Articles Posted in Morgan Keegan /RMK Funds

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The Commodity Futures Trading Commission (CFTC) is investigating the sky high fees that are charged to investors in managed futures funds. This comes after a December 19, 2013 letter that the Senate’s Special Committee on Aging sent to the CFTC asking them to work with the Securities and Exchange Commission (SEC) on investigating the fees and the means for their disclosure when associated with retirement accounts .

A managed future fund is a variety of alternative investment that is overseen by the CFTC. These funds are normally sold to consumers via brokers. Fund managers then invest in futures, which are financial contracts in which the buyer promises to buy an asset at a predetermined date in the future. Such futures obligations typically obligate the buyer to purchase assets like global commodities (goods and services), and foreign currencies, among other speculative financial instruments .

A review of these funds has shown that over 89% of the gains of $11.51 billion these funds posted were eaten up by fees, commissions, and expenses of the fund managers. As The Economist describes hedge fund fees, it is “easy to think of people who have become billionaires by managing hedge funds; it is far harder to think of any of their clients who have got as rich.”

What is worse is many of these fees are not adequately disclosed to investors. The National Futures Association (NFA), a self-regulating watchdog organization that oversees the trading of commodities and futures, does not require managers of managed futures funds to disclose how their fees impact investor profits over time. And given that these funds are sold to investors by brokers, it is not likely a broker would disclose that all of the gains from the fund are likely to be eaten up by these fees .

In the December 19 Senate Committee letter that has prompted the CFTC probe, Senators Bill Nelson and Elizabeth Warren wrote: “Clearly, individual investors, especially senior investors looking to find a suitable place to place their retirement savings, should be made aware of these managed-future funds’ fees and commissions and the draining effect upon their investments. Although these funds are purported to be for sophisticated investors, some of these firms have a very low minimum investment that can be made from an Individual Retirement Account (IRA). We are very concerned about the potential impact these fees could have on the retirement security of the Americans who invest in these funds.”

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A recent press by the Secretary of State for the State of Mississippi announced that the SEC has published their proposed plan for fund distribution to those injured by Morgan Keegan investments.

This comes two years after the $200 million dollar settlement with Morgan Keegan and Morgan Asset Management. The settlement funds are to be used as payments to investors who were damaged by Morgan Keegan and Morgan Asset Management’s failure to “disclose risks associated with certain investments and presenting misleading marketing materials to investors”, according to the Secretary of State’s press release.
The settlement was to be paid originally in two parts, with the States involved in the suit distributing $100 million to injured investors and the SEC distributing the other $100 million. The States have already distributed their portion and have been waiting on the SEC, according to the press release.

Secretary Hosemann stated in his press release that, “by their own administrative rule, the SEC is required to have a distribution plan in place within 60 days of the Commission receiving funds. It has been two years”. After repeated demands by the Secretary of the State, three investors filed a lawsuit against the SEC to demand payment; the Attorney General demanded action from the SEC within 14 days of the demand, the press release stated.

The SEC announced the proposed distribution plan early this April; a copy of the plan can be found http://www.sec.gov/litigation/fairfundlist.htm#morganassetmgmt.

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Just a few weeks after the 11th Circuit Court ordered Morgan Keegan to buy back more of their ultra-risky auction rate securities, Raymond James dropped the name Morgan Keegan altogether. In November 2012, this blog reported that 11th Circuit Judge William Duffy dismissed an SEC claim against Morgan Keegan. According to the article underlining the blog post, District Judge Duffy dismissed the SEC claims, ruling that the brokers’ misleading statements were not material and that the brokers could not predict the market. However, the Court of Appeals disagreed with Judge Duffy and remanded the case back to the judge for a non-jury trial.

The Bloomberg.com article discussed Judge Duffy’s opinion, which said that the brokerage firm did not act fraudulently but some of its brokers negligently made misrepresentations and omitted important information about the securities sold. Though Morgan Keegan voluntarily bought back around $2 billion of the highly-risky auction rate securities, according to the article, Judge Duffy ordered still more of the risky securities to be purchased back from the investors adversely affected by the high-risk funds and the misrepresentations surrounding them. Morgan Keegan was also ordered to pay a fine of over $100,000 per the Bloomberg.com article.

This decision came just a month before Raymond James Financial announced plans to drop Morgan Keegan from the name of its fixed-income arm. The onwallstreet.com article quoted Raymond James CEO Paul Reilly as saying that the two companies have reached a “cultural integration.” The article also quoted Mr. Reilly as saying that Morgan Keegan was the one that requested their name be dropped.

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Morgan Keegan is back in court, this time in a bench trial scheduled to last two weeks in front of a judge who originally dismissed the SEC regulators’ claims, according to an article in Bloomberg Businessweek.

US District Judge William Duffy dismissed the action brought by the SEC which alleged Morgan Keegan misled thousands of investors about the high risks of auction-rate securities. The Court of Appeals in Atlanta, GA overruled Judge Duffy and remanded the case back down to him. Judge Duffy originally ruled that statements of the brokers were immaterial in light of disclosures on Morgan Keegan’s website, the article explains. The Court of Appeals did not agree with Judge Duffy, per the article, and the trial started on November 26, 2012.

