In a June 7, 2009 Birmingham New article, Morgan Keegan continue to deny there was anything wrong with the way the funds were presented and managed. However, Claimants have won 16 of the last 25 arbitrations involving the funds, indicating the FINRA arbitration panels found the evidence indicates otherwise.
Losses associated with the RMK funds approximates $2 billion dollars, much of which was experienced by retirees who were told the funds were safe and suitable for their portfolios. Because of these claims, state and federal securities regulators are looking into the RMK situation as well. The Funds’ manager, James Kelsoe, once believed to be a fund managing genius has been reassigned to an undisclosed position within the firm.
The full text of the article appears below:
Morgan Keegan brokerage soldiering on as aggrieved investors circle Posted by Russell Hubbard — Birmingham News June 07, 2009 5:34 AM
James ‘Jim’ Kelsoe, fund manager with Morgan Keegan Inc., was a top-ranked junk-bond fund manager since 2000 but dropped to last place this year because of losses tied to mortgages for people with poor credit.Morgan Keegan & Co., the stock brokerage unit of Birmingham-based Regions Financial Corp., has spent the past 10 months fending off investors who claim they were misled, and there is no letup in sight.
At the heart of the current disputes are seven investment pools operated by Morgan Keegan, all of which operated under some variation of the name “RMK Fund.” They were mutual funds that invested in bonds.
Aggrieved investors say they were risky bonds that speculated on the odds that people and companies with bad credit ratings would pay their high-interest debts such as equipment leases and home mortgages.
Now, the investors are also saying they were misled by their Morgan Keegan stockbrokers into thinking the funds contained safe, highly rated corporate bonds suitable for retirees. Some of the funds lost more than half their value when the housing market tanked in 2007, leaving investors with more than $2 billion in losses that year. There are hundreds of cases pending against Morgan Keegan over the funds, investor lawyers say.
“Morgan Keegan was pushing the heck out of those bond funds,” said Richard Frankowski, a Birmingham lawyer who has dozens of cases pending against the company. “They were really suitable for no one.”
The bond fund flap is yet another headache for Morgan Keegan parent Regions Financial, the metro area’s largest private-sector employer, with 6,000 workers. The company’s shares have fallen more than 70 percent in the past year after bad loans jumped and $3.5 billion of government capital was accepted to bolster the balance sheet. The dividend was cut to a penny, and employee retirement contributions suspended.
Morgan Keegan and Regions, the largest bank based in Alabama, say there was nothing improper about the management, promotion or selling of the funds, and that the brokerage is winning most disputes with investors. The assets that backed the funds were entirely proper given the prevailing economic conditions, Morgan Keegan says, and the risks were properly disclosed.
The forum for the Morgan Keegan disputes, arbitration under the auspices of the private Financial Industry Regulatory Authority, is unfamiliar to most individual investors. But the FINRA process is increasingly being whispered about at watercoolers and cocktail parties in Birmingham, as more Alabamians who lost money file claims.
The arbitration scorecard
• 41 RMK bond fund cases have made it to arbitration out of the hundreds filed since August 2008.
• Morgan Keegan has prevailed 21 times, with investors awarded money 20 times.
• Total investor awards are $3.3 million — and awards have averaged
12 cents per dollar claimed.
• 74 cases have been dropped by investors after being filed, and Morgan Keegan has settled “relatively few” cases under confidential terms.
• The largest award went to a Tennessee investor, former NFL football player Jerome Woods, who collected $950,000.
• Memphis native and former Major League Baseball star Tim McCarver collected $100,000.
FINRA, based in Washington, is authorized by the government as a “self regulatory” organization, meaning its members agree to abide by certain rules and accept whatever penalties are levied by the group if they are broken. Investor disputes are heard by a three-person panel, people such as attorneys and former government regulators judged to be experts in securities industry compliance.
The panel is chosen from a pool of people by mutual consent of the lawyers representing aggrieved investors and the lawyers representing the FINRA-member company. There were about 5,000 claims filed against FINRA members last year, although only a fraction ever made it to arbitration, with most dropped by the customer or settled by the broker.
Customers seeking redress against their brokers have won between 40 percent and 50 percent of the time in the past five years, according to FINRA records. In most cases, claimants don’t collect the full amount they are seeking.
For individual investors, lawsuits are out of the question in a dispute such as the Morgan Keegan bond funds, because standard brokerage agreements contain clauses waiving that right. Critics say the arbitration game is rigged by the brokerage industry because most referees have historical ties to the investment industry, but U.S.
courts have consistently upheld mandatory arbitration agreements as lawful.
