Morgan Keegan Toxic Bond Fund Cases Provide Disturbing Examples of How Industry Arbitration Fails Investors


In her recent New York Times article entitled “Findings That May Get Lost,” Gretchen Morgenson writes about a “disturbing paradox” presented by the following scenario: Investors who lost over $1 billion in toxic RMK bond funds may not benefit from the recent settlement with regulators that Morgan Keegan paid $200 million to obtain, despite findings that Morgan Keegan and James Kelsoe misled and defrauded investors in those funds, because Morgan Keegan’s lawyers will argue that the regulatory findings are irrelevant in arbitration proceedings filed by injured investors, and, incredibly, some arbitrators will agree not to consider those findings, despite court decisions holding that such findings must be admitted in evidence.

The SEC found that RMK bond funds manager James Kelsoe and others, defrauded clients by falsely inflating the values of mortgage securities held by the funds from at least January 2007 to July 2007, as the mortgage market tumbled. Essentially, Kelsoe reported made up prices.

According to regulators, Kelsoe ordered his accounting department to markup the prices of securities above their fair values, and when he got a lower price from an outside firm, he persuaded that firm to raise the price, thereby falsely propping up the net asset values of the funds that were reported to investors.

As part of his settlement, Kelsoe will pay $500,000 in penalties and be banned for life from the securities industry.

Morgan Keegan neither admitted nor denied wrongdoing, and this is standard procedure in settlement agreements.

Reflecting on this disgraceful story, Ms. Morgenson recalled her December 30, 2007 article describing how the Indiana Children’s Wish, a charity that grants wishes to terminally ill youngsters, was pushed to invest in one of Morgan Keegan’s proprietary bond funds stuffed with toxic mortgage securities, promptly losing $48,000 on a $223,000 investment.

Morgan Keegan settled with the charity in late 2007 after Ms. Morgenson called to inquire about the matter. The charity’s investment was apparently made during the time Kelsoe was mispricing his funds.

Since the SEC’s April 2010 charges of fraud, many injured investors have had their arbitration claims denied, because, in arbitration proceedings, Morgan Keegan routinely took the position that it did nothing improper and that these charges (the very ones it just paid $200 million to settle) were baseless.

One of Morgan Keegan’s attorneys confirmed to Ms. Morgenson that the firm probably would argue against letting the SEC and FINRA findings be introduced in arbitration cases, reportedly saying: “I wouldn’t expect that they would be relevant.”
Not relevant? It is hard to imagine findings that could be any more relevant than the SEC’s findings that Morgan Keegan misled and defrauded investors in its RMK bond funds.

The $200 million that Morgan Keegan agreed to pay will be placed in several restitution funds. It is not clear how the money will be distributed, but one thing is clear: Investors who lost more than $1 billion will not be made whole with the $200 million settlement.

How a firm like Morgan Keegan can wrongfully cause $1 billion of damage and be let off the hook for far less than that is an outrageous example “of the upside-down world we live in.”

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in Morgan Keegan cases. For further information, please contact us.