Securities Law Blog

David Scheer and Jesse Westbrook of Bloomberg report that U.S. regulators, concerned brokerages may have sold clients money-losing securities tied to subprime mortgages, are seeking information about how the investments were marketed, a person familiar with the situation said.The Financial Industry Regulatory Authority, which polices about 5,100 brokerages, sent letters Dec. 14 to more than a dozen firms that sell collateralized mortgage obligations, a type of security linked to home-loan payments, said the person, who declined to be identified because the inquiry isn't public. One letter obtained by Bloomberg seeks sales spreadsheets, marketing materials, and procedures and methods for matching products to clients' investment needs.

Mounting losses from securities tied to home loans are prompting regulators to examine how Wall Street firms valued and promoted the products. Finra Chief Executive Officer Mary Schapiro said in September the agency was scrutinizing sales of mortgage-backed products to retirees, and had sent a round of letters seeking information on the transactions.

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Shefali Anand of the WSJ reports that as the credit crunch is starting to hit some bond mutual-fund investors in unexpected ways, some are now taking legal recourse for losses in their investments.

In the most recent instance, an Indiana charity filed an arbitration complaint against Memphis, Tenn., broker-dealer Morgan Keegan & Co. unit of Regions Financial Corp., for an alleged misrepresentation in selling a bond mutual fund. The fund has lost nearly half of its value this year.

The complaint comes on the heels of a lawsuit filed in a federal court in Manhattan in October over an institutional bond fund of State Street Corp., which alleged that the fund invested in "high risk" investments. A State Street spokeswoman has denied that the firm incorrectly communicated the investment objective of the fund.

In its arbitration complaint, the Indiana Children's Wish Fund says that it invested around $220,000 in the Regions Morgan Keegan Select Intermediate Bond Fund, on the understanding that it was a relatively safe investment. The complaint was filed with the Financial Industry Regulatory Authority last month.

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The WSJ reports that Regions Financial Corp.  will set aside four times as much money to cover expected loan losses in the fourth quarter as it did in the third, citing further weakening in its portfolio of loans made to home builders.

The Birmingham, Ala.-based bank said its loan loss provision would rise to about $360 million in the fourth quarter from $90 million in the earlier period. The announcement is the latest sign that costs from the struggling housing market are mounting at the country's regional banks.

Regions has made about $7.5 billion in loans to residential builders, representing about 8% of its total loan portfolio. To slow defaults, the bank said it has assigned a team of executives to help distressed builders work out their debts. Still, it thinks the sector will struggle "well into 2008" and expects bad debts to mount through the year.

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Continue reading "Regions Bank Takes $38 Million Charge To Cover Morgan Keegan Fund Losses" »

Kara Scannell of the WSJ reports that securities regulators, broadening their review of Wall Street's role in the mortgage industry, have asked several brokerage firms for information about the marketing and sale of mortgage-related products, specifically those sold to individual investors.

The Financial Industry Regulatory Authority, Wall Street's self-regulatory body, last month sent letters to firms asking for documents, including marketing materials, a list of supervisory policies and procedures, and descriptions of how collateralized mortgage obligations were valued, according to a copy of the letter reviewed by The Wall Street Journal.

The letters were sent to more than a dozen brokerage firms believed to be involved in the CMO market, one person familiar with the matter said. It is unclear which brokerage firms received the letter.

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Sudeep Reddy of the WSJ reports that the number of homes starting foreclosure jumped in the third quarter to the highest level since the Mortgage Bankers Association began keeping track in 1972, while the fraction of homeowners behind in their payments rose to the highest level in 21 years.

Both reflect the continuing credit-market turmoil, a slowing economy and falling house prices.

Foreclosures rose for all types of mortgage loans, according to the association's quarterly survey. But the upturn was sharpest for adjustable-rate mortgages, including homeowners with better records who are considered to be in the "prime" loan category.

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Greg Ip, Mark Whitehouse and Aaron Lucchetti of the WSJ report that the home has long been the bedrock asset of most American families. Now, its value has become the biggest question mark hanging over the global economy and financial system.

Over the past decade, Wall Street built a market for more than $2 trillion in securities sold globally and backed by loans to U.S. homeowners on two long-accepted beliefs and one newer one. The prevailing logic: The value of the American home would never fall nationwide, and people would almost always make their mortgage payments. The more recent twist: Packaging mortgage loans and turning them into securities would make the global economy more resilient if anything went wrong.

In a matter of months, though, much of the promise of the new financial architecture -- together with its underlying assumptions -- has proven to be a mirage. As house prices fall and homeowners default on mortgages at troubling rates, the pain has spread far and wide. An examination of the resulting crisis shows that it is comparable to some of the biggest financial disasters of the past half-century.

