Archive for the “SEC Investigation” Category

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

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.

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 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.

It’s become a familiar scene across the country: Public pension funds gambled billions of dollars of their employees’ retirement money in the high stakes world of hedge funds. Now, as pension fund managers discover that their hedge funds investments have delivered far less than what they expected, many people are left to wonder if their golden years will instead be spent logging more time in the workforce.

Long before Bernard Madoff made front page news for his $50 billion hedge fund Ponzi fraud, hedge funds were garnering the attention of state and federal regulators for their lack of transparency and opaque oversight standards.

Despite this veil of secrecy, public pension funds nonetheless gravitated to hedge funds in droves, putting their money into everything from real estate to private equity funds. In 2005, 13% of all public pension funds invested in hedge funds, according to an April 15 article in the New York Times. Three years later, the percentage had climbed to 40%.

The apparent infatuation of public pensions and hedge funds may be changing, however. Faced with the grim reality of massive losses on their hedge fund investments, more pension funds are scaling back or, at the very least, trying to change the terms of their hedge fund investments.

The California Public Employees’ Retirement System (Calpers) is a prime example. As reported in the New York Times article, the nation’s largest public pension fund is trying to reduce hedge fund fees and alter the terms of its investments to hedge funds. The decision comes after Calpers saw its investments in hedge funds fall from $7.6 billion to $5.9 billion.

Moreover, the annual returns Calpers has achieved since it began investing in hedge funds in 2002 have been modest at best: only a 3.5% annual rate of return. The percentage is far, far less than what it initially had been promised by Caplers’ hedge fund managers, according to the New York Times story.

As for hedge funds, many are in no position to question the demands of investors like Calpers. In the past year, hedge fund assets have collectively fallen by nearly 40% to $1.2 trillion due to record losses and redemption requests. Adding to the industry’s blight are state and federal investigations into whether certain hedge funds made illegal payments to intermediaries in order to gain access to state public pension funds.

Among the hedge firms under investigation by the Securities and Exchange Commission (SEC) and New York Attorney Andrew Cuomo as having paid fees to garner business from the New York State Common Retirement Fund are the Carlyle Group, Odyssey Investment Partners, and HFV Asset Management LP. On April 15, Barrett Wissman, an executive at HFV, pleaded guilty to securities fraud and agreed to a $12 million settlement as part of the investigation.

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. 

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. 

In what appears to be a page right out of the Bernie Madoff book on hedge fund fraud, money managers Paul Greenwood and Stephen Walsh are charged with bilking $550 million out of investors, state and city pension funds and higher education institutions in order to fund elaborate personal purchases that included multimillion-dollar mansions, rare books and 1,350 Steiff teddy bears.

Like Madoff, Greenwood and Walsh had been revered on Wall Street - their supposed investment prowess legendary among clients and colleagues across the country. For years, the two men succeeded in living up to the hype with claims of outperforming the Standard & Poor’s 500 Index. Their bragging came to an abrupt halt on Feb. 25, however, when FBI agents arrested them on conspiracy, securities and wire fraud charges.

The Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission brought separate civil charges against Greenwood and Walsh. In its 22-page complaint, the CFTC charged the two men of fraudulently soliciting some $1.3 billion from investors over the past decade.

Greenwood, 61, and Walsh, 64, are principals of the Greenwich, Conn.-based hedge fund WG Trading Co. LP and Westridge Capital Management in Santa Barbara, Calif. According to SEC documents, the duo conned investors with an elaborate hedge fund investing strategy that involved buying and selling equity futures and enhanced equity index arbitrage trading. 

As part of the scam, investors were told that their money was going toward “conservative” investments. Instead, court documents say the funds were used as a personal piggy bank by Greenwood and Walsh. Included in their buys: $160 million for personal expenses, $80,000 for a Steiff teddy bear (Greenwood is said to own the world’s largest collection), a $10 million property in North Salem, a $4 million home on Long Island’s Gold Coast and a 54-acre riding school and horse farm once belonging to the now-deceased actor Paul Newman.

A number of pension funds and universities are included among those who lost money to Greenwood and Walsh. The Sacramento County Employees’ Retirement System in California reportedly invested nearly $90 million with Westridge Capital Management. The Iowa Public Employee’s Retirement System invested nearly $340 million, and the University of Pittsburgh and Carnegie Mellon University collectively invested $114 million.

According to court documents, there may be as many as 16 universities or public-employee pension funds that used Westridge Capital Management as their investment advisor.

Federal authorities believe the swindle by Greenwood and Walsh could date as far back as 1996. The two men were caught only this month during a routine audit investigation by the National Futures Association. The association found $812 million in assets on the balance sheets of the pair’s hedge fund, with $794 million in promissory notes due from Greenwood and Walsh.

If convicted, Greenwood and Walsh could spend up to 20 years in prison on each of the fraud counts and five years for conspiracy. They currently remain out of jail on a $7 million bond.

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. 

Times are tough for hedge funds, and they’re likely to get even tougher. Taking their lead from Capitol Hill, Connecticut lawmakers have proposed three new bills designed to dramatically shake up hedge fund business in that state with stiffer rules governing hedge fund transparency and oversight.

For years, Connecticut - which is home to hundreds of hedge funds - has taken a hands-off approach to hedge fund regulation. Until now that is. As reported Feb. 23 in the Hartford Business Journal, Connecticut’s proposed legislation would require hedge funds to obtain a state license, provide annual financial audits and disclose fees and any changes in management or investing strategy.

The plan also would bar individuals with less than $2.5 million and institutions with less than $5 million in assets from investing in a hedge fund. Stricter rules to promote transparency for hedge funds that hold investments from pension funds are an integral part of the Connecticut legislation, as well.

Connecticut’s hedge fund legislation comes on the heels of similar recommendations currently being touted in Washington. The Hedge Fund Transparency Act of 2009, which was introduced in the Senate on Jan. 29, would impose stricter regulatory oversight of hedge funds.

For years, hedge funds have operated in what many call a regulatory black hole. Despite the fact that more than 9,000 hedge funds exist today, the industry remains largely unregulated. There are no mandatory requirements for hedge fund managers to register with the Securities and Exchange Commission (SEC) or to provide detailed financial disclosures about their investing strategies.

This laxness may in part be responsible for the record number of hedge funds that shuttered in 2008. According to Hedge Fund Research, 920 funds closed down this past year. Of the survivors, the majority posted dismal performances. On average, hedge funds lost more than 18% in 2008.

Hedge funds also have been in the hot seat for their role in short selling and credit-default-swaps, both of which are at the core of the nation’s credit meltdown.

The arrest of hedge fund manager Bernie Madoff added further tarnish to the reputation of hedge funds, with many people citing the industry’s lack of transparency as the reason Madoff, who is accused of running a $50 billion global Ponzi scheme, went undetected from federal authorities for so long.

The bottom line: Heightened vigilance of hedge funds isn’t just a good idea, it’s critical if we want to protect investors and mitigate further risk to the nation’s already troubled financial system. For too long, this once-secret-but-powerful financial sector has operated under a veil of secrecy. It’s time to lift that veil.

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.