Colling, Gilbert, Wright & Carter Securites Fraud
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Monday, June 29, 2009
Gov. Crist Signs Securities Fraud Bill
Governor Charles Crist signed a bill giving attorney general Bill McCollum additional ammunition in the battle against securities fraud. This is very important as Florida is home to one of the largest retiree populations in the country and retirees are often the most targeted and most vulnerable to this type of financial fraud. Investor confidence, seen as a key component of a economic turnaround, has been shaken of late by various high profile ponzi schemes and other securities fraud cases. This bill will give the AG the tools and power to hopefully bring about the changes needed to restore the lost confidence. The full article from the South Florida Business Journal appears below.
On the same day Bernard Madoff is being sentenced for his involvement in a multimillion dollar Ponzi scheme that left thousands financially devastated, Gov. Charlie Crist signed into law a bill that gives Florida’s top law enforcement officer new tools in the battle against securities fraud.
During a ceremonial bill singing Monday at the Miami-Dade County Courthouse, Crist, with Attorney General Bill McCollum and some of the bill’s sponsors at his side, signed the Investor Protection Act (HB 483).
It gives McCollum’s office, with approval from the Office of Financial Regulation, the authority to investigate and prosecute large-scale securities scams under the state’s securities law.
Previously, white-collar criminal prosecutions fell under the racketeering statute, which is harder to prove. Prosecutions also were limited to the office of the state’s attorney, McCollum pointed out.
Crist noted that this kind of authority was lacking during his tenure as attorney general and that this law would put “teeth” into the state’s prosecutorial powers.
The law enhances the Office of Financial Regulation’s enforcement powers by increasing penalties for violators and strengthening the license registration requirements for securities dealers. Penalties double from $5,000 to $10,000 as a result of the law, which goes into effect Wednesday. State authorities will also be able to pursue civil lawsuits to recover lost money, McCollum said.
McCollum worked with Rep. Tom Grady, R-Naples and Sen. Garrett Richter, R-Naples on the legislation. Both attended the signing. Sen. Dan Gelber, D-Miami Beach, a bill sponsor, also attended Monday’s ceremony.
Grady is a securities attorney and expert in securities regulation who drafted the bill and sponsored it in the House.
“Now the attorney general will have the tools to do the job,” said Grady, prior to the signing.
“Our economy will grow stronger if investors have confidence in our financial markets,” he said in a statement.
“By increasing the tools available to the state to prosecute violators of our securities laws, we protect investors and foster needed trust in the system.
On the same day Bernard Madoff is being sentenced for his involvement in a multimillion dollar Ponzi scheme that left thousands financially devastated, Gov. Charlie Crist signed into law a bill that gives Florida’s top law enforcement officer new tools in the battle against securities fraud.
During a ceremonial bill singing Monday at the Miami-Dade County Courthouse, Crist, with Attorney General Bill McCollum and some of the bill’s sponsors at his side, signed the Investor Protection Act (HB 483).
It gives McCollum’s office, with approval from the Office of Financial Regulation, the authority to investigate and prosecute large-scale securities scams under the state’s securities law.
Previously, white-collar criminal prosecutions fell under the racketeering statute, which is harder to prove. Prosecutions also were limited to the office of the state’s attorney, McCollum pointed out.
Crist noted that this kind of authority was lacking during his tenure as attorney general and that this law would put “teeth” into the state’s prosecutorial powers.
The law enhances the Office of Financial Regulation’s enforcement powers by increasing penalties for violators and strengthening the license registration requirements for securities dealers. Penalties double from $5,000 to $10,000 as a result of the law, which goes into effect Wednesday. State authorities will also be able to pursue civil lawsuits to recover lost money, McCollum said.
McCollum worked with Rep. Tom Grady, R-Naples and Sen. Garrett Richter, R-Naples on the legislation. Both attended the signing. Sen. Dan Gelber, D-Miami Beach, a bill sponsor, also attended Monday’s ceremony.
Grady is a securities attorney and expert in securities regulation who drafted the bill and sponsored it in the House.
“Now the attorney general will have the tools to do the job,” said Grady, prior to the signing.
“Our economy will grow stronger if investors have confidence in our financial markets,” he said in a statement.
“By increasing the tools available to the state to prosecute violators of our securities laws, we protect investors and foster needed trust in the system.
posted by
William B. Young Jr. Esq.
at
9:51 AM
Thursday, June 25, 2009
Target-Date Funds May Not Hit the Mark
Touted as an efficient and sensible way to invest for retirement, target date funds have come under scrutiny for not living up to their promise. According to a June 24, 2009, NY Times article, some of the funds may not provide the returns (and in some cases provided losses) touted when they were sold, leaving prospective retirees short of the money they need to comfortably retire. Excerpts of the article appear below:
Washington blessed them as a way to put your 401(k) on automatic pilot and glide safely toward retirement. But popular target-date mutual funds have badly missed the mark — and now regulators are asking why.
