Recent regulatory settlements with Morgan Keegan and affiliates providing for creation of $200 million in fair funds damages do not reduce the damages that may be recovered in the private litigation brought on behalf of shareholders of the open-end funds class and derivative actions, and the factual findings of the regulatory agencies provide support for the allegatons in the private litigation.
Two major cases have been brought for the benefit of shareholders and former shareholders of the former RMK Select High Income Fund, the RMK Select Intermediate Bond Fund, and the RMK Select Short-Term Bond Fund, renamed the Helios Select Funds (“Funds”) that are now pending and are being actively prosecuted. The first of these, In re Regions Morgan Keegan Open-End Mutual Fund Litigation, No. 2:07-cv-02784-SMH-dkv ( “Open-End Funds Class Action”), initially filed on December 6, 2007 in the federal district court for the Western District of Tennessee, was the first of all of the actions brought against Morgan Keegan and certain Morgan Keegan affiliates. The primary defendants in that case are Morgan Asset Management, Morgan Keegan & Company, Regions Bank, Regions Financial Corp., the directors of the Funds, and certain officers of Morgan Asset Management and Morgan Keegan (the “Regions Morgan Keegan Defendants”), and PricewaterhouseCoopers, the Funds’ independent accountants. A related case, referred to as a derivative action, was filed in March 2008 on behalf of the Funds against the Morgan Keegan Defendants and Pricewaterhouse Coopers under the name Landers v. Morgan Asset Management, Inc., No. 2:08-cv-02260-SMH-dkv (“Landers Derivative Action”). It too is pending in the federal district court for the Western District of Tennessee.
Counsel for Plaintiffs in both cases are Vernon J. Vander Weide of Head Seifert & Vander Weide, P.A.; Richard A. Lockridge and Gregg M. Fishbein of Lockridge Grindal Nauen P.L.L.P.; Carolyn G. Anderson, Patricia A. Bloodgood, and Kirsten D. Hedberg, of Zimmerman Reed, P.L.L.P., all of Minneapolis, MN; and Jerome A. Broadhurst and Charles D. Reaves of Apperson Crump, PLC, Memphis, TN (collectively “Plaintiffs’ Counsel”).
Regulatory Settlements: Securities and Exchange Commission. On June 22, 2011, three groups of regulators announced that settlements had been reached in administrative proceedings against certain Morgan Keegan related entities, which settlements resolved formal charges that had been brought by the three groups of regulators in April of 2010. The Securities and Exchange Commission had brought charges against Morgan Asset Management (the Funds’ investment adviser), Morgan Keegan & Company, Inc. (a brokerage firm), and two individuals, James Kelsoe (the Funds chief portfolio manager) and Joseph Thompson Weller (the controller and head of the Funds valuation committee). The SEC’s proceeding and settlement order covered the period from January, 2007 through July 2007. The SEC proceeding and order focused on the issue of the respondents’ falsification of the Funds’ portfolio’s net asset values during that period in 2007. As a result of the regulatory actions, Morgan Keegan and Morgan Asset Management are required to pay a total of $200 million in civil penalties. Of this amount, $100 million will go to establish an “SEC Fair Fund” and $100 million will go to establish a “States’ Fund” both for the benefit of the Funds’ investors. In addition, James Kelsoe was ordered to pay $500,000, which will be split equally between the SEC Fair Fund and the States’ Fund. Also, Mr. Kelsoe is permanently barred from employment in the securities industry. And Mr. Weller was ordered to pay civil penalties of $50,000 to the SEC, which goes to the SEC Fair Fund. The SEC also imposed certain restrictions on Mr. Weller’s ability to be employed in the securities industry.
Regulatory Settlements: The State Proceedings. Five states, Alabama, Mississippi, South Carolina, Kentucky, and Tennessee, participated in a joint proceeding against Morgan Asset Management, Morgan Keegan, and four individual officers of these entities, including James Kelsoe, the portfolio manager. The States’ action focused on omissions and misrepresentations in marketing materials and regulatory filings (such as prospectuses), preferential treatment of certain favored customers in redeeming their shares early, unsuitable investment recommendations by financial advisers to customers, and failure of supervision and obstruction of the due diligence process by Morgan Keegan’s Wealth Management Division. The settlement here included the corporate respondents and Mr. Kelsoe, but did not include the other three individual respondents, who may be subject to hearings in the near future if they have not settled by the time those proceedings begin.
