Report Says Regions Morgan Keegan Misled Investors About Risks of its Bond FundsOct 23, 2008 | Parker Waichman LLP
Regions Morgan Keegan, an investment firm based in Memphis, Tennessee, has been named in several class action lawsuits filed on behalf of investors in the firm's bond funds. These lawsuits allege that Regions Morgan Keegan and other named defendants did not disclose the leveraged credit risks it was exposing investors to until well after the bond funds had sustained significant losses in 2007. Now, a financial consulting firm has released a damning report that concludes that Regions Morgan Keegan did, in fact, mislead its investors.
Regions Morgan Keegan is the investment banking and securities division of Regions Financial Corp, the largest banking system in middle Tennessee. The brokerage firm has offices in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee and Virginia. The firm faces lawsuits filed on behalf of investors who purchased shares of the Regions Morgan Keegan Select Intermediate Bond Fund and Regions Morgan Keegan Select High Income Fund from December 6, 2004 through October 3, 2007. Each fund had three classes of shares that it issued. Those classes are:
- Regions Morgan Keegan Select Intermediate Bond Fund A (MKIBX)
- Regions Morgan Keegan Select Intermediate Bond Fund C (RIBCX)
- Regions Morgan Keegan Select Intermediate Bond Fund I (RIBIX)
- Regions Morgan Keegan Select High Income Fund A (MKHIX)
- Regions Morgan Keegan Select High Income Fund C (RHICX)
- Regions Morgan Keegan Select High Income Fund I (RHIIX)
In 2007, investors in Regions Morgan Keegan bond funds lost a total of $2 billion It turns out that mortgage-backed securities and collateralized debt obligation (CDO) made up over 50 percent of each fund’s portfolio. CDOs are bonds established on large pools of debt. While such investments pay interest like ordinary bonds, these mortgage backed securities also repay the principal a little bit at a time as the underlying mortgage is paid off. There is a risk is that the mortgage will never get paid off.
When the mortgage market collapsed in 2007, investors in Region Morgan Keegan mutual funds found they were exposed to substantially more risk than investors in other high and intermediate income funds, which didn’t suffer the same drastic losses from market conditions. Investors who have filed lawsuits against Regions Morgan Keegen claim that they were not aware of the bond fund's ties to risky subprime mortgage-related assets when they made their investments.
A new report that backs up the allegations made in various lawsuits has now been issued by the Securities Litigation and Consulting Group, Inc, a financial economics consulting firm that provides expert witnesses to parties involved in securities litigation, According to the report, 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 concludes 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.