There’s a new twist in the legal debacle over six Morgan Keegan proprietary bond funds - i.e. the RMK Bond Funds - that suffered massive losses due to overexposure in risky mortgage-related securities. Last week, a Tennessee court vacated an arbitration award that had previously been decided by a Financial Industry Regulatory Authority (FINRA) panel in favor of an investor and his claims against the Memphis-based broker.

The reason for the Tennessee court’s decision reportedly had to do with bias on the part of two FINRA arbitrators who ruled against Morgan Keegan in a similar case involving the bond funds.

Ultimately, the court’s decision could spell big headaches for FINRA in the future. So far it’s been standard practice for arbitrators who are familiar with claims involving Morgan Keegan and the specific group of bond funds to reside on multiple FINRA arbitration panels. That could change in light of Tennessee’s recent decision to vacate a prior FINRA award, creating a flood of new motions filed to request that FINRA remove any arbitrator who has sat on previous panels involving similar claims.

The funds involved in investors’ claims against Morgan Keegan include the Select Intermediate Bond Fund; Select High Income Fund; RMK High Income Fund; RMK Strategic Income Fund; RMK Advantage Income Fund; and the RMK Multi-Sector High Income Fund. Among other things, investors allege that Morgan Keegan represented the funds as safe and secure, as well as an investment designed to provide opportunities for high income without high risks.

Contrary to those characterizations, the Morgan Keegan bonds were heavily invested in risky collateralized debt obligations and other mortgage-related securities.

As reported Feb. 23 by the Wall Street Journal, FINRA has received more than 400 arbitration claims against Morgan Keegan and the six bond funds. Earlier that same month, a FINRA arbitration panel awarded $2.5 million to an investor for his claim involving the Morgan Keegan funds. It is the largest amount awarded thus far in response to investors’ claims over losses in the RMK funds.

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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.

The verdict for Eric Butler is five years in prison for fraudulently selling risky auction-rate securities that ended up costing investors more than $1.1 billion in losses. The ex-Credit Suisse broker also was fined $5 million.

Butler was convicted of securities fraud and conspiracy to commit securities fraud back in August. At the time, prosecutors were seeking a 15-year prison sentence.

One month earlier, Butler’s partner - Julian Tzolov - pleaded guilty to fraud, conspiracy charges and bail-jumping after previously fleeing the country. His sentencing is set for April 27, 2010.

Prosecutors in the case accused Butler and Tzolov of trying to take in bigger commissions by convincing clients they were investing in safe, conservative securities backed by federally guaranteed student loans. The scheme began to backfire in the fall of 2007 as auctions for the investments started to fail.

Institutional investors in particular suffered millions of dollars in losses as a result of the former brokers’ actions. Among the companies affected: STMicroelectronics NV (which later sued Credit Suisse and was awarded $406 million by the Financial Industry Regulatory Authority), Potash Corp of Saskatchewan Inc. and Roche Holding AG.

The case against Butler marks one of the first criminal prosecutions related to the credit crisis.

It’s bonus time on Wall Street, and individual and institutional investors of auction rate securities (ARS) should be up in arms. While the financial press reports that some of the nation’s biggest banks - including Goldman Sachs, Bank of America, JP Morgan Chase and Citigroup - have set aside billions of dollars in bonuses for 2009, untold numbers of ARS investors are still in dire financial straits. And they have been since February 2008, when the market for auction rate securities came to an abrupt standstill.

Today, investors  of auction rate securities are left with little recourse to recover their now-illiquid investments. They can attempt to unload the instruments, albeit at a loss, on the secondary market or file a complaint with the Financial Industry Regulatory Authority (FINRA.)

Either way, the same investment firms and banks that were taken to task by state and federal regulators for allegedly failing to disclose the risks associated with auction-rate securities are now patting themselves on the back with outrageous bonus packages.

When the auction rate market collapsed in February 2008, investors were hit hard. They couldn’t access their supposedly liquid investment, leaving many forced to postpone plans for retirement or pay other expenses.

Eventually, the ARS meltdown led many financial firms to reach settlements with state regulators to buy back auction rate securities from retail clients and some smaller businesses.

Larger institutional ARS investors, however, were not so lucky. They still hold billions of dollars worth of auction rate securities that can’t be sold or are sharply reduced in value.

