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Regions Morgan Keegan Facing Slew of Arbitration Claims Over Bond Funds

Nov 11, 2008 | Parker Waichman Alonso LLP

Regions Morgan Keegan is facing an avalanche of arbitration claims over  its failed bond funds.  The first wave of Morgan Keegan  arbitration hearings is scheduled to begin later this year, with more to follow early next year. Plaintiff's lawyers say 1,000 to 1,500 arbitration cases ultimately could be filed against Morgan Keegan, with potential damages surpassing $200 million.

Regions Morgan Keegan is the investment banking and securities division of Regions Financial Corp, the largest banking system in middle Tennessee.    Since 2007, the firm's Regions Morgan Keegan Select Intermediate Bond Fund and Regions Morgan Keegan Select High Income Fund  lost up to 95 percent of their value, thanks to losing bets on high-risk collateralized debt obligations.

Last month, the Securities Litigation and Consulting Group, Inc, a financial economics consulting firm that provides expert witnesses to parties involved in securities litigation,  issued a report that found Regions Morgan Keegan misrepresented hundreds of millions of dollars of leveraged asset-backed securities as corporate bonds and preferred stocks.  This made the funds seem more diversified and less risky than they actually were, the report said.

The report concluded that had Regions Morgan Keegan performed a rudimentary analysis on its holdings - as it had claimed to have done - it would have determined that investors in the funds were being exposed  as much as 10 times the credit risk of the underlying, already risky, debt in exchange for 1 percent or 2 percent higher returns than a diversified, transparent high-yield bond portfolio would have earned.

According to investmentnews.com, Morgan Keegan lost its first arbitration case  related to the funds' losses this month. A panel administered by the Financial Industry Regulatory Authority Inc. of New York and Washington awarded two investor plaintiffs a total of $90,000. The panel also assessed all forum fees against Morgan Keegan. Typically, panels split such fees.

"This is a clear indication of what is to come in arbitration awards against Morgan Keegan," a lawyer representing the two plaintiffs told the website.