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VOL. 123 | NO. 83 | Monday, April 28, 2008

Lawsuits Active, Multiplying Against Morgan Keegan

By Andy Meek

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AT THE FEDERAL BUILDING: Nine separate federal lawsuits are pending in U.S. District Court for the Western District of Tennessee on behalf of shareholders who lost large sums of money in a variety of Regions Morgan Keegan mutual funds. -- Photo By Andy Meek

At 5 p.m. Feb. 18, an attorney-client meeting was called to order at the Poplar Avenue law offices of Apperson Crump & Maxwell PLC.

In attendance was a group of about 10 people. It included at least four lawyers, Regions Morgan Keegan mutual fund shareholders and representatives of other shareholders who were not present. The first item of business: mapping out the next few steps in a complex securities class action suit filed on behalf of those shareholders against the Memphis-based Morgan Keegan brokerage firm.

The shareholders involved in that litigation collectively lost more than $1 million in a variety of RMK funds that saw most of their value wiped out over the past year. Part of the funds' weakness lie in their risky ties to subprime mortgage-related assets, a reality that many investors insist was not fully conveyed to them.

That mutual fund debacle has become one of the more dramatic and far-reaching episodes connected to the credit crunch and mortgage meltdown that surfaced in 2007. As it stands now, for the last five months - excluding January - at least two lawsuits have been filed each month in U.S. District Court for the Western District of Tennessee on behalf of investors making similar claims.

Time to hand off

Morgan Keegan apparently has had enough. Last week, directors of seven RMK funds signed an agreement that, pending shareholder approval, would remove themselves and the funds' director from oversight of the funds and transfer them to a New York-based asset management company.

Still to be determined is the effect the management change will have on the now nine federal lawsuits pending in Memphis over the matter. That February meeting of shareholders at the Memphis law office is just one example of the complexity and breadth of the legal forces still arrayed against Morgan Keegan.

"I think, in the end, some of the litigation that has been brought up regarding these funds may have just been a real thorn in RMK's side," said Lawrence Jones, an analyst with investment research firm Morningstar Inc., about the hand-off of the local funds to Hyperion Brookfield Asset Management. "They may have just wanted to put this part of their business to rest and just mop up the litigation and then move on. It's been a massive problem for their asset management division."

One of the RMK fund shareholders present at that February meeting was Pete Aviotti, special assistant to Memphis Mayor Willie Herenton. Others who were part of the meeting include businessmen, doctors, a certified public accountant and an active-duty major general in the Air National Guard.

"The ... group is composed of sophisticated, successful business executives, entrepreneurs and professionals who are comfortable with, and accustomed to, performing in leadership roles," wrote the group's local counsel in a court memorandum.

At that meeting, a few additional shareholders took part in the proceedings by conference call. The group agreed its lawyers should circulate regular status reports on the litigation. The group also decided to hold meetings on at least a quarterly basis if it is appointed by the local federal court as lead plaintiff in the class action.

Other organizational matters were agreed to. It was unanimously decided that the group would try to reach a consensus on any issue it considers. If all the members cannot agree, a vote of seven of the 11 shareholders represented in the group would represent the decision of the group.

What now?

One of the lawyers involved with the group, local attorney Charles Reaves, was retired and not seeking new clients in August, when he wrote a letter to the editor that was published in the Commercial Appeal that blasted the RMK mutual fund meltdown.

Reaves, a special counsel with Apperson Crump, then began to be approached by several of the investors with whom the law firm is now working. His interest was piqued when he noted the exorbitantly large losses many of the investors claimed to have suffered in the mutual funds, which generally are regarded as a stable type of investment.

Reaves later was contacted by a reporter from the Wall Street Journal about the matter. In October, two WSJ reporters wrote what became an exhaustive front-page story about the Regions Morgan Keegan funds. They used the plight of Colorado truck driver Roger Rodriguez as the backdrop for their story.

Ownership of Rodriguez's subprime mortgage loan passed through several hands before a piece of it eventually wound up in one of the portfolios managed by Jim Kelsoe, the Morgan Keegan executive who oversees the RMK funds.

"There are large numbers of people here in Memphis who've lost significant amounts of assets in these funds," said Reaves, whose neighbors include Dr. Richard Atkinson, a retired anesthesiologist. Atkinson is one of the named plaintiffs in the lawsuit Reaves is working on.

"We've talked to numerous people, and it's really a very unfortunate situation to hear some of their stories. They've lost large portions of their retirement funds, their IRAs. They've lost money set aside for children to go to college."

Another one of those people is 64-year-old Ann Hamm, a widow who lives in Collierville.

She has been immersing herself in the world of finance and investments in the years that followed her husband Bill's death in 2002. He left her with a $200,000 life insurance policy, much of which went toward funeral expenses, debts, taxes, mortgage costs and home repairs, among other things.

Hamm lost more than $10,000 in one of the RMK funds. She pulled her money out in December.

"Right after my husband died, I was just trying to keep body and soul together," she said. "Are we just plain stupid for trusting a financial adviser?"

PROPERTY SALES 100 375 3,773
MORTGAGES 63 202 2,481
BUILDING PERMITS 392 651 8,607
BANKRUPTCIES 38 117 2,021