked to a two-year investigation by New York Attorney General Andrew Cuomo over possible illegal payments to influence investment decisions of the New York State Common Retirement Fund. In March, Hank Morris, the top political aide to former New York State Comptroller Alan Hevesi, was indicted, as well as the pension fund’s chief investment officer David Loglisci, on charges the duo asked for and received kickbacks from companies that sought access to public pension fund investment dollars.

Carlyle paid $13 million to Morris for his help in influencing the New York State Retirement Fund, which ultimately invested more than $730 million with the equity fund.

As reported May 18 by Bloomberg, Carlyle’s settlement makes it the first money manager to adopt what NYAG Cuomo calls a new “code of reform” for the municipal-pension market. The code, which is designed to create greater transparency and accountability over the pension fund investment process, prohibits money managers from conducting business with a public pension plan for two years after making political donations to officials who have influence over the fund’s investment decisions. A similar idea was proposed by the Securities and Exchange Commission (SEC) in 1999, but went nowhere following opposition from politicians and investment industry insiders.

Carlyle’s May 18 settlement takes the legal heat off in terms of possible criminal charges, since the company and its executives will not be subject to any criminal liability. Cuomo is, however, continuing to investigate Riverstone Holdings LLC, a New York private equity firm that has a joint venture with Carlyle. Funds managed by Carlyle alone or with Riverstone received about $730 million in investment commitments from the New York fund, according to Bloomberg.

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.

Already facing a slew of investor lawsuits and arbitration claims for losses in certain bond funds, Morgan Keegan & Co. could soon find itself the subject of a civil proceeding by the Securities and Exchange Commission (SEC) for the alleged mishandling of auction-rate securities.

In a quarterly report filed in March, Regions Financial revealed that the SEC had filed what’s known as a Wells Notice against Morgan Keegan. Receipt of a Wells Notice indicates the possibility of future civil action by the SEC, and gives recipients the opportunity to gather materials and other relevant information for their defense.

In the case of Morgan Keegan, the SEC’s focus is on whether the brokerage appropriately disclosed the liquidity risks associated with auction-rate bonds. In addition, the SEC is investigating whether Morgan Keegan subsequently sold off large volumes of the securities once its ability to support weekly auctions for the instruments was diminished.

Auction-rate securities are long-term financial instruments with interest rates that reset in weekly or monthly auctions. In February 2008, the $330 billion market for auction-rate securities came to an abrupt standstill, leaving investors holding a security they could only sell at a significant loss.

Following the auction market’s meltdown, officials from the Financial Industry Regulatory Authority and the SEC began a series of investigations at nearly 40 brokerages nationwide to determine if they adequately informed customers about the risks of auction-rate investments. Last summer, in an effort to settle accusations by regulators, many of the nation’s biggest banks agreed to buy back more than $55 billion worth of bonds that their retail clients had been unable to sell.

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. 

At least two more investors have filed a lawsuit against OppenheimerFunds, Inc. after assets in the Oppenheimer Champion Income Fund (OPCHX) entered a free fall last year. Investors Gary and Rita Wallen filed their lawsuit April 10 in a Denver, Colorado, U.S. District Court.

The couple’s complaint follows similar charges against Oppenheimer in which investors say managers of the Oppenheimer Champion Income Fund misled them about the fund’s portfolio composition. Instead of being a conservative high-income fund, the Champion Income Fund invested more than 25% of its assets in high-risk mortgage-backed securities and illiquid derivatives.

According to the fund’s own policies, that move required a majority vote from shareholders, something Oppenheimer failed to obtain and which violated state laws.

As a result of the high-risk investments, the Oppenheimer Champion Income Fund lost more than 80% of its value, dropping almost $2 billion over the course of a year. By comparison, other high-yield funds averaged a drop of 32% in 2008.

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.

Preliminary results of the government’s stress tests on the fiscal soundness of the nation’s biggest banks indicate that State Street Corp., the world’s largest money manager for institutions, does not have a need to raise billions of dollars in additional capital should the economy worsen. That’s good news in light of the fact the Boston-based company faces a slew of lawsuits from pension funds, institutional investors and others over claims State Street intentionally hid the risks of certain bond funds.

Earlier this month, Massachusetts Secretary of State William Galvin confirmed that his office had opened an investigation into State Street and its Limited Duration Bond Fund. At issue is the fact pension funds and other institutional investors invested in the Limited Duration Bond Fund as an “enhanced cash fund,” with the idea to generate better returns than ultra-safe, conservative money market funds with just slightly more risk. As it turns out, the Limited Duration Bond Fund held large concentrations of risky mortgage-backed assets.

When the subprime mortgage crisis unfolded in the summer of 2007, funds like the State Street Limited Duration Bond Fund took a huge hit, as did investors who suffered millions of dollars in losses.

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

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 month, the state of Oregon sued OppenheimerFunds in an effort to recover more than $35 million that officials say investors lost because Oppenheimer misrepresented the risk of its Oppenheimer Core Bond Fund.  Now it appears Oregon state officials may share in some of the blame by failing to reel in managers of OppenheimerFunds and stop the risky investments they were making in the Oregon College Savings Plan with money labeled as conservative and ultra-conservative.

According to a May 6 article in The Oregonian, e-mails between the state treasurer’s office and OppenheimerFunds reveal state officials failed to closely monitor the Oppenheimer Core Bond Fund and didn’t take action to prevent additional losses until it was too late. Instead, documents show the state relied on information from OppenheimerFunds that the money was being well-managed.

