Archive for February, 2010

Legal expenses have skyrocketed for Morgan Keegan & Company, the Memphis-based broker that has been the subject of countless lawsuits and arbitration claims over losses suffered by investors in several Morgan Keegan bond funds. The funds plummeted in value due to investments in toxic mortgage-related securities.

As reported Feb. 25 by Investment News, Morgan Keegan’s legal bills equaled 12% of the firm’s total revenue last year. That’s double from 2008. In total, the company spent more than $160 million in “professional and legal fees” last year on revenue of $1.28 billion, according to the Investment News article.

Recent big wins for investors have added to Morgan Keegan’s growing legal fees. Earlier this month, an arbitration panel of the Financial Industry Regulatory Industry Authority (FINRA) ruled against Morgan Keegan, awarding separate claims of $2.5 million and $1.1 million to investors.

Adding to Morgan Keegan’s legal woes has been ongoing scrutiny from securities regulators. The Securities and Exchange Commission (SEC) and FINRA both recently issued Wells Notices to Morgan Keegan, a move indicating that disciplinary action could be in the company’s future. In the SEC filing, the action stemmed to the group of Morgan Keegan bond funds. Another Wells notice was filed in connection to auction rate securities sales.

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Memphis-based broker Morgan Keegan must pay an investor $2.5 million for losses tied to several Morgan Keegan bond funds that made bad bets on mortgage-related securities. A Financial Industry Regulatory Authority (FINRA) panel announced the award decision on Feb. 19.

The panel found Morgan Keegan liable for negligence, failure to supervise and selling unsuitable investments to Florida investor Andrew Stein and his two companies.

Morgan Keegan has been the subject of numerous arbitration claims and lawsuits over six bond funds that were heavily invested in risky collateralized debt obligations (CDOs) and other mortgage-related holdings. The funds plummeted in value - some by as much as 90% - following troubles in the housing market.

As reported Feb. 22 by the Wall Street Journal, Stein’s $2.5 million award is the largest to date ordered against Morgan Keegan.

Stein’s claim against Morgan Keegan contained many of the same allegations previously citied by investors. Specifically, Stein and his companies alleged that Morgan Keegan failed to disclose the magnitude of risks associated with the funds until it was too late. Stein also alleged that Morgan Keegan artificially inflated the value of the funds’ assets in order to give the appearance they were more stable.

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.

Former UBS executive David Shulman has agreed to pay a $2.75 million fine over insider trading charges connected to auction-rate securities sales and be suspended from employment by a broker or dealer until next January. He was suspended by UBS in July 2008.

“While thousands of UBS customers received no warning about the auction-rate securities market’s serious distress, David Shulman - one of the company’s top executives - used insider information to take the money and run,” said New York Attorney General Cuomo in a press statement. “From the start, our prime goal has been to get investors their money back.  But let there be no mistake - when corporate executives unlawfully take advantage of their positions, we will hold them accountable.”

Cuomo announced the settlement with Shulman on Feb. 18. Shulman is the second UBS executive to settle with Cuomo’s office thus far. To date, Cuomo’s investigation into auction-rate securities has reached agreements with 13 broker/dealers and produced more than $60 billion in repurchases of investors’ ARS holdings.

Shulman was accused of selling off $1.45 million of his personal investments in auction-rate securities in December 2007 after he learned that UBS’ own auctions were hitting a snag. On Dec. 11, one of Shulman’s employees e-mailed him that the group was “very concerned” about certain issues related to UBS’ student loan auction-rate program and its continuing support for that program.  In that e-mail, the employee stated that “the auction product is flawed.”

On Dec. 12, records show that one of Shulman’s employees forwarded an e-mail to Shulman with a subject line of “stud loans,” and warned Shulman that “the auction product does not work … our options are to resign as remarketing agent or fail or ?” In another e-mail that same day, the employee advised Shulman in no uncertain terms that with respect to UBS’ student loan auction-rate securities, “the entire book needs to be restructured out of auctions.”

Finally, on Dec. 13, Shulman instructed his broker to immediately sell his holdings in student loan auction-rate securities, before the upcoming auctions could occur.  Later that day, Shulman’s ARS holdings were sold via inter-auction directly to the UBS Short Term Trading desk.

Coincidentally, the Short Term Trading desk was under Shulman’s supervision.  Shulman’s broker mentioned Shulman by name when he called the desk to place the trades. This was the first and only time Shulman sold auction rate securities inter-auction.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with significant investment losses.