Archive for July, 2009

Morgan Keegan & Company has officially been charged by the Securities and Exchange Commission (SEC) of misleading thousands of retail and institutional investors about the liquidity risks of auction-rate securities (ARS). The SEC, which announced the charges against the Memphis brokerage on July 21, is seeking a court order requiring Morgan Keegan to repurchase the illiquid instruments from customers. 

According to the SEC’s complaint, Morgan Keegan misrepresented auction-rate securities as a low-risk alternative to cash - an investment that could easily be redeemed if investors needed immediate access to their money.

Between Nov. 1, 2007, and March 20, 2008, Morgan Keegan sold approximately $925 million of auction-rate securities to clients. At the same time, the SEC contends Morgan Keegan failed to inform its customers about the increasing liquidity risks of the instruments, even after the firm decided to stop supporting the ARS market in February 2008. 

“Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms’ ARS auctions began to fail,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “As we’ve done in our enforcement actions against other firms, the SEC is firmly committed to restoring liquidity to Morgan Keegan customers who purchased ARS.” 

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

Publicly referred to on Capitol Hill as “the problem child of banking,” Citigroup now faces a whole new set of issues. The latest trouble for the bank, which has received some $45 billion in taxpayer bail-out money to date, concerns huge losses in its private investments division and, specifically, two funds overseen by former Citigroup chief financial officer Michael Froman.

According to a July 20 story in the Wall Street Journal, the funds in question include the Citi Infrastructure Investors fund, a private-equity fund that amassed $3.4 billion to invest in various infrastructure projects before clients pulled the plug, exercising their right to restrict new investments because of previously failed deals. Adding to the fund’s problems were resignations by several key Citigroup managers, one of whom included Froman. Another Citigroup private-equity fund was shelved altogether after failing to attract clients. 

In January 2009, the Obama administration welcomed the former Citigroup manager of those troubled funds - Froman - into its fold as deputy assistant to the president and deputy national security adviser for international economic affairs. Given the depth of financial problems in the two funds formerly managed by Froman, the addition of the Citigroup executive to the president’s inner circle was viewed by many as controversial. 

Over the past year, Citigroup has been immersed in legal and financial issues related to its alternative investments. Two such products, the ASTA/MAT hedge funds, currently are the focus of numerous lawsuits and arbitration claims by investors who say Citigroup misrepresented the funds as safe, conservative and stable fixed-income investments. Any losses were projected to be minimal - no more than 5% a year in the worst-case scenario.

Instead, ASTA/MAT plummeted in value last summer because of turmoil in the financial markets. During the same time the funds were sinking, however, Citigroup allegedly told investors to “stay the course” and to expect ASTA/MAT to rebound once the market returned to normal.

That didn’t happen, of course. Investors later learned the ASTA/MAT funds were highly leveraged, borrowing approximately $8 for every $1 raised. Meanwhile, the managers ASTA/MAT continued to invest in some of the most risky and speculative investments possible, including subprime mortgages and derivatives.

Now Citigroup has new issues to deal with: massive losses in its infrastructure fund and the ongoing compensation controversy surrounding the fund’s former manager, Froman. According to the Wall Street Journal, as Froman prepared to begin his White House post in late January, he was due and later received more than $4 million in compensation from Citigroup.

Froman also had a big financial stake in the Citi Infrastructure Investors fund, which he had received as part of his pay package. When Froman wanted to cash out, he suggested Citigroup pay him at least $10 million for his stake in the fund, according to the Wall Street Journal.

Keep in mind, Froman was part of Citigroup’s Alternative Investment division - the same division that accumulated hundreds of millions of dollars in losses last year because of high-risk and esoteric investments. As the financial losses multiplied, a number of Citigroup executives in that division - including Froman - bailed, with many collecting seven-figure salaries and bonuses as their parting “gift.”

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.

A July 14 story in the Wall Street Journal is reporting that Regions Financial Corp.’s investment arm, Morgan Keegan & Co., has received a Wells Notice relating to a group of mutual funds formerly managed by the Memphis-based brokerage.

According to the article, Regions received the Wells Notice on July 9 from the Securities and Exchange Commission (SEC). The notice states that investigators will recommend the SEC brings enforcement actions for possible violations of federal securities laws.

A Wells Notice is considered a precursor to a civil lawsuit, outlining what charges might be filed against a person or company. Regulators are not legally required to provide a Wells Notice; however, it is the practice of the SEC and the Financial Industry Regulatory Authority (FINRA) to do so.

