Sub Prime Securities Investment Law Blog

If you own one of these funds you probably know that Morgan Keegan's High Income and Intermediate Bond Funds crashed and burned in 2007, losing over 50% of their value in a year. The problem began when the value of the funds' assets (which included lots of securities tied to toxic subprime mortgages) collapsed. At that point hordes of understandably anxious fund owners said "enough" and began redeeming their shares , forcing the funds to sell assets for cash. The rush to the exits hardly slacked off in August when the Morningstar mutual fund newsletter questioned whether either fund could recover from their losses. Morgan Keegan's solution to the "problem" of shareholders who want their money back came on March 4, 2008, when the funds amended their prospectus to give them the right to limit the amount of cash paid on redemptions. In fact, Morgan Keegan now claims the right to require redeeming shareholders to accept the funds' securities in place of cash. So if you have ever wanted to own your own collateralized debt obligation, this could be your chance. And if that sounds good, there's a bridge in Brooklyn you might consider buying.

Brian N. Smiley

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So how bad is it? Take a look at the “Money and Investing” section of the February 8, 2008 Wall Street Journal. The story “Prosecutors Widen Probes into Subprimes” reveals that criminal or regulatory investigations concerning fraud in the subprime market are underway by:

(1) U.S. Attorneys Office for the Eastern District of New York (Brooklyn) – investigating Bear Stearns and UBS;

(2) U.S. Attorneys Office for the Southern District of New York (Manhattan) – newly initiated investigation concerning activities of Merrill Lynch & Co.;

(3) Securities & Exchange Commission – thirty-six investigations involving such biggies as Merrill, UBS, Bear Stearns, Morgan Stanley, and Citigroup;

(4) FBI – investigating 14 companies for accounting fraud and insider trading;

(5) New York Attorney General – has issued subpoenas to Bear Stearns, Deutsch Bank, Morgan Stanley, Merrill Lynch and Lehman;

(6) Massachusetts Secretary of State - has sued Merrill Lynch over mortgage- backed securities sold to a municipality and is now probing Bear Stearns.

And that was just on Page C1! On Page C2, we learn that New York’s Attorney General, Andrew Cuomo, has blasted as mere “window dressing” the proposals of Moody’s and Standard & Poore’s to “improve” the manner in which they rate mortgage related bonds. These rating firms are squirming under heavy scrutiny for having given their highest ratings of creditworthiness to bonds backed largely by loans to uncreditworthy borrowers. And why would they do that? Cynics might suspect it has something to do with the fact that S&P and Moody’s get paid to rate the bonds by the people who issue them. Can you say “conflict of interest”?

Judging by the WSJ, I’d say we are about to enter an era of full employment for white-collar criminal defense lawyers. Times may be tougher for the poor investors who got stuck holding the bag when Wall Street’s tainted investments got sold to Main Street.

Brian N. Smiley

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“They” are the giants of Wall Street. “They” are the folks who pumped billions of dollars of bonds backed by subprime mortgage obligations into the hands of unsuspecting investors like you. These loans are called subprime because they were made to people who were likely to be unable to repay them. Subprime loans were made to borrowers who had low credit scores, a history of late payments, or even recent bankruptcies. These subprime loans were then bundled and “repackaged” by financial institutions into securities with impressive names such as collateralized debt obligations (CDOs) that were snapped up by banks, traders, and hedge funds in the United States and throughout the world. “They” meaning brokerage firms, might have even foisted CDOs on you in bond mutual funds your broker told you were a safe place to stash money you weren’t willing to risk in the stock market.

Continue reading "THE SUBPRIME MESS: WHY WHAT “THEY” SOLD YOU WASN’T AND STILL ISN’T WHAT YOU NEED" »

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Posted In: Effect on Securities Markets , Morgan Keegan Bond Funds , Regions Morgan Keegan

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Merrill Lynch reported recently its 2007 statistics. The new boss announced $15 billion in subprime mortgage write-downs and a fourth quarter 2007 loss of $9.91 billion. Citigroup recently made similarly stunning write offs and other major brokerage firms are in the same boat.

The Associated Press notes that, by posting significant fourth quarter losses, “Merrill Lynch joins rival Wall Street investment houses Morgan Stanley and Bear Stearns Cos. in posting losses in the last three months of fiscal 2007. Citigroup Inc., the nation’s largest bank, reported on Tuesday a quarterly loss of almost $10 billion, the largest in its 196-year history.” The article also noted that Merrill’s stock fell around 50% in 2007.