So far, Morgan Keegan has won 21 of the 41 RMK fund cases that have made it before a FINRA arbitration panel, a winning percentage of slightly more than 50 percent, according to the industry group’s online records.
The total paid out to investors, as ordered by FINRA arbitrators: $3.3 million. While not chump change, it’s hardly enough to make a dent in Morgan Keegan, which had a profit last year of $128 million.
Attorneys for investors paint a different story. They say their side is gaining momentum, with 16 of their 20 wins coming in the last 25 hearings.
“As the arbitration process has gone on, lawyers for investors have gotten access to more and more of Morgan Keegan’s internal documents,”
said Birmingham lawyer Frankowski, whose is part of a multi-state litigation group that won about $80,000 last month for two Alabama married couples. “They fight tooth and nail to not give up anything, but the arbitrators are compelling them to hand over more and more material.”
As for the underlying assets in the RMK funds, investors aren’t kind in their descriptions.
“A lot of it was toxic waste, as much as 70 percent,” said Craig McCann, a Virginia-based consultant for investor lawyers who has a doctorate in economics from UCLA. “Nowhere in any materials did Morgan Keegan explain the credit risk of these investments.”
The argument made by RMK investors is tied to the subprime mortgage problem. The important thing to remember is that most mortgages, once made, become investments for other people.
That’s because the banks that originate them usually sell their future cash flows, content with earning the upfront origination fee. The future payments from homeowners end up being owned by a big financial firm, like a Morgan Keegan mutual fund.
Mortgages pools gauged as risky — those backed by payments from people or companies with poor credit records — bring a greater prospect of reward. That’s because those with poor credit records are forced to pay what bankers call “a nice fat interest rate” on their mortgages. That premium goes to bond-fund investors once the mortgage is sold and its monthly payments sliced up and parceled out to pools such as the RMK family.
McCann, the investor consultant and expert witness, performed an in-depth analysis of the RMK funds. He said he found the following, all of which is disputed by Morgan Keegan:
• The bond funds lost hundreds of millions of dollars from writing credit default swaps. They are side bets between two parties on the probability that someone else’s bonds will default. When the housing market cratered, the RMK funds had to pay off the huge losses on its side bets, McCann said.
Morgan Keegan spokeswoman Kathy Ridley said the funds never wrote default swaps, but did have some exposure to them through the normal course of investing. The exposure applied to less than 10 percent of the funds’ assets, she said.
• Another finding, McCann said, was that only 30 percent of overall holdings were in safe, fixed-rate corporate bonds from blue chip companies. The funds RMK compared itself to in promotional materials, the CSFB High Yield Fund and the Lehman Brothers Corporate High Yield Ba Index, had 70 percent of holdings in safe, fixed-rate corporate bonds, McCann said.
“The Morgan Keegan funds fell 70 percent in value in some cases,”
McCann said. “The purportedly comparable bond funds hardly fell at all.”
Morgan Keegan again disagrees, saying it is “just flat out wrong”
about the composition of the comparable bond funds, Ridley said. The competing funds, she said, were the best comparisons available at the time.
“The only one getting rich here is Mr. McCann,” sniffed Ridley, commenting on McCann’s paid testimony at 14 arbitration hearings so far.
McCann rebutted: “Morgan Keegan is bad-mouthing me and lying to people about what has gone on because I am absolutely killing them every time out. Of the 10 cases that have been decided after my testimony, claimants are ahead 8-2, including two cases that settled for big, big settlements afterwards.”
The RMK strategy wasn’t always a loser. It was a winning bet as long as housing prices kept rising, allowing people who bought too much house to generate cash flow from home-equity loans. From 2000 through 2006, the flagship Regions Select High Select Income fund was an all-star. It rose 17 percent in 2000, 18 percent the next year and 11 percent in 2002, outperforming 99 percent of its competitors.
Double-digit gains continued through 2006.
Fund manager James Kelsoe, a University of Alabama graduate, was seen as a genius, a man who knew how to gauge the risk of borrower default versus the reward of a premium interest rate. He admitted to an “intoxication” with playing such high stakes financial poker in a 2007 interview with Bloomberg News.
His headaches began in that very same year, when people with little cash and large monthly mortgage payments began feeling pinched.
Payments from borrowers started showing up late and, then, not at all.
Some of those payments were owned by Kelsoe’s bond funds. When the cash flow slowed, the value of the underlying mortgage-backed bonds plummeted, and with them, the net value of the bond funds.
Kelsoe no longer manages any Morgan Keegan funds. The company said he has been reassigned to an unspecified role.
If you have experienced losses as a result of purchasing one or more RMK funds from Morgan Keegan, please contact our office for a free case evaluation. Thank you.