Stock Broker Fraud Blog

Some Investors have complained they were sold mutual funds by the securities firm of Morgan Keegan & Company, Inc. based on representations of safety which were unfounded. At this time such complaints are only allegations and no determination has been made that the firm and/or its representations engaged in any wrongdoing.

The funds in question include RMK High Income Fund (RMH), RMK Advantage Income Fund (RMA), and RMK Multi-Sector High Income Fund (RHY). Reportedly, these funds were heavily invested into collateralized debt obligations (CDO's) based on sub-prime mortgages and have therefore declined sharply in value.

Morgan Keegan is a Memphis, Tenessee based brokerage firm and is a division of Regions Financial Group. The firm's offices are located primarily in the South, including in the states of Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee and Virginia.

Persons who believe they were sold the above listed mutual funds, or other investments, based of false information or misrepresentations concering the safety of such investments can contact the law firm of Shepherd Smith & Edwards. Our law firm represents investors who have lost money as a result of worngdoing by members of the securities industry, including Morgan Keegan. Contact us today to arrange a free confidential consultation via telephone to discuss your situation with one of our experienced attorneys.

Additional information is available to you here regarding Morgan Keegan & Company and Regions Financial Group.

Last month, brokerage firm Morgan Keegan made an undisclosed payment to the Indiana Children’s Wish Fund to settle an arbitration dispute. The wish granting organization had lost $48,000 in a mutual fund that was heavily invested in mortgage securities.

The Indiana Children’s Wish Fund has about $1 million in assets. The Wish Fund was founded by Richard Culley, a blind attorney, in 1984. The charity has granted some 1800 wishes to children who have been diagnosed with life-threatening illnesses. If the charity had not received its settlement sum, it would not have been able to realize the wishes of nine children.

Last June, a banker at Regions Bank in Indiana recommended that the Wish Fund invest money in a bond that Morgan Keegan offered. Regions Bank and Morgan Keegan are affiliated with one another. Terry Ceaser-Hudson, the Wish Fund’s executive director, says that the Morgan Keegan broker told her that the fund was very safe.

The Wish Fund placed nearly $223,000 into the fund on June 26. A little over two weeks later, Ceaser-Hudson received the Wish Fund’s first brokerage statement. The wish granting organization lost $5,000 within the first few days of making its investment. In September, Ceaser-Hudson sold the charity’s stake in the Morgan Keegan fund and received $174,000 back—a 22% loss over 3 months.

Ceaser-Hudson filed an arbitration claim against Morgan Keegan in November. She cited the unsuitable recommendation, saying the broker had breached his duty to the Wish Fund. By the end of December, the Morgan Keegan fund was down nearly 50% from its $1 billion in assets that it reported in March.

Overall, the mortgage securities market debacle has cost more than $100 billion in losses and write-offs, as well as eliminated billions of dollars in stock market value. Fortune 500 CEO’s have been fired over the crisis and some of the country’s leading credit rating agencies have lost their credibility. Many investors may still be unaware of the damage that the mortgage securities collapse has wreaked upon them—but all of this will eventually be revealed.

The stockbroker fraud law firm of Shepherd Smith and Edwards is dedicated to helping investors who have lost money because a broker was careless or engaged in broker misconduct and breached his or her duty to a client. Please contact Shepherd Smith and Edwards today and ask for your free consultation with one of our stockbroker fraud attorneys.

Related Web Resources:

The Debt Crisis, Where It’s Least Expected, New York Times, January 4, 2008

Indiana children's charity sues Morgan Keegan fund over alleged subprime investment, The Birmingham News, November 29, 2007

Indiana Children's Wish Fund

Citadel Investment Group is investing $2.5 million into E*Trade Financial Corp, which has been negatively affected by shaky mortgage investments. The “bailout” will increase the hedge fund’s stake in E*Trade from 2.5% to 18%. Citadel will pay $800 million for E*Trade’s $3 billion in asset-backed securities. This will allow E-Trade to take off the riskiest assets from its balance sheet.

Citadel says the investment is a good business opportunity. The hedge fund cited E*Trade ’s online brokerage platform as a big reason for making the large investment.

The investment deal is an indicator of how much hedge funds have become involved in both sides of the mortgage crisis, sometimes as a victim and at other times as a rescuer. It also shows the growing influence that hedge funds have in the financial arena.

E*Trade met with 40 potential financial and strategic buyers before making the deal with Citadel. E*Trade says that out of all potential buyers, Citadel offered the “most comprehensive solution” to the company’s problems.

The Citadel-E*Trade deal has some people wondering whether a long-awaited price can now be placed on mortgage-backed securities. People familiar with the details of the E*Trade deal, however, say that the portfolio being talked about includes collateralized debt obligations and a number of securities that make a uniform price seem unlikely.

