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Split Decision in First Regions Morgan Keegan Bond Fund Arbitrations

Nov 17, 2008 | Parker Waichman Alonso LLP

Investors in failed Regions Morgan Keegan  bond funds have started bringing their cases to arbitration, and there have been decisions in four such suits.  According to a report in "The Commercial Appeal", investors have won two cases so far, but Morgan Keegan has been successful in two others.  Morgan Keegan, like most investment firms, requires brokerage clients to agree to submit disputes to arbitration when they first open accounts.

Since 2007, the 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 "The Commercial Appeal", at least 50 claims against Morgan Keegan have been submitted to the Financial Industry Regulatory Authority.  Plaintiff’s lawyers say 1,000 to 1,500 arbitration cases ultimately could be filed against Morgan Keegan, with potential damages surpassing $200 million.  In addition, Morgan Keegan has been named in at least about 10 lawsuits filed by investors in U.S. District Court in Memphis,

"The Commercial Appeal" is reporting that in the most recent arbitration decision, Aubrey and Martha Wright of Georgia were awarded $90,052 as compensation for losses they claimed in four Regions Morgan Keegan funds.  Another investor, Samuel Short of Brookwood, Ala., was awarded $15,000 in an earlier arbitration proceeding.

But not all claims have been successful.  According to "The Commercial Appeal", an $80,000 claim filed by Ray and Ruth Colter of Mississippi was denied, as was a $25,414 claim -- plus $20,000 in punitive damages filed by Robert McLean of North Little Rock.  No reason was given for the denials.