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Jennifer Woods of CNBC.com reported that though most mutual funds have managed to steer clear of the subprime mortgage mess, some with heavy stakes in riskier and shorter-term bonds, asset-backed securities or sizable holdings of value stocks have particularly paid the price.

According to Paul Herbert, senior mutual fund analyst with Morningstar, Fidelity has a number of funds that fall into the troubled asset-backed securities category.

One is the Fidelity Ultra-Short Bond fund, which has about $785 million in assets. The fund has a 37.1% weight in asset-backed securities; as a result, its total return is down about 3% year-to-date, according to Morningstar.com. (Weightings are as of Sept. 30, according to Morningstar.com). Compared with benchmark index, the Lehman Brothers Aggregate Bond Total Return Index the fund is down 7.7 percentage points.

Fidelity Short-Term Bond Fund has also been impacted, though to a lesser extent. This fund, with assets of more than $7.31 billion and about a 16.3% weighting in asset-backed securities, has ticked up about 1.5% this year. Compared to the Lehman Brothers Aggregate Bond Total Return Index, however, it is down about 2.3 percentage points.

"The downside has been pretty severe," says Herbert, who notes that these funds were pretty good holdings prior to the subprime mortgage meltdown.

There are also a handful of smaller bond funds that have suffered. Topping the list is the $291 million Regions Morgan Keegan Select High Income Fund, which has been among the worst performers in 2007. Year-to-date, this fund, which has a 28.25% in asset-backed securities, is off more than 48%. 

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Continue reading "Sub-Prime Fund Fallout" »

Diya Gullapalli of the WSJ has reported that Investors in Tennessee filed a federal lawsuit seeking class-action status against Morgan Keegan Asset Management Inc. over two mutual funds that are among the hardest-hit in this year's credit chaos.

Fund managers and others on Wall Street will be closely watching this case and others that are expected to be filed, as investors take losses from the credit crunch.

At issue are the Regions Morgan Keegan Select Intermediate Bond Fund and the Select High Income Fund, which are down 47% and 56%, respectively, so far this year. The suit alleges, in part, that the funds misrepresented or failed to disclose material facts relating to the risks and ease of trading for certain securities in the portfolios.

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Continue reading "Morgan Keegan Bond Fund Blues" »

Serena Ng of the WSJ has reported that the corporate-debt market unwittingly became a victim of contagion from the subprime-mortgage turmoil in 2007, as prices of many bonds and loans plunged even while corporate defaults remained very low.

Investors are hoping for a reprieve this year, but they expect more volatility in the coming months.

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Andy Meek of the Daily News reported that the Memphis brokerage firm that oversees a group of struggling mutual funds has settled an arbitration claim filed against one of them. The RMK funds saw much of their value wiped out in 2007's credit crisis. Terms of the settlement between Morgan Keegan & Co. and the Indiana Children's Wish Fund, a group that grants wishes to children with terminal illnesses, include a payment by the firm to the charity. That payment, the amount of which remains private, was made a little more than a week ago. The Indiana charity, which lost almost $50,000 investing in the Regions Morgan Keegan Select Intermediate Bond Fund, was one of the first investors in the group of bloodied RMK funds to file a claim or lawsuit recently saying the funds' volatility had not been fully disclosed.

Full story here.

Continue reading "Morgan Keegan Settles with Charity" »

Russell Hubbard of the Birmingham News has reported that an Indiana investor has filed an arbitration complaint against Regions Financial Corp. subsidiary Morgan Keegan, saying investments in subprime credit securities were inappropriate.

The Indiana Children's Wish fund, which arranges trips and adventures for children with life-threatening illnesses, filed its complaint with the Financial Industry Regulatory Authority, the largest nongovernmental regulator of securities firms.

The charity says it was told by Morgan Keegan that investments in the company's Select Intermediate Bond Fund C were safe. The complaint says the charity believes the fund held risky mortgage-backed securities.

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Andrew Tanzer of Kiplinger.com reports that for years, bond funds run by Morgan Keegan's Jim Kelsoe soared. Then, like Icarus, Kelsoe strayed too close to the sun and came crashing back to earth with melting wings.

Kelsoe's losses so far in 2007 have been stunning. Regions Morgan Keegan Select High Income (symbol MKHIX) plummeted 56% through December 5, and Regions Morgan Keegan Select Intermediate Bond (MKIBX) collapsed 45%. Results of four closed-end Morgan Keegan fixed-income funds also managed by Kelsoe have also been disastrous.

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