All of these companies are toying with layoffs, bailouts from foreign investors, and other uplifting alternatives. All of the companies point to the CDO and subprime debt debacle as the cause of their woes.

http://www.nytimes.com/aponline/business/AP-Earns-Merrill-Lynch.html?scp=5&sq=subprime

Posted by Kirk Reasonover | Permalink | Email This Post

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In a comparison of bond funds, Regions Morgan Keegan’s Select High Income Fund was cited as one of the worst disasters of 2007, due to its losses from exposure to investments backed by subprime loans.

Read the story by the San Francisco Chronicle:

http://www.sfisonline.com/cgi-bin/article.cgi?f=/c/a/2008/01/03/BU42U86EG.DTL&hw=ultra&sn=010&sc=273

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Two New Jersey residents have filed an arbitration claim against Lehman Brothers holdings for $1.14 billion. The claim alleges that the firm placed the investors savings into “investments that have become hard to sell.” The securities held were auction-rate securities, yet another form of security that has been racked by the subprime mortgage market and ensuing credit crunch.

The Lehman Brother’s contingent “disputed the [claimant’s] accusation. ‘These clients had a professional investment consultant with whom we dealt… we believe we have meritorious defenses to this claim.’” In other words, the claimants sought securities over exposed in the subprime market.

As the true extent of the subprime debt crisis plays out, it is safe to expect many more situations where damages have been incurred.

Read the full story:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aMvCcBjj9w9M&refer=home#

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Fed Chairman Ben S. Bernake appeared before Congress this week to discuss his thoughts on the dwindling US economy, which is still sliding from the subprime debt crisis. The chairman indicated support for a stimulus package, indicating that further Fed action (another rate cut seems inevitable) is not enough to put the economy back on its feet.

The New York Times quotes Bernake in saying that “In the financial markets, the subprime shock ‘has contributed to a considerable increase in investor uncertainty,’ he reported, adding that the Fed is seeing ‘considerable evidence that the banks have become more restrictive in their lending to firms and households.” The extent of the subprime mortgage damage goes beyond investor uncertainty as many investors unknowingly purchased risky securities and suffered as a result.

http://www.nytimes.com/2008/01/11/business/11fed.html

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The recent purchasing patterns in Florida’s pension funds serve to identify a sleazy side of the subprime debacle. In the February 2008 Bloomberg Markets David Evans has discussed some horrid behavior in a pension fund that was once an example for the rest of the nation. “On Sept. 30, 2005, 25 percent of the pool was invested in U.S. Treasuries and debt issued by U.S. agencies, the safest and most liquid debt sold… Florida was more aggressive than most states. In October, the Florida pool had the highest return of any public fund in the U.S., earning 5.63 percent.” However, in 2007, something changed and Florida’s fund managers began buying risky, subprime holdings.

Coleman Stipanovich supervised an investment fund for Florida’s school district until he resigned on December 4, 2007 and after school districts in Florida began panicking and pulling money out of his fund. Apparently, in July and August 2007, Stipanovich bought $842 million of mortgage-backed debt with taxpayer money. The securities defaulted within four months.

David Evans uncovered a consistent scheme of purchasing subprime laden debts. “As the subprime crisis unfolded around the world, Stipanovich and [pool manager] Lombardi increased their holdings of high-risk debt. They steadily reduced holdings of government securities in favor of higher-yielding—and riskier—commercial paper. In February 2007, London-based HSBC Holdings Plc, Europe’s largest bank by market value, reported it had losses of $1.8 billion more than expected on its U.S. subprime lending. In the same month, Lombardi bought the $400 million in Countrywide CDs.”

Florida’s funds suffered not only due to a consistent plan of purchasing high risk subprime securities but also from the predatory self-dealing of its managers.

http://www.bloomberg.com/news/marketsmag/mm_0208_story2.html

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Posted In: Effect on Securities Markets , Institutional Investors

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The year-end performance statistics are in and there are no huge surprises. Equity mutual funds made lackluster gains, and stock funds with mortgage or financial company holdings suffered losses. The worst sectors were financials and mortgage companies.

However, some funds suffered far more than the average losses, among them the Regions Morgan Keegan family of funds. “The worst-performing bond fund was the $190 million Regions Morgan Keegan Select High income, which plunged 59 percent because of losses tied to subprime mortgages” according to Bloomberg.com.