The Securities and Exchange Commission and the Labor Department are examining why the funds, which were supposed to become safer as their investors grew older, seemed to get riskier instead.
Big mutual fund companies like Fidelity and Vanguard promised that target-date funds would shift automatically from high-growth investments, like go-go tech stocks, toward safer ones, like bonds, as investors neared the year of retirement — a “target date,” like 2010, 2020 or 2030.
Labor Department officials evidently found the concept persuasive. In 2007, they issued an unusual rule that protects employers who automatically send workers’ 401(k) money to target funds if, later, the employees lose money. That so-called safe harbor unleashed a flood of money into the funds.
But as the stock market plummeted last year, some 2010 funds — which many investors thought would be invested safely by then to protect their nest eggs — lost 40 percent of their value. That showing was even worse than that of the Standard & Poor’s 500, which fell 38.5 percent.
Mary L. Schapiro, the chairman of the S.E.C., is now questioning whether fund companies misled investors about the risks associated with target-date funds, a concern the mutual fund industry says is unjustified.
Data collected by the S.E.C. shows that target-date funds vary widely in terms of their investment risks, even when they use similar target years or names. Even though federal officials put a stamp of approval on target-date funds, there are no clear standards about how they should work.
Funds marketed to people hoping to retire in 2010, for instance, have anywhere from 21 percent to 79 percent of their holdings in stocks, Ms. Schapiro said in a speech in New York last week, citing data collected by Morningstar.
No hard and fast rules exist for how to balance a portfolio as retirement approaches. A lot of variables come into play, including age, sources of income and appetite for risk. Some financial planners recommend that people who are at or near retirement age, and comfortable with some risk, invest about 40 percent of their portfolios in stocks.
But Ms. Schapiro said the S.E.C. was concerned that funds with the same target dates vary so widely in their investments and returns. The average 2010 fund had more than 45 percent of its holdings in stocks last year. The Fidelity Freedom 2010 Fund was 50percent in stocks and lost a quarter of its value, according to Morningstar. The AllianceBernstein 2010 fund was 57 percent in stocks and fell by a third.
Funds leaning toward safer bonds, by contrast, fared far better. A Wells Fargo 2010 fund that was heavily invested in bonds lost just 11 percent, while a Deutsche Bank fund that also favored fixed-income investments was down just 4 percent.
“Funds with the same target date in their names can be structured, and thus perform, very differently,” Ms. Schapiro said.
Target-date funds have exploded since 2006, when Congress enabled companies to make them the automatic choice for employees who do not specify where they wanted to invest their 401(k) savings. The move, a boon for the mutual fund industry, occurred over the objections of insurance companies, whose money market-style “stable value” funds had been the default choice for 401(k) investments. About $182 billion has been poured into target-date funds, and fund companies have set up scores of them.
Now, in a reversal, a number of bills before Congress seek to provide greater disclosure of fees, more accurate marketing and improved financial advice to workers investing in target-date funds and other 401(k) funds.
Critics of target-date funds maintain that these investments are often opaque and difficult to understand. Mutual fund companies often create them by bundling existing mutual funds, some with good track records and some with worse records. This “fund of funds” concept enables mutual fund companies to collect more assets and fees, but can make it hard for investors to understand what these funds contain or how they are being charged.
The S.E.C. is looking into whether putting a date in a fund’s name should be prohibited, whether there is enough information about the risk of these funds and whether they are properly structured to provide for a safe retirement. There is also legislation calling for greater fee disclosure, more objective investment advice and the inclusion of low-cost index funds in workers’ 401(k) plans.
If the combination of explosive growth and poor performance was not enough to raise alarms, another concern is that buyers of target-date funds are often the least sophisticated investors.
A study by Envestnet Asset Management and Behavioral Research Associations found a range of misconceptions, including that employees thought target-date funds would provide a guaranteed return, that their money would grow faster in target-date funds than in other investments, and that these funds allowed workers to put away less money and still be able to retire.
This conflict between perception and reality came into play at the joint S.E.C. and Labor Department hearing in Washington last week. Ms. Schapiro, the S.E.C. chairwoman, asked about the extent to which these funds “are marketed as the solution and pushed as a be-all and end-all.”
If you have lost money in a target date fund or funds, please contact our office for a free case evaluation. Thank you.
Washington blessed them as a way to put your 401(k) on automatic pilot and glide safely toward retirement. But popular target-date mutual funds have badly missed the mark — and now regulators are asking why.