The funds at the center of the SEC’s investigation include seven proprietary funds formerly managed by Morgan Keegan and which plunged in value in 2007 and 2008 because of the declining value of securities backed by subprime mortgages. The losses have since sparked a slew of lawsuits and arbitration claims by investors who say Morgan Keegan misrepresented the funds as containing safe, highly rated corporate bonds suitable for retirees and conservative-minded investors.

Some of the Morgan Keegan funds lost more than half their value when the housing market crashed in 2007, leaving investors with more than $2 billion in losses that year. Read a story in The Birmingham News about the funds and the legal actions investors are taking against them.

 In 2008, Regions transferred management of the funds to New York-based Hyperion Brookfield Asset Management. According to the Wall Street Journal article, Hyperion has so far not received a Wells notice in connection to the funds.

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.

It’s a familiar story: Homeowners across the country face foreclosure on their home because of abuse and reckless lending practices. The surge in foreclosures is in part linked to the predatory lending practices of mortgage lenders. On the sidelines, however is a silent partner in the problem: Wall Street financial institutions that helped finance the mortgage loans and concocted the securitization arrangements that pooled the loans together and then sold them to investors. 

So far the latter group has remained under the radar when it comes to legal responsibility for the mortgage loan crisis. That may be changing, however, predict legal experts, citing several high-profiles cases in which plaintiffs contend the investment firms involved in the securitization process of toxic mortgage loans worked so closely with the lenders that they, too, should face liability as members of a joint venture.

Gretchen Morgenson writes about this issue in the July 11 edition of the New York Times. She points to a lawsuit in Atlanta where homeowners Patricia and Ricardo Jordan are suing over a home foreclosure they say was the result of an abusive and predatory loan made by NovaStar Mortgage. Also named as a defendant in the case is JP Morgan Chase, the initial trustee of the securitization containing the Jordans’ loan.

The lawyer for the Jordans contends JP Morgan should be held liable because it was involved in the securitization of their loan and profited from it.

Another case involving a brokerage firm/predatory lender partnership is First Alliance and Lehman Brothers Holdings. As its main source of financing, Lehman had provided First Alliance, which declared bankruptcy in 2000 over fraud charges, some $500 million over the years. More than 7,500 borrowers successfully sued First Alliance for fraud, according to the New York Times article. In 2003, a jury also found Lehman liable for its role in assisting First Alliance, and ordered Lehman to pay $5.1 million.

“As we are unpeeling what was happening on Wall Street, we may see that Wall Street didn’t find the safety from litigation risk that it hoped to find in securitization,” said Kathleen Engel, a professor at Cleveland-Marshall College of Law at Cleveland State University, in the July 11 New York Times article. “I think there is potential for liability if borrowers can engage in discovery to see exactly how much the sponsors were shaping the practices of the lenders.”

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.

Two institutional investors are suing Lehman Brothers Holdings, charging the bank of misleading them about the risks of auction-rate securities. The investors, Western Digital Corporation and Ceradyne Inc., are suing Lehman for more than $190 million.

According to the lawsuits, Western Digital and Ceradyne say they suffered devastating financial losses as a result of Lehman’s alleged deception concerning auction-rate securities, which were supposedly liquid financial instruments. The companies contend that Lehman knew, but failed to inform them, that the securities were “not supported by a broad, fully-functioning market.”

Western Digital and Ceradyne are in the same situation as many institutional ARS investors. When the market for auction-rate securities collapsed in February 2008, the products suddenly became illiquid, leaving corporate and retail investors unable to sell their investments at auctions.

Later that same year, a number of Wall Street investment firms and banks agreed to settle charges by state and federal regulators over sales practices of auction-rate securities and bought back millions of dollars worth of the securities from retail investors and small businesses. Larger institutional investors, however, were for the most part left out of the settlement offers. Today, many are still forced to hold onto their toxic instruments.

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.

Securities fraud, corrupt brokerage firms and stockbroker misconduct have become a permanent fixture in news headlines recently. What follows is a summary of an article that first appeared in BusinessWeek on March 11, 2009, about the most celebrated financial frauds and scandals in U.S. history.

Interestingly, more than half of the alleged frauds featured in the story occurred in 2008 and 2009.

