Archive for the “SEC Involvement” Category

Recent news coverage has not been rosy for Regions Financial Corp., the parent company of Memphis-based Morgan Keegan. In its second quarter, Regions posted $244 million in net losses versus $206 million in profits during the same period in 2008. Adding to the bank’s woes is news from the Securities and Exchanges Commission (SEC) that the regulator issued a Well notice to Regions subsidiary Morgan Keegan in July, as well as to Morgan Asset Management Company and three employees, informing them to get ready for future enforcement action over violations of federal securities laws. 

Morgan Keegan also received a Wells notice from Financial Industry Regulatory Authority (FINRA), which stated discipline actions against the brokerage were forthcoming in connection to sales of a group of proprietary mutual funds.

The now-controversial funds at the focus of the SEC and FINRA regulatory notices are the same funds facing hundreds of arbitration claims by investors who allege that Morgan Keegan misrepresented the products as low-risk and high-yield investments. In truth, the funds held huge concentrations of subprime mortgages and corporate junk bonds.

The risky composition of the RMK funds eventually spelled financial disaster for investors beginning in the summer of 2007 and the subsequent collapse of the housing market. Since then, investors have filed scores of arbitration claims with FINRA, winning a total of about $4 million in awards so far.

According to recent analyses of the Morgan Keegan funds, losses in the funds entailed more than $2 billion between March 31, 2007, and March 31, 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.

It was in the 1990s that the Shelby County, Tennessee, government first entered into a contractual agreement with Memphis-based Consulting Services Group (CSG) for advice on how to allocate its pension fund assets and on which money managers to hire. One of those money managers eventually included Morgan Asset Management, a subsidiary of Morgan Keegan & Co. Today, both companies - CSG and Morgan Keegan - are the subject of ongoing investigations and possible enforcement actions by the Securities and Exchange Commission (SEC) for misleading investors.

CSG has been identified as channeling clients’ money into Ponzi schemes, including the notorious one run by Bernie Madoff. It’s also being questioned by the SEC and New York Attorney General Andrew Cuomo for its role in the so-called “pay-to-play” pension fund consulting scandal in New York.

Meanwhile, Morgan Keegan, Morgan Asset Management and three unidentified employees were put on notice by the SEC earlier this month to expect legal action in the relating to various types of securities and financial products that Morgan Asset Management managed and which the SEC believes Morgan Keegan misrepresented to investors.

The products in question include several Morgan Keegan mutual funds whose values plummeted in 2007 and 2008 because of the underlying investments they contained. Those investments, which Morgan Keegan allegedly marketed to investors as stable investments, included high concentrations of risky and untested securities. 

In addition, the SEC filed a federal complaint against Morgan Keegan in early July over its sales of auction-rate securities. Again, the agency claims Morgan Keegan misrepresented the nature of risks associated with the instruments to investors.

As for Shelby County, the account that Morgan Asset Management oversees is comprised of intermediate bond funds; securities in that account are currently valued at $3.6 million. The account was opened nine years ago with $20 million, according to a July 24 article in the Memphis Daily News. At the pension board’s request, Morgan Asset Management recently began disposing of securities in the fund; the $3.6 million in securities is what remains. The fund should be completely liquidated within the next three to six months, according to the article. Once that happens, Shelby County will no longer have a relationship with Morgan Asset Management.

CSG’s future role in managing Shelby County’s finances is still unclear, though given the fact it has a long history of regulatory black eyes against it - the most recent being the New York state pension fund scandal - county officials may finally start to scrutinize the company’s practices in earnest. Some food for thought might include a recent article in the June 8 issue of Forbes magazine. The story provided a cautionary tale on the pension fund consulting industry, citing CSG as one of the biggest players. Among the highlights: 

• In the 1990s, CSG began steering clients into hedge funds, including its own and others that paid finder’s fees. One CSG client was municipally owned Memphis Light, Gas & Water. In 1997, Memphis Light discovered CSG was collecting $800,000 annually in commissions from a Florida money manager. The utility’s pension replaced CSG later that year as its consultant.

• In 1998, CSG signed up Shelby County and its $670 million pension fund as a new client. CSG put Shelby County into five funds of funds, which invested in 120 hedge funds. That “strategy” subjected Shelby County to three layers of fees that together cost between 2.5% and 3.25% annually, plus 20% of any profits. Last year, the pension lost 25% of the assets it had invested in CSG’s hedge fund program, net of fees.

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.

Investors across the country are finally hearing from authorities what they privately believed for more than a year: Memphis-based Morgan Keegan misrepresented a batch of mutual funds that ultimately produced billions of dollars in losses because of close ties to the subprime mortgage market. Investors’ beliefs were confirmed earlier this month when Morgan Keegan’s parent company, Alabama-based Regions Financial Corp., disclosed in a regulatory filing that the Securities and Exchange Commission (SEC) was poised to bring formal charges against Morgan Keegan and its asset management unit over performance issues of the collapsed Morgan Keegan funds. 

As reported July 31 by the Wall Street Journal, the presence of the Wells Notice is a positive sign for aggrieved investors in the RMK funds, since Morgan Keegan hasn’t voluntarily shared documentation concerning its valuation of positions in funds or email communication between those involved in management and operation of its mutual funds.

“That notification has to influence arbitrations when the issue of discovery of regulatory documents comes up,” said Steven Caruso, a New York attorney with Maddox Hargett & Caruso, in the article.

Since 2008, hundreds of investors have filed arbitration claims against Morgan Keegan and at least seven troubled bond funds (collectively known as the “RMK Funds”). The focus of investors’ claims concerns how Morgan Keegan characterized the bond funds as corporate bonds and preferred stocks. In reality, the underlying investments in the funds included high-risk and speculative investments such as subprime mortgage securities and collateral debt obligations (CDOs).  

Those investments ultimately had catastrophic financial consequences on investors. Losses in the RMK funds reached more than $2 billion between March 31, 2007, and March 31, 2008.

Regions’ disclosure of the Wells notices suggests federal regulators are very close to taking action against Morgan Keegan for the problems related to the funds.

A Wells notice serves as formal notification that the SEC will bring civil charges.

In July 2008, Regions transferred management of several of the RMK funds in question to New York-based Hyperion Brookfield Asset Management.

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.

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

Business headlines are reporting the same story: Morgan Keegan, the brokerage arm of Regions Financial Corp., may face a civil lawsuit by the Securities and Exchange Commission (SEC) over the collapse of several mutual bond funds formerly managed by the Memphis-based firm. On July 15, Regions Financial acknowledged that the Atlanta office of the SEC had served a Wells Notice on Morgan Keegan, Morgan Asset Management and three unidentified employees. 

“We knew it was just a matter of time before the SEC and probably other state regulators (brought) the hammer down,” said Indianapolis attorney Mark Maddox in a July 16 article appearing in the Memphis Daily News. Maddox is one of dozens of attorneys who has won arbitration cases against Morgan Keegan for investor losses in the mutual funds.

A Wells Notice is a letter issued by the SEC that advises a company or a person of the possibility of pending civil charges by the regulator. The letter itself outlines various violations that the SEC is contemplating and gives the company or the person receiving the notice a chance to argue against the potential action.

The Wells Notice concerning Morgan Keegan likely focuses on a group of proprietary mutual bond funds that plummeted in value following the onset of the mortgage loan crisis. The funds, known as the “RMK Funds,” contained large concentrations of lower-level tranches of risky structured finance products, including collateralized debt obligations (CDOs). Because of those risky holdings - a fact investors allegedly were never made aware of by Morgan Keegan’ s management - several of the funds lost 90% and more of their value in 2007.

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.