Legal expenses piling up at Morgan Keegan

Company says legal tab in 2009 equaled 12% of revenue; crashed bond funds to blame

Feb 25, 2010 @ 3:27 pm

By Bruce Kelly

Facing intense pressure from securities regulators and plaintiffs' lawyers, Morgan Keegan & Co. Inc.'s legal costs have skyrocketed over the past few years, consuming a greater chunk of the firm's revenue.

Legal expenses equaled 12% of the firm's total revenue in 2009. That's twice as much as the year before.

All told, Morgan Keegan spent $161 million in “professional and legal fees” last year on revenue of $1.28 billion. In 2008, it spent $90 million on such fees and reported $1.34 billion in revenues.

The legal expenses were reported Tuesday in the annual report of Regions Financial Corp., which owns Morgan Keegan.

A spokesman for Regions Financial, Tim Deighton, said that the company had no comment other than what was reported in the filing.

With the fallout still coming from the historic stock market drop, other broker-dealers face rising legal costs. They may not be as onerous as Morgan Keegan's legal tab, however.

For example, Raymond James Financial Inc. said in its annual report for fiscal 2009 that the provision for loan loss, legal proceedings, bad debts and other accruals was $186.4 million. That compares with a $68.8 million provision in fiscal 2008 for the same items. That's a sizable outlay, to be sure, but Raymond James has about four times as many brokers and advisers as Morgan Keegan, which had 1,267 brokers in 324 offices at the end of last year.

Morgan Keegan is facing a tide of investor complaints stemming from bond funds that blew up due to investments in mortgage-backed securities.

Plaintiff's attorneys said Morgan Keegan faces hundreds more arbitration claims from investors who bought the company's bond funds. Some of those funds have seen as much as 95% of their value evaporate since mid-2007.

This month alone, Morgan Keegan lost separate claims with awards of a $2.5 million and $1.1 million.

While some high-profile investors such as ex-NBA all-star Horace Grant have won substantial awards in arbitration, Morgan Keegan has also scored big wins. In November, the company emerged as a winner in an $8.2 million investor complaint that alleged unsuitability and breach of fiduciary duty related to the bond funds.

Nevertheless, securities regulators are hammering away at the company. Last summer, both the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. issued Wells notices to Morgan Keegan, a step signaling that disciplinary action may follow. The potential action by the SEC relates to the bond funds, Regions Financial stated. The commission has also filed a Wells notice over the firm's sale of auction-rate securities.

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