The Securities and Exchange Commission and the Labor Department are examining why the funds, which were supposed to become safer as their investors grew older, seemed to get riskier instead.
Big mutual fund companies like Fidelity and Vanguard promised that target-date funds would shift automatically from high-growth investments, like go-go tech stocks, toward safer ones, like bonds, as investors neared the year of retirement — a “target date,” like 2010, 2020 or 2030.
Labor Department officials evidently found the concept persuasive. In 2007, they issued an unusual rule that protects employers who automatically send workers’ 401(k) money to target funds if, later, the employees lose money. That so-called safe harbor unleashed a flood of money into the funds.
But as the stock market plummeted last year, some 2010 funds — which many investors thought would be invested safely by then to protect their nest eggs — lost 40 percent of their value. That showing was even worse than that of the Standard & Poor’s 500, which fell 38.5 percent.
Mary L. Schapiro, the chairman of the S.E.C., is now questioning whether fund companies misled investors about the risks associated with target-date funds, a concern the mutual fund industry says is unjustified.
Data collected by the S.E.C. shows that target-date funds vary widely in terms of their investment risks, even when they use similar target years or names. Even though federal officials put a stamp of approval on target-date funds, there are no clear standards about how they should work.
Funds marketed to people hoping to retire in 2010, for instance, have anywhere from 21 percent to 79 percent of their holdings in stocks, Ms. Schapiro said in a speech in New York last week, citing data collected by Morningstar.
No hard and fast rules exist for how to balance a portfolio as retirement approaches. A lot of variables come into play, including age, sources of income and appetite for risk. Some financial planners recommend that people who are at or near retirement age, and comfortable with some risk, invest about 40 percent of their portfolios in stocks.
But Ms. Schapiro said the S.E.C. was concerned that funds with the same target dates vary so widely in their investments and returns. The average 2010 fund had more than 45 percent of its holdings in stocks last year. The Fidelity Freedom 2010 Fund was 50percent in stocks and lost a quarter of its value, according to Morningstar. The AllianceBernstein 2010 fund was 57 percent in stocks and fell by a third.
Funds leaning toward safer bonds, by contrast, fared far better. A Wells Fargo 2010 fund that was heavily invested in bonds lost just 11 percent, while a Deutsche Bank fund that also favored fixed-income investments was down just 4 percent.
“Funds with the same target date in their names can be structured, and thus perform, very differently,” Ms. Schapiro said.
Target-date funds have exploded since 2006, when Congress enabled companies to make them the automatic choice for employees who do not specify where they wanted to invest their 401(k) savings. The move, a boon for the mutual fund industry, occurred over the objections of insurance companies, whose money market-style “stable value” funds had been the default choice for 401(k) investments. About $182 billion has been poured into target-date funds, and fund companies have set up scores of them.
Now, in a reversal, a number of bills before Congress seek to provide greater disclosure of fees, more accurate marketing and improved financial advice to workers investing in target-date funds and other 401(k) funds.
Critics of target-date funds maintain that these investments are often opaque and difficult to understand. Mutual fund companies often create them by bundling existing mutual funds, some with good track records and some with worse records. This “fund of funds” concept enables mutual fund companies to collect more assets and fees, but can make it hard for investors to understand what these funds contain or how they are being charged.
The S.E.C. is looking into whether putting a date in a fund’s name should be prohibited, whether there is enough information about the risk of these funds and whether they are properly structured to provide for a safe retirement. There is also legislation calling for greater fee disclosure, more objective investment advice and the inclusion of low-cost index funds in workers’ 401(k) plans.
If the combination of explosive growth and poor performance was not enough to raise alarms, another concern is that buyers of target-date funds are often the least sophisticated investors.
A study by Envestnet Asset Management and Behavioral Research Associations found a range of misconceptions, including that employees thought target-date funds would provide a guaranteed return, that their money would grow faster in target-date funds than in other investments, and that these funds allowed workers to put away less money and still be able to retire.
This conflict between perception and reality came into play at the joint S.E.C. and Labor Department hearing in Washington last week. Ms. Schapiro, the S.E.C. chairwoman, asked about the extent to which these funds “are marketed as the solution and pushed as a be-all and end-all.”
If you have lost money in a target date fund or funds, please contact our office for a free case evaluation. Thank you.
Labels: broker misconduct
posted by
William B. Young Jr. Esq.
at
6:14 AM
Monday, June 8, 2009
Morgan Keegan Denies RMK Funds Were Toxic but Arbitration Panels See it Differently
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.
Watercooler whispers
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.
'Toxic waste'
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."
Kelsoe's 'intoxication'
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.
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.
Watercooler whispers
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.
'Toxic waste'
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."
Kelsoe's 'intoxication'
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.
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