Plaintiff's attorneys who are suing Morgan Keegan & Co. Inc. for its failed Regions Morgan Keegan Select bond funds are in an uproar over what they claim is the firm's cover-up of embarrassing documents.
The furor is the result of the complaint filed by several state regulators that revealed internal Morgan Keegan documents that plaintiff's attorneys say should have been produced during arbitration hearings but were not.
For example, a May 2007 email sent by Gary Stringer, director of investments for Morgan Keegan's Wealth Management Services division, reads:
"What worries me about this [Regions Morgan Keegan Select Intermediate] bond fund is the tracking error and the potential risks associated with all that asset-backed exposure. Mr. & Mrs. Jones don't expect that kind of risk from their bond funds. The bond exposure is not supposed to be where you take risks. I'd bet that most of the people who hold that fund have no idea what's [sic] it's actually invested in. I'm just as sure that most of our FAs have no idea what's in that fund either."
Mr. Stringer's "e-mail just kills [Morgan Keegan] to me. That's just shocking," said Craig McCann, president of Securities Litigation and Consulting Group Inc., an expert witness who testifies for plaintiffs in Morgan Keegan arbitrations.
"I had heard that [the Stringer email] existed, and I've been pressuring Morgan Keegan attorneys to produce that," but the firm has refused, said Scott Beall, a Memphis, Tenn. plaintiff's attorney with several cases pending against the firm.
Mr. Beall said a broker for an investor he represents was one of the individuals who was copied on the Stringer email.
Regulators also claim that in the summer of 2007, Kim Escue, a fixed-income analyst for the Wealth Management Services division, was stonewalled by Mr. Kelsoe's group in her attempts to update the division's research on one of the bond funds.
"They have let me sit for nearly three weeks with no comments, feedback, or information that I have requested," Ms. Escue wrote in a July 2007 e-mail that was attached to the state complaint.
The WMS division "failed to notify the [Morgan Keegan] sales force or the … compliance department of [the] refusal to cooperate," the state regulators' complaint says.
"The assertions made by the plaintiff's attorneys are simply not true," said Morgan Keegan spokesman Eric Bran in a statement. "We have provided the documents required of us in the arbitration process."
Mr. Bran said the firm will "vigorously refute" the charges brought by regulators.
"We are disappointed at the decision by these agencies and the states to bring charges which we believe are meritless and based upon erroneous hindsight analysis," he said in a statement.
In addition to the state complaint, the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. also filed charges against the firm last week.
Plaintiff's lawyers are happy that regulators have taken action. They also say that under Finra rules, brokerage firms are supposed to automatically produce a variety of documents for arbitration cases.
Arbitration panels can also order document production.
Of course, when regulators serve a subpoena, “a brokerage firm sits up and listens," said Scott Shewan, a Clovis, Calif. attorney and president of the Public Investors Arbitration Bar Association, which represents plaintiff's lawyers.
"When an arbitration panel issues an order, there's always room for interpretation," he said. "It's not quite the same hammer."
Morgan Keegan "has denied the existence of documents [and] denied the rules of discovery, and to some extent they've gotten away with it, at least until yesterday" when the state complaint uncovered some of the material, said Dale Ledbetter, a plaintiff's attorney in Ft. Lauderdale, Fla.
Morgan Keegan has produced some documents for arbitration hearings, but usually under the condition of arbitrator-ordered confidentiality, plaintiff's attorneys say, so the information cannot be shared among lawyers.
Morgan Keegan will have a harder time keeping those documents out [of arbitrations] in the future" now that some have come public, Mr. McCann said.
Plaintiff's attorneys estimate that several hundred cases are pending against Morgan Keegan over the bond funds.
In 2008 and 2009, Morgan Keegan spent a total of $251 million on legal costs, according to the latest annual report of Regions Financial Corp., which owns Morgan Keegan.
The bond funds at issue — which at one point had $2 billion in assets — invested in risky mortgage-backed securities but lost most of their value in 2007 and 2008 following the collapse of the real estate markets.