Morgan Keegan Investment Advice Takes TN Towns Down

Communities like Claiborne County and Lewisburg, TN are finding out the investment advice they received from the Memphis-based Morgan Keegan is costing them far more than they bargained for. Today's NYTimes published a report today on how the firm has been working the state as educator, advisor, and investor all with state approval.

"The municipal bond marketplace was so lightly regulated that in Tennessee Morgan Keegan was able to dominate almost every phase of the business. The firm, which is based in Memphis, sold $2 billion worth of municipal bond derivatives to 38 cities and counties since 2001, according to data compiled by the state comptroller’s office.

After The New York Times made inquiries, the Tennessee comptroller, Justin P. Wilson, ordered a statewide freeze on bond derivatives and a review of the seminar taught by Morgan Keegan and others.

Representatives of Morgan Keegan pointed out that they saved cities and counties money for years by delivering lower interest rates, and that the economic decline that created the turmoil in the bond market was beyond their control. Moody’s credit rating agency on Tuesday issued a negative outlook for the fiscal health of municipal governments."
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"Unlike most states, Tennessee was one of the few where the legislature passed a law intended to regulate the sale of these complicated municipal bond derivatives to local governments. But the profusion of those deals and the various roles of Morgan Keegan have left leaders of those cities and counties furious at both the firm and the state.

In Claiborne County, north of Knoxville, officials said they were recently told by Morgan Keegan bankers that extracting themselves from a municipal bond derivative would cost $3 million, a sum the poor county cannot afford. “I told the Morgan Keegan man here in my office, ‘It seems to me, you are all trying to slip paperwork by us like a small, shady loan company,’ ” said Joe Duncan, the mayor of Claiborne County."
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"Municipal bond experts say they know of no other state where a firm was allowed to wear three hats; several states prohibit a single firm from acting as both adviser and underwriter. In Pennsylvania, which has such a prohibition, federal prosecutors are investigating accusations that investment banks and financial advisers conspired to sell bonds with inflated fees to school districts.

“It’s like the lion being hired to protect the gazelle,” Robert E. Brooks, a municipal bonds expert and a professor of financial management at the University of Alabama, said of the situation in Tennessee. “Who was looking after these little towns?”

Morgan Keegan said local officials were unfairly blaming them for the economic downturn. “People are upset; we’re upset, too,” said Joseph K. Ayres, the firm’s managing director. “We’ve been very successful helping a lot of communities try to weather this storm. Obviously, there are going to be a few disappointments. People are going to look to find a scapegoat. We’re big boys and girls. We understand that.”

Mr. Ayres denied that the firm had a conflict in advising municipalities and underwriting bond derivatives. He said that Morgan Keegan had taught the seminar at the request of the state and that they had offered unbiased descriptions of municipal bond options. He added that the firm had not marketed products during the sessions."
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"In many corners of Tennessee, the first anyone heard of interest-rate swaps was from C. L. Overman, a vice president of Morgan Keegan who assured officials that the deals carried little risk, city and county officials said. “He told us it would be a good thing and there wasn’t much downside,” said Mayor Duncan of Claiborne County. He then laughed, adding, “When everything went belly up, of course, they told us it wasn’t their fault.”

"Earlier this year, Claiborne County officials were told by Mr. Overman that they had only a few weeks to refinance an $18 million bond or pay a quadrupled quarterly payment of $700,000. Mr. Overman declined to comment for this article. In Lewisburg, after Mr. Overman pitched the swap idea for the sewer project, Kenneth E. Carr, a city official, attended the class. “The seminar was dull and boring,” said Mr. Carr, who still has a copy of the book, stamped with the state seal of Tennessee on every page. “I thought, ‘Well, this is approved by the state because they put their seal of approval on it."

Morgan Keegan is also facing an ever-growing number of legal fights with investors:

"One industry source said that level of activity, coupled with the fact that there may be more than 100 pending arbitration claims related to the RMK issue, means Morgan Keegan has still spent several million dollars so far defending itself against the claims, not counting the awards on behalf of claimants.

In Stoltmann’s recent case, he said the Fitzgeralds were brothers who inherited family money and were looking for safe, conservative investments.

Craig McCann, a former economist for the U.S. Securities and Exchange Commission, said he believes Morgan Keegan misrepresented the risks of investing in six RMK funds that cost investors $2 billion in 2007. McCann, who has served as an expert witness in some of the arbitrations, released a paper late last year titled “Regions Morgan Keegan: The Abuse of Structured Finance.”

Also the firm has been ordered to repay $267,000 to one investor in California:

"The Financial Industry Regulatory Authority ordered the Memphis-based company to pay a San Francisco-based investor all losses plus interest and court costs, said Chicago-based arbitration lawyer Andrew Stoltmann, who handled the case.

The award – which is the largest arbitration award against Morgan Keegan’s bond funds as of late – set a precedent for pending arbitration lawsuits against the company, Stoltmann said.

“There has been some nefarious stuff that (has) come out in the last two months that has changed the dynamics of these cases and made them better,” he said. “An award like that is a real clear sign that the arbitrators were upset with what they heard.”

The “tide has turned” in favor of the plaintiffs because it has been established that 10 percent to 15 percent of the funds were being misclassified as safer investments, Stoltmann said."

More on the story from Enclave and from KnoxViews and this NYTimes blog.

According to a press release from Morgan Keegan dated Jan. 29, 2009, the firm is ranked among the Top Ten Underwriters of 2008:

"We begin the New Year in a strong position as a top ten national underwriter,” said Rob Baird, president of Morgan Keegan’s Fixed Income Capital Markets division. “Through a continued focus on providing relationship and idea-oriented investment banking services to issuers throughout the country, we expect to further grow our market share and remain a top ten underwriter in 2009.”

Additionally, for the 16th consecutive year, Morgan Keegan dominated municipal bond underwriting in the South Central U.S. The five-state region includes Alabama, Arkansas, Kentucky, Louisiana, Mississippi and Tennessee. Serving as senior manager on 219 issues with a par value of $4.9 billion, the firm’s market share in the region jumped from 15 percent in 2007 to 24.8 percent in 2008.

Morgan Keegan was also the leading municipal bond underwriter, in terms of number of transactions, in the Southeast and Southwest regions of the country. In the 10-state Southeast region that includes Virginia, the firm senior managed 226 issues with a par value of $5.6 billion."