Meanwhile, in letters sent Jan. 11 to eight major banks - Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo - New York Attorney General Andrew Cuomo is requesting a slew of information about Wall Street’s 2009 bonuses. The banks have until Feb. 8 to respond.

Investors should pay close attention to their responses.

Our affiliation of lawyers is actively advising individual and institutional investors and evaluating their legal options concerning auction rate securities. Tell us about your investment losses; leaving a message in the Comment Box below or via the Contact Us form.

Auction rate securities continue to create financial havoc for many institutional investors, with businesses across the country fighting an uphill battle to recover billions of dollars that are still frozen in the instruments. As reported Jan. 2 by the Wall Street Journal, some 400 companies hold more than $20 billion of auction rate securities that can’t be sold or are sharply reduced in value.

As a result, those companies are pulling back their spending which, in turn, creates yet another drain in an already-depressed economy.

It was in February 2008 that the $330 billion market for auction rate securities met its demise. Investors were left without the liquidity they had been promised and, instead, faced a new reality altogether: To access their money, they could only sell their investments on the secondary market at a steep discount or hold onto the securities until they matured - a process that could take 20 years or more.

Since then, individual and institutional ARS investors accuse the investment firms and banks that sold them auction rate securities of misrepresenting the safety and liquidity of the products. The complaints eventually prompted a series of investigations by both state regulators and the Securities and Exchange Commission (SEC), which resulted in a number of settlements last year. Under the settlements, many of Wall Street’s major brokerage houses agreed to buy back auction rate securities from individual investors and small businesses. For the most part, however, larger institutional investors were left out of the buy-back deals.

One of those institutional investors is Abercrombie & Fitch. According to the WSJ article, the company has $230 million, or 33%, of its cash on hand tied up in the auction-rate securities it purchased from several banks, including UBS AG and Bank of America.

“If we had more cash, we’d be running different [business] models, with more stores and more inventory,” said Abercrombie & Fitch treasurer Everett Gallagher, in the WSJ story.

For other companies, lack of access to short-term cash means employee cutbacks. Nanophase, an Illinois business that provides molecular technology for floor coatings and sunscreens, has let go 12 of its 54 employees. The company says that auction-rate securities have tied up about half of its $8 million, money it needs for corporate expenses.

According to the Wall Street Journal, Nanophase survived 2009 in part by selling some of its auction-rate securities for 87 cents on the dollar.

Another ARS investor who is hurting is Bob Bridgeman. When Bridgeman sold a small New Jersey oil-change and car-wash business, he put his money into LandAmerica 1031 Exchange Services. The company enables small business owners to invest their cash tax-free. It turns out that LandAmerica invested its entire pool of about $200 million in auction rate securities. In November 2008, LandAmerica was forced to close its doors. On Sept. 9, 2009, it filed for bankruptcy reorganization, leaving investors like Bridgeman - who had more than $1 million in LandAmerica - with no access to their cash.

“It was a big portion of what I worked for my whole life,” Bridgeman, 60, said in the Wall Street Journal.

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.

Consulting Services Group (CSG) is the latest investor to sue Morgan Keegan & Co. for losses suffered in several collapsed RMK funds. CSG filed its lawsuit on Dec. 22, naming Morgan Keegan, Morgan Asset Management, parent company Region Financial Corp., and James Kelsoe, former manager of the Morgan Keegan funds, as defendants. 

CSG’s complaint mirrors other lawsuits filed by hundreds of individual and institutional investors against Morgan Keegan and the bond funds. Among the laundry list of illegal actions that CSG cites in its lawsuit: Misrepresentation and suppression, fraudulent concealment, breach of fiduciary duty, intentional interference with business relationships and “negligent supervision and conspiracy in the underwriting, marketing and management” of the RMK Funds.

In addition, CSG alleges that Morgan Keegan and Kelsoe used “misrepresentation” and “fraudulent concealment” to keep CSG and its clients invested in the RMK funds even after Morgan Keegan reportedly knew the investments had become risky and were plummeting in value. 

“A complete collapse of the funds in the current market was only a matter of time,” the lawsuit reads. “By March 2008, the damage was done: All six of the (RMK) funds collapsed, causing many of CSG’s clients to lose most, if not all, of their investment.”