Regulatory Settlements: FINRA. The Financial Industry Regulatory Authority or FINRA, which oversees the activities of member brokerage firms, brought a proceeding solely against Morgan Keegan, which is a FINRA member, charging it with using misleading sales and marketing materials and the failure to file for review all of such materials as required, and with failing to maintain and enforce an adequate supervisory system. The FINRA settlement accordingly applies only to Morgan Keegan & Co., Inc., the brokerage firm. In addition, the FINRA settlement applies only to activities involving the RMK Select Intermediate Bond Fund, but none of the other open-end or closed end bond funds.
General Terms of the Regulatory Settlements. The SEC Fair Fund and the States’ Fund will be distributed to persons who suffered losses in both the open-end and the closed-end funds. At present, no procedures for distribution of these damages have been adopted, and it is not known who will be eligible to receive damages and how the amounts will be determined. It is contemplated that the SEC and the five states will appoint an Administrator, an outside entity or person, who will organize the distribution process and determine what groups of shareholders will receive distributions and the amounts of those distributions.
Effects of the Settlements on Private Litigation. Plaintiffs’ Counsel in the Landers Derivative Action have estimated that potential damages incurred by the Funds approximate more than $900 million. Plaintiffs’ Counsel also estimate that potential damages in the Open-End Funds Class Action alone will significantly exceed $200 million. As a result, the fair funds’ damages of $200 million, which cover losses of shareholders in both the open-end funds and the closed-end funds, will not fully compensate shareholders of both the open-end funds and the closed-end funds for their losses. Importantly, the orders issued by the regulatory agencies specifically provide that the amounts distributed to shareholders from the fair funds cannot be used as an offset against any damages that may be recovered in any private litigation. As a result, to the extent that the Open-End Funds Class Action and the Landers Derivative Action may be successful in recovering damages for shareholders, those recoveries should not be reduced by amounts paid to shareholders under the fair funds distributions. In addition, the factual findings made by the regulatory authorities in their opinions provide important factual support for some of the allegations of the complaints in these cases. However, the wrongful conduct alleged in the Open-End Funds Class Action and the Landers Derivative Action covers a longer period of time and a broader range of conduct than was the subject of the federal, state and FINRA regulatory proceedings.
Recent Developments in the Open-End Funds Class Action and the Landers Derivative Action.The new Board of Directors of the Funds that took office after the Funds were transferred to a new advisor, Hyperion-Brookfield Investment Management in New York, is proposing that the Landers Derivative Action should be continued as a direct action by the Funds against the Morgan Keegan entities and PwC. The Funds’ New Board is also proposing to retain Plaintiffs’ Counsel in the original Landers Derivative Action to represent the Funds when the derivative action is converted to a direct action against the Regions Morgan Keegan Defendants and PwC.
In addition, the Funds, which are also defendants in the Open End Fund Class Action, have agreed to consent to the entry of an order of judgment under Sec. 11 of the Securities Act of 1933 in the class action case, with that judgment to be satisfied from any amounts recovered in the Landers Derivative Action.
These undertakings in the Open-End Funds Class Action and the Landers Derivative Action are provided for in a Memorandum of Understanding between the Funds and Plaintiffs’ Counsel that was filed with the court on November 30, 2010, and in an Amended Memorandum of Understanding, filed with the court on June 24, 2011. Motions with respect to the approval of the Amended Memorandum of Understanding are now pending in federal district court in Memphis, where the cases are assigned to Judge Samuel H. Mays.
For additional information, contact:
Jerome A. Broadhurst or Charles D. Reaves
Apperson Crump PLC
6070 Poplar Avenue, Sixth Floor
Memphis, TN 38119-3954
Tel : 901-260-5133
Fax : 901-435-5133
Gregg M. Fishbein
Lockridge Grindal Nauen LLP
100 Washington Ave., South, Ste. 2200
Minneapolis, MN 55401
Tel: (612) 339-6900
Fax: (612) 339-0981