Even more troubling: E-mails point to a possible conflict of interest between OppenheimerFunds and Oregon state officials. In addition to OppenheimerFunds buying meals for state executives at expensive Portland restaurants, the Oregonian article reports that when problems surrounding the Oppenheimer Core Bond Fund were made public, OppenheimerFunds provided the state with a talking points document, and a state official gave the company a heads-up about a pending state investigation.

The central issue concerning the Oppenheimer Core Bond Fund focuses on the investing strategies used by Oppenheimer’s managers. According to a February 2008 filing with the Securities and Exchange Commission (SEC), OppenheimerFunds changed the investment focus of the fund in 2007 by dramatically increasing its holdings in the complex investing arena of derivatives. When the state initially hired OppenheimerFunds, the fund held three derivatives in the form of total-return swap contracts. By the end of 2007, the Core Bond Fund held 150 derivative contracts. 

At the close of 2008, the Oppenheimer Core Bond Fund - at one time a $1.4 billion fund - had lost 41% of its value.

As reported in the May 6 Oregonian article, OppenheimerFunds first disclosed its exposure to the crisis on Wall Street in a Sept. 24 letter to Oregon 529 College Savings Network Executive Director Michael Parker.  The letter, however, failed to accurately portray the amount of the Core Bond Fund’s exposure and lacked other important details. Moreover, OppenheimerFunds reportedly marked the letter as “not for public disclosure.”

On Oct. 23, at a board meeting to discuss the financial status of the Oregon College Savings Plan, Former Oregon State Treasurer Randall Edwards reportedly expressed concern about the deep losses in the Oppenheimer Core Bond Fund yet did not call for making any changes to the investments, according to the Oregonian story.

In January 2009, Oregon voted to replace the Core Bond Fund from the Oregon College Savings Plan; it wasn’t until March, however, that any action occurred.

The bottom line: Red flags were waving loud and clear when it came to OppenheimerFunds’ mismanagement of the Oregon College Savings Plan and the Core Bond Fund. Meanwhile, state officials apparently chose to remain asleep at the wheel as OppenheimerFunds and its managers took on more and more risks with investors’ money.

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.

Memphis-based Morgan Keegan & Co., the brokerage arm of Regions Financial Corp., is discovering the best-laid plans can indeed have dire - and expensive - consequences. In 2002, Morgan Keegan enthusiastically unveiled a group of high-yield bond funds filled with unconventional and untested structured finance products, including large concentrations of mortgage-backed securities. Today, Morgan Keegan and those bond funds are mired in lawsuits, with six cases costing the company more than $1.6 million in just the past two months.

For awhile, the RMK funds, which included the Select Intermediate Bond Fund and the Select High Income Fund, outperformed their peers. Then, in 2007, the subprime mortgage crisis took center stage and a dark cloud suddenly was cast over the future performance of the funds. In late 2006, the funds’ assets were $1.6 billion; by the end of June 2008, the figure had shrunk to $52 million.

As reported May 1 by the Birmingham Business Journal, investors in the RMK funds cried foul, contending the “safe” investments that Morgan Keegan had sold them essentially were now worthless. Hundreds of arbitration claims against Morgan Keegan soon followed, along with several class-action lawsuits.

Morgan Keegan’s bonds were fat with some of the “worst pieces of structured finance deals,” on the market, said securities expert Craig McCann of Virginia-based Securities Litigation & Consulting Group in the Birmingham Business Journal article.

New information regarding the risk factors of the bond funds and what Morgan Keegan did and did not reveal to investors, including the funds’ classification as investments similar to corporate bonds and preferred stocks when in fact they were high-risk derivatives, ultimately has helped investors prove their cases. Since early March, six different investors have rendered significant awards from FINRA arbitration panels. In one case, an investor won $950,000.

The bottom line: There seems to be a new trend shadowing the arbitration claims against Morgan Keegan and its bond funds, one in which more investors are coming out on top because the evidence speaks for itself.

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.

There appears to be no end in sight for the arbitration claims that keep piling up against Charles Schwab & Co. over losses suffered by investors in the Schwab YieldPlus Fund and the Schwab YieldPlus Select Fund. As recently as April 2009, investor claims were filed with the Financial Industry Regulatory Authority (FINRA), charging Schwab with breach of fiduciary duty, negligence, misrepresentation and fraud.

The focus of the claims centers on the fact that Schwab allegedly failed to disclose certain risks about the Schwab YieldPlus Funds. Specifically, investors say Schwab marketed and sold the funds as safe, low-risk alternatives to money-market investments, with the idea they would generate higher potential returns at only a slightly higher risk.

It turns out the Schwab YieldPlus Funds were heavily invested in subprime mortgage-backed securities, with more than 50% of the funds’ assets in these high-risk products. In the face of the subprime mortgage market collapse, this over-concentration caused investors to suffer $1.3 billion in losses between July 1, 2007, and April 30, 2008.

Since then, investors from Indiana to California have taken legal action against Charles Schwab, filing both arbitration claims with FINRA and class-action lawsuits. So far, FINRA arbitration panels have ruled in favor of several investors. In one decision, FINRA awarded more than half a million dollars, or about 81% of the investor’s claimed damages. Other FINRA claims have resulted in awards totaling 100% of investors’ claimed damages.

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.