• Bernard Madoff

Estimated losses to investors: $65 billion 

• Charles Ponzi

Estimated losses to investors: $20 million

• R. Allen Stanford

Estimated losses to investors: $8 billion

• Jerome Kerviel

Estimated losses to investors: $8 billion

• Ralph Cioffi and Matthew Tannin

Estimated losses to investors: $1.6 billion

• Edward Strafaci

Estimated losses to investors: $350 million

• Tom Petters

Estimated losses to investors: $1 billion

• Kazutsugi Nami

Estimated losses to investors: $1.4 billion 

• Nick Leeson

Estimated losses to investors: $1.4 billion

• Paul Greenwood and Stephen Walsh

Estimated losses to investors: $554 million

• Michael Berger

Estimated losses to investors: $393 million

• Nicholas Cosmo

Estimated losses to investors: $380 million

• Samuel Israel III

Estimated losses to investors: $350 million 

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.

Securitization entered the financial mainstream 40 years ago, when mortgage lenders discovered there were big profits to be made by selling their home mortgages to Wall Street. Investment banks bought the mortgages in droves, converting them into securities and selling them to retail and institutional investors, pension funds, foundations and others.

The problem was the securitization market had little oversight and regulation. Disclosures and transparency were essentially non-existent, meaning lenders could unload almost any type of mortgage, including risky subprime mortgages. Meanwhile, Wall Street began to securitize other types of speculative debt, such as collateral debt obligations, auction-rate securities, credit derivatives and total return swaps.

The boom days of securitization came to a screeching halt in the summer of 2007, with the collapse of the mortgage market. As reported in a July 6 story by NPR, many believe the housing meltdown and the recession that followed would never have happened if the securitization market had been better regulated.

The Obama administration is now considering a major overhaul of the securitization market. Among the proposals on table: Requiring securitizers to hold on to a piece of whatever financial product they’re trying to sell to investors. In doing so, investment banks and other securitizers would assume some of the risk of their products and therefore might take more precautions - and much needed oversight - of those investments.

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.

Regions Financial Corp., whose investment arm Morgan Keegan is at the center of hundreds of lawsuits and arbitration complaints over a group of collapsed bond funds, says it has no plans to sell its Memphis-based brokerage - for now anyway.

Regions is responding to a loss analysis story that appeared last week in American Banker. The story intimated Regions could be forced to sell Morgan Keegan in order to secure additional capital.

In May, Regions announced plans to raise $2.5 billion in new capital to comply with government mandates relating to stress tests of U.S. banks. Less than a month later, Regions raised the necessary capital but only after deeply discounting bank shares by nearly 25% in a stock offering. According to the American Banker article, Regions may not be able to repeat that particular capital-raising scenario in the future.  

On July 1, Regions Financial stock closed at $3.97; one year ago, the stock was trading at $11.97.

As for Morgan Keegan, it has been on the losing end recently of recent arbitration awards concerning several proprietary high-yield funds that bought toxic waste assets. Losses in the funds-more than $2 billion between March 31, 2007, and March 31, 2008-ultimately were linked to highly risky and untested types of investments, including subprime mortgage securities, collateral debt obligations (CDOs) and other toxic debt instruments.

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.

With investments tanking, U.S. college and university endowments lost an average of 24% in the second half of 2008, the biggest loss in more than three decades. By comparison, endowments previously experienced their worse year in 1974, when the average loss was 11%.

The financial pain is being felt by institutions large and small. According to a recent report by the Commonfund Institute, institutions with endowments under $10 million have been hardest hit, with their funds losing more than 30%. Even endowments of more than $1 billion lost an average of 20% in 2008. 

Poor returns on alternative investments were a key factor behind the losses. As of Dec. 31, 2008, approximately 51% of endowment assets were allocated to alternative investments, including derivatives - an increase of 46% from six months earlier, according to the Commonfund survey.

A number of schools are now coming forth with claims they were recommended investments unsuitable for endowments or misled about the stability of certain financial products.

In addition to tuition and fees, income from endowments serves as a vital source of revenue for postsecondary institutions. The recent financial free fall has forced many colleges and universities across the country to delay capital improvement projects, freeze salaries and cut back on scholarships and academic programs.   

In March, the University of Chicago announced plans not only to reduce its operating budgets for the current year but also in 2010. In addition, the university halted $30 million in building projects after its endowment fell 30%.

“It’s really a firestorm of bad news,” said John Griswold, executive director of the Commonfund Institute, in a March 5 story by Bloomberg. “Those kinds of declines in such a short time frame are very upsetting in a number of ways from the standpoint of having to test the impact on operating budgets.”

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.