Morgan Keegan Arbitration Losses Could Exceed $200 Million

Over 1,000 investors have filed FINRA arbitration cases against Morgan Keegan to recover losses suffered in a number of bond funds managed by the regional brokerage firm, some of which have lost up to 95% of their value since mid-2007. According to Investment News, Morgan Keegan could ultimately end up paying over $200 million to resolve these cases.

The Morgan Keegan arbitration claims allege that investors were not properly informed about the risk associated with the firm’s bond funds, and the extent to which the funds were invested in risky mortgage backed securities, primarily involving the subprime mortgage market which began to collapse in late 2007.

The Morgan Keegan bond funds, such as RMK Select High Income Fund, RMK Select Intermediate Bond Fund, RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Advantage Income Fund and RMK Strategic Income Fund, were sold to investors as relatively conservative investment options. However, the arbitration claims allege that the fund managers violated the objectives outlined in the prospectuses, and exposed investors to a level of risk which they would not have agreed to accept if they had been fully informed of the circumstances surrounding the assets held by the funds.

Although several Morgan Keegan class action lawsuits have been filed on behalf of all investors who purchased or acquired shares in the mutual funds, most investors are electing to pursue their claims as individual arbitration claims through the Financial Industry Regulatory Authority (FINRA). In most cases, lawyers expect these Morgan Keegan arbitration claims to be heard within 12 to 18 months, while the class action lawsuits could take years to resolve.

FINRA oversees nearly 5,000 brokerage firms throughout the United States, and most broker agreements require that individual disputes between investors and their brokers be resolved through FINRA arbitration. The securities arbitration panels are generally comprised of attorneys, accountants, retired judges, bankers, brokers and other professionals, but usually one one of them is considered an “industry” person.

The first Morgan Keegan arbitration award stemming from the losses associated with the crash of the subprime mortgage market last year was returned by a FINRA panel in August, 2008. The claim was filed on January 14, 2008, and the investor was awarded over 75% of his claimed investment losses.

A wave of arbitration claims against Morgan Keegan are expected to reach hearings later this year, with the rest currently scheduled for early 2009.