According to a August 8, 2008, Business Week article, Memphis brokerage firm Morgan Keegan is under fire for allegedly failing to disclose the subprime risks of seven mutual funds. The subprime securities that created massive losses to Wall Street investment firms have created tragic losses for individual investors as well.
Regulators in at least five states are investigating whether the Memphis brokerage firm failed to disclose the level of risk associated with seven mutual funds overweighted in toxic debt and whether it inappropriately sold them to seniors and other small investors. Numerous lawsuits and arbitration claims filed around the country allege the brokerage firm did.
Many senior retirees were sold the RMK Morgan Keegan funds with the assurance the funds were safe and appropriate conservative investors who didn’t wan’t to expose their retirement funds to risk. However, undisclosed to these investors, the RMK Morgan Keegan bond and income fund holdings were over-concentrated in risky securities, including some backed by subprime mortgages. Collateralized debt obligations, the same investments that have wiped out billions on Wall Street, made up a quarter of the fund holdings.
The RMK Morgan Keegan closed and open-ended bond and income funds have lost, on average, approximately 75% in the past year, making this family of funds one of the the worst-performing funds in their respective categories.
The investigations, lawsuits, and arbitration cases focus on bond funds formerly run by Keegan’s James C. Kelsoe, once a star manager. Unlike many peers, Kelsoe sidestepped the problems in the bond market when WorldCom imploded in 2002. His RMK Select High Income ranked in the top 1% of its category every year but one between 2000 and 2005, according to Morningstar, a mutual fund rating service.
Morgan Keegan promoted Kelsoe’s funds as a stable source of income. For example, sales materials for the RMK High Income fund noted its “relative conservative credit posture” without “excessive credit risk.” However, these same “conservative” funds owned mortgage pools as well as other exotic and untested complex, thinly traded, securities such as collateral debt obligations (CDOs), allegedly violating rules in the prospectuses limiting such investments.
Over the past year, the seven funds under Kelsoe’s purview have lost 51% to 86%. On July 29 shareholders voted to replace Morgan Keegan and hire New York’s Hyperion Brookfield Asset Management (BAM) to run the funds.
If you have experienced losses in a RMK Morgan Keegan bond or income fund(s), please contact our office for a free case evaluation.