What can we learn from this? We know that these Morgan Keegan Funds were overexposed to subprime mortgages, and that their managers did not take the proper steps to mitigate the decline. Other bond funds were able to weather the subprime decline; the Regions Morgan Keegan funds were an exceptional case of mismanagement.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ainZkO4sUAtA

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Early this month Morgan Keegan & Co. settled a lawsuit with the Indiana Children’s Wish Fund. This fund, which tries to help terminally ill children fulfill their last wishes, lost nearly $50,000 investing with Morgan Keegan. The primary culprit was the Regions Morgan Keegan Select Intermediate Bond Fund.

Andy Meek of The Daily News said the Indiana charity “was one of the first investors in the group of bloodied RMK funds to file a claim or lawsuit recently saying the funds’ volatility had not been fully disclosed.” Apparently, this is the case for many of the Regions Morgan Keegan Funds, most of which have suffered tremendously from the subprime mortgage fallout. In Memphis, further lawsuits have already been filed against the RMK Select Intermediate Bond Fund and the RMK Multisector Bond Fund.

The Morgan Keegan Funds were heavily laden with risky mortgage backed securities. Individual investors were not warned about the potential volatility of these funds. The RMK funds and their managers overexposed their funds to the subprime mortgage market, and the funds investors are bearing the losses from the mortgage fallout, and the managers should have been more responsible.

Read the full story:
http://www.memphisdailynews.com/Editorial/StoryLead.aspx?id=100438
http://www.memphisdailynews.com/Editorial/StoryLead.aspx?id=100478

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In what can only the beginning of a slew of charges, several Regions Morgan Keegan funds have been named in a class action lawsuit out of Tennessee. Coughlin, Stoia, Geller, Rudman, & Robbins LLP filed a complaint in December naming, among others, the Morgan Keegan Select Fund Inc. and the RMK Multi-Sector High Income Fund, Inc.

The press release highlighted some specifics. “The complaint alleges that parts of the Funds’ portfolios have been invested in collateralized debt obligations (“CDOs”), including CDOs backed by subprime mortgages to higher-risk borrowers… As late of the summer of 2007, as the housing and credit crisis depended, MK Select and the RHY Fund continued to play down and conceal the Funds’ growing exposure to the problems in the subprime market.” It wasn’t until late in 2007 that the Regions Morgan Keegan fund managers fully admitted their risks in the face of the plummeting subprime market.

It is safe to assume that the Regions Morgan Keegan funds are not alone in their exposure to the subprime crisis. Mutual Funds, CDOs, and SIVs across the country bought up subprime debt with the promise of high returns while ignoring the inherent risks. Their casual disregard of the inherent volatility in the subprime mortgage market is sure to lead to further charges.

Read the Story:
http://markets.about.com/about?GUID=4148961&Page=MediaViewer&ChannelID=3191

Posted by Kirk Reasonover | Permalink | Email This Post

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Once again the subprime mortgage crisis is taking its toll on the average working American. Bloomberg Markets has recently described investments in Structured Investment Vehicles (SIVs) and Collateralized Debt Obligations (CDOs) by public funds across the United States. Both SIVs and CDOs invest heavily and opaquely in subprime mortgages, and fund managers are enticed by the potential returns and undisclosed risks.

SIVs are perhaps the most sinister investment vehicles. “SIVs finance themselves by selling asset-backed commercial paper, or short-term loans backed by collateral such as mortgages. When the subprime debt market blew up in August, investors stopped buying SIV commercial paper. As a result, in September and October, SIVs didn’t have the cash to pay debt holders of more than $8 billion of their paper.” These programs do not file with the SEC and do not publicly disclose financial statements. As a result, they can hide any and all risk associated with their investments.

State pension plans bought up SIVs and CDOs riddled with subprime debt and are now facing tremendous losses not only from market declines but from major default rates. As Bloomberg Markets David Evans says: “Until municipal fund managers learn to steer clear of traps like CDOs and SIVs, taxpayers’ money will be at risk—and it’s not likely anyone will tell them.” Taxpayers certainly aren’t the winners in the subprime mess.

http://www.bloomberg.com/news/marketsmag/mm_0108_story3.html

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Posted In: Effect on Securities Markets , Institutional Investors

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