Some of the broker statements classified the auction-rate securities as “liquid, short term investments” and did not disclose that the investors’ money could be “tied up” for a very long time, according to the SEC’s opening statement. The lawyer for the SEC went on to say the auction-rate securities were sold to investors as zero risk investments. Investors thought they could get their money back at any time due to the allegedly misleading statements of the brokers and unfortunately found that when they needed their money, it was not there. Morgan Keegan did start a buyback program at one point during the failure of the auction-rate securities it sold to its investors; this program only paid back principal invested.

Another point of contention between the District Judge and the Court of Appeals is Judge Duffy’s statement that not being able to predict the market is not a securities violation. The SEC is not alleging that Morgan Keegan was misleading investors because they could not predict the market. Instead, the SEC alleges that Morgan Keegan and its brokers were all aware that the auction-rate securities offered and sold to investors was nowhere near as safe as they advertised them to be. The SEC alleges that Morgan Keegan told investors that the auction-rate securities at issue were just the same as cash, or a cash equivalent, with “zero risk”, according to the article; however, the investors could not sell the securities when they tried after the auctions started to fall.

The SEC is seeking unspecified monetary penalties against Morgan Keegan. The case is Securities and Exchange Commission v. Morgan Keegan & Company Inc., 1:09-cv-01965, U.S. District Court, Northern District of Georgia (Atlanta).

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Morgan Keegan agreed to pay over $630,000 to 10 ERISA pension plans after an investigation by the US Department of Labor, according to the Department’s press release.  The investigation found that Morgan Keegan violated federal law when it recommended certain hedge funds to the pension plans.

The press release went on to state that Morgan Keegan will now disclose to all of the ERISA plans it works with if indeed Morgan Keegan is acting as a fiduciary to them and what exactly that role entails. Morgan Keegan also must disclose all fees it has collected in conjunction with the pension plans and refund any third party fees collected to the pension plans.

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The United States Court of Appeals for the Eleventh Circuit reinstated the SEC’s civil securities fraud action against Morgan Keegan & Co. Inc., according to a Reuters.com article. This reversed the district court’s dismissal of the SEC’s action arising from Morgan Keegan’s sales of Auction Rate Securities (ARS).

The Eleventh Circuit found that the alleged oral misstatements of the brokers at Morgan Keegan could have been material, according to the article. These oral misstatements could have negated the accurate written disclosures.

The decision in Morgan Keegan follows The United States Supreme Court decision in Matrixx Initiatives Inc. v. Siracusano, which  reaffirmed that it is a fact-specific inquiry when determining if an alleged misstatement or omission is indeed material.

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A Morgan Keegan broker has been barred from the industry by FINRA, according to an article on onwallstreet.com. Michael Venable, of Tyler, Texas, was barred for life from the financial industry after he jeopardized 10 of his clients. The article discussed Venable putting people into investments that were not suitable for them, sometimes without their knowledge at all, and engaging in excessive trades to garner large commissions for himself (also called “churning”).

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According to this article from Bloomberg News, Raymond James dismissed 200 employees as a result of its purchase of Morgan Keegan & Co., Inc. earlier this year.  Two thirds of those who were cut were Morgan Keegan employees in the fixed income and equity capital markets whose jobs overlapped with Raymond James employees’, according to the article.  Regions Financial Corporation sold Morgan Keegan to Raymond James after Morgan Keegan was sanctioned by regulators, including FINRA and the SEC, for fraudulent sales of the RMK family of bond funds.

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To repay a $3.5 billion taxpayer bailout, Regions Bank has announced plans to sell $900 million worth of common stock, according to this article from Bloomberg Businessweek.  While most of the biggest U.S. banks already returned bailout funds,  Regions was among the worst performers in the KBW Bank Index (BKX) in 2008 and 2009 as defaults contributed to four straight years of losses totaling $7.7 billion for common shareholders, according to the article.

In January, Regions sold the Morgan Keegan & Co. brokerage unit to Raymond James Financial Inc., under terms that were expected to generate proceeds of $1.18 billion for the bank.  Morgan Keegan was the subject of state and federal investigations and sanctions arising out of its misrepresentations and omissions in the sale of the Regions Morgan Keegan (RMK) family of bond funds.  Investors in those funds should have received information from the regulators’ “fair fund” management company, A.B. Data, regarding how to apply to recover some or all of their lost investment through the fair fund.

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Morgan Keegan must repay the financial losses of three Georgia RMK Fund investors, plus forum costs, according to the January 18, 2012 Order of an arbitration panel of the Financial Industry Regulatory Authority (FINRA), which heard the case in Atlanta, Georgia.

The Claimants are among thousands of investors who lost money as a result of Morgan Keegan’s fraudulent conduct in connection with the RMK (Regions Morgan Keegan) family of bond funds.  The claimants were represented by attorneys Robert E. Norton and Richard S. Frankowski of the firm The Frankowski Firm in Birmingham, AL.

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