Plaintiff's attorneys who are suing Morgan Keegan & Co. Inc. over its failed Regions Morgan Keegan Select bond funds are in an uproar about what they claim is the firm's cover-up of embarrassing documents.
The furor is the result of a complaint filed this month by several state regulators which revealed internal Morgan Keegan documents that plaintiff's attorneys said should have been produced during arbitration hearings.
A May 2007 e-mail sent by Gary Stringer, director of investments for Morgan Keegan's wealth management 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 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., who is an expert witness who testifies for plaintiffs in Morgan Keegan arbitrations.
“I had heard that [the Stringer e-mail] existed, and I've been pressuring Morgan Keegan attorneys to produce that,” but the firm has refused, said Scott Beall, a 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 received a copy of the Stringer e-mail.
Regulators also allege that in the summer of 2007, Kim Escue, a fixed-income analyst for the wealth management division, was stonewalled by James Kelsoe, the bond fund's head portfolio manager, 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 states' complaint.
The wealth management division “failed to notify the [Morgan Keegan] sales force or the ... compliance department of [the] refusal to cooperate,” the complaint states.
“The assertions made by the plaintiff's attorneys are simply not true,” Morgan Keegan spokesman Eric Bran said 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 the statement.
In addition to the states' complaint, the Securities and Exchange Commission and the
Financial Industry Regulatory Authority Inc. also filed administrative charges against the firm this month.
Plaintiff's lawyers are happy that regulators have taken action. They also say that under Finra rules, brokerage firms are supposed to produce a variety of documents automatically 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, an 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,” up to the point that the states' complaint uncovered some of the material, said Dale Ledbetter, a plaintiff's attorney.
Morgan Keegan has produced some documents for arbitration hearings, but usually under the condition of arbitrator-ordered confidentiality, so the information cannot be shared among lawyers, plaintiff's attorneys said.
Morgan Keegan will have a harder time keeping those documents out of arbitrations in the future now that some have become public, Mr. McCann said.
Plaintiff's attorneys estimate that several hundred cases are pending against Morgan Keegan over the bond funds.
The funds at issue invested in risky mortgage-backed securities but lost most of their value in 2007 and 2008.
E-mail Dan Jamieson at [email protected].
