Morgan Keegan Loses Sixth FINRA Arbitration Over Failed Bond FundsApr 21, 2009 | Parker Waichman LLP
An investor who lost money as a result of the collapse of Morgan Keegan bond funds was awarded $950,000 by an arbitration panel. According to Investment News, the award marked the sixth time a Financial Institution Regulatory Authority (FINRA) panel ruled against Morgan Keegan in a arbitration case involving its failed bond funds.
In 2007, the Morgan Keegan bond funds lost up to 95 percent of their value, thanks to losing bets on high-risk collateralized debt obligations. Late last year, 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 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 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 to 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.
Former NFL defensive back Jerome Woods and his wife were among the hundreds of investors who lost money as a result of the collapse of the funds. In his claim against the Tennessee-based firm, Woods alleged negligence and a breach of fiduciary duty by Morgan Keegan.
The Woods' attorney told the Memphis Commercial Appeal that although his clients were not interested in speculative risk, "Morgan Keegan recommended that they invest almost their entire portfolio in junk bond funds that were highly speculative." The Woods' alleged that Morgan Keegan never disclosed the true risk of their investment.
The Woods' were seeking a total of $1.7 million in damages from Morgan Keegan, but were awarded $950,000 in compensatory damages. According to Investment News, the panel gave no reason for its decision.
Including the Woods' claim, the Morgan Keegan has been ordered to pay investors in the failed funds a total of $1.6 million in damages in six cases brought before a FINRA arbitration panel. The Woods' case resulted in the largest FINRA award to date.