Losses in the Morgan Keegan funds have been significant, ranging from 51% to 86%.  Between March 2007 and March 2008, the funds lost $2 billion of their value. 

The six funds in question include the Regions Morgan Keegan Select High Income Fund, the Regions Morgan Keegan Select Intermediate Bond Fund, RMK High Income Fund Inc., RMK Strategic Income Fund Inc., RMK Advantage Income Fund Inc. and the RMK Multi-Sector Fund.

As reported Dec. 22 by the Memphis Business Journal, 78 cases involving the Morgan Keegan funds have been heard by arbitration panels with the Financial Industry Regulatory Authority (FINRA). Claimants in those cases have received approximately $7.6 million in awards. 

Memphis-based CSG provides investment advice to institutions, foundations, pension funds and wealthy investors. 

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.

Yet another Schwab Yield Plus investor has emerged victorious in a case against Charles Schwab and the Schwab Yield Plus Fund Select Shares (SWYSX). On Dec. 7, a Financial Industry Regulatory Authority (FINRA) arbitration panel awarded an investor from Huntington Beach, California, more than 100% of his net out-of-pocket losses - $19,400 - for his claims against Charles Schwab regarding Schwab Yield Plus Fund Select Shares.

The claimant was represented by the law firms of David P. Meyer & Associates Co., L.P.A.; Maddox, Hargett & Caruso, P.C.; Aidikoff, Uhl & Bakhtiari; and Page Perry, LLC.

The Schwab Yield Plus Funds have been at the center of ongoing litigation and claims by investors that Charles Schwab misrepresented the risks of the products, as well as failed to disclose important information regarding certain securities held by the funds.

Those securities included an overconcentration of high risk, speculative mortgage-backed securities. Ultimately, investors in the Schwab Yield Plus Funds lost 31.7% from June 2007 through June 2008, while other ultra short bond funds experienced little or no losses.

Thousands of Yield Plus investors have filed arbitration claims with FINRA in an attempt to recover their investment losses in the Yield Plus Funds. In each of the claims, the common theme involves allegations that Charles Schwab presented the Yield Plus Funds as similar to money market investments but with higher potential returns and only marginally higher risks.

In August, a federal court certified a Charles Schwab Yield Plus lawsuit as a class action lawsuit. With the ruling, the court imposed a Dec. 28 deadline for class members to decide whether they wish to opt out of the class action and pursue an individual arbitration claim with FINRA. This means Yield Plus investors who intend to opt out of the class action must ensure that their exclusion request is received by the Dec. 28 deadline. After that date, investors will be bound by the final results of the class action lawsuit.

For more information about opting out of the Charles Schwab Yield Plus class action lawsuit, please contact us at 800-505-5515.

Additional information is available at SubprimeLosses.com.

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.

Schwab Yield Plus investors have approximately two weeks to opt out of a Schwab Yield Plus class action lawsuit involving the Schwab Yield Plus Fund Select Shares (SWYSX) and the Schwab Yield Plus Investor Shares (SWYPX). The deadline to opt out is Dec. 28, 2009.

San Francisco broker Charles Schwab marketed and sold the Yield Plus funds as a safe alternative to money market accounts, depicting the funds as a way to preserve capital while generating income at relatively low risk. Unfortunately for investors, those representations did not live up to their hype. Evidence shows that the Schwab Yield Plus funds contained more than 45% of toxic mortgage- and asset-backed securities, which exposed investors to the potential of more risk and greater financial losses.

More investors are filing individual arbitration claims with the Financial Industry Regulatory Authority (FINRA) as they try to recover their investment losses in the YieldPlus funds.  Among the allegations in their complaints: Charles Schwab misrepresented the Yield Plus products by failing to disclose the fact that the funds were over concentrated in risky mortgage-related holdings.             

Investors need to understand that they are considered part of a class action - and bound by the lawsuit’s final outcome - unless they formally request exclusion. For some Schwab Yield Plus investors who suffered significant financial losses in their Schwab Yield Plus investments, filing an individual claim with FINRA may present a better opportunity to recover more of their financial losses. Investors should consult with legal counsel to thoroughly review all of their options.

For additional information about opting out of the Schwab Yield Plus class action before the Dec. 28 deadline, please contact us at 866-827-6537. 

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.