Citadel will nominate a representative on E*Trade s board of directors. E*Trade CEO Mitchell Caplan resigned last week.

This is not the first time that Citadel has searched for and bought assets in distress. In June, Citadel paid $180 million for assets of ResMae Mortgage Corp. at a bankruptcy auction. It also recently acquired assets of Sowood Capital Management LP.

The law firm of Shepherd Smith and Edwards represents investors who have lost money because of the misconduct of members of the securities industry. Please contact Shepherd Smith and Edwards and ask for your free consultation. We have helped thousands of investors get their money back.

Related Web Resources:

Citadel boosts E*Trade stake with $2.5 billion investment, Chicago Tribune, November 30, 2007

What the E*Trade Bailout Says About “Marking to Market”, The Wall Street Journal, November 29, 2007

E*Trade Financial

Former Freddie Mac CEO and Chairman Leland C. Brendsel says he will pay the $13 million in penalties imposed by the Office of Federal Housing Enterprise Oversight. As part of the deal, he will also waive his claim to $3.4 million from Freddie Mac. Payment of the fine would settle the OFHEO’s administrative enforcement action against the former Freddie Mac CEO.

The OFHEO charges, initially filed in December 2003, alleged that Brendsel created a company environment that permitted improper earnings management, allowed accounting to function without the proper resources, and neglected to set up proper controls within the company. As a result of the unsound and unsafe practices, as well as the misconduct, the OFHEO claimed that Freddie Mac sustained financial losses.

The consent order is connected to an accounting scandal that forced the company to restate up to $4.5 billion in earnings.

The OFHEO issued Freddie Mac a number of consent orders that mandated that the company restructure its internal controls, corporate governance, and accounting penalties. Over $100 million in civil penalties were also involved.

As part of paying the penalties, Brendsel has to disgorge $3.4 million in income, including the $10.5 million bonus that had been previously been paid to him by Freddie Mac. He can never work for Freddie Mac again unless the OFHEO grants him permission. Brendsel must pay the remaining $2.5 million to the US government. Disgorged funds will go toward helping distressed homeowners keep their homes.

Other related claims were settled against former Freddie Mac President David Glen, Ex-CFO Vaughn Clark, and two other former company vice-presidents.

Freddie Mac guarantees or owns about 1/5th of the $11.5 trillion residential-mortgage debt in the United States. Freddie Mac has paid OFHEO $125 million related to bogus accounting charges. Last month, the company agreed to pay $50 million to settle claims that it defrauded investors.

If you are an investor who has lost money because of the inappropriate actions of a member of the securities industry contact Shepherd Smith and Edwards right away. We can protect your rights. Our securities fraud lawyers have helped thousands of people recover their losses.

Related Web Resources:

Former Freddie Mac Chief to Pay $16.4 Million Penalty

Freddie Mac

Office of Federal Housing Enterprise Oversight

In August, Wall Street pundent Jim Kramer went ballistic when he felt the Federal Reserve did not act fast enough to rescue the stock market. Washington officials from George Bush to Nancy Pelosi are vying over how and how much to make avalible to troubled mortgage holders to keep afloat. The Chairman of the Federal Reserve acknowledges the need to preserve the banking system.

But no one seems worried about millions of individual investors who have chunked billions of dollars into mortgage related securities while being told these were completely safe. Many securities which were rated AAA only months ago, have lost a fourth of their value or more and likely face further markdowns in the near future.

Other investments which carried lower ratings, but were hyped as perfectly safe, are worth less than half their purchase value and may be all but wiped out before the dust settles. Many of these securities were sold as CD substitutes to small investors and retirees and to pension funds. The fallout of the failure of such investments will be tragic.

When naïve investors were sold high flyers in 1999 their advisors should have have warned them this was gambling. Others were lied to through bogus research. Yet, almost none of these victims were reimbursed. This appears to be the ultimate outcome for those who were defrauded through mortgage debts.

Welfare is currently being designed for those who borrowed more than they can pay back. More welfare is forthcoming for banks which lent to those without the ability to pay. Rating agencies and other financial institutions continue to be exempt from liability for their roles. Yet there is no mercy on the horizon for those individuals and small institutions who are the only innocent victims of this fraud.

Shepherd Smith and Edwards represents institutional and individual investors nationwide in claims against securities firms. We have represented investors in more than 1,000 securities cases, including many involving mortgage securities. To learn whether we may be able to assist you with a claim contact us to arrange a free consultation with one of our attorneys.

The other shoe is dropping on mortgage securities holders who have already suffered devaluations on what many were told were low risk investments. Monthly interest payments are now falling and in some cases have ended on securities backed by risky home loans.

Large numbers of collateralized debt obligations (CDO's) and mortgage back securities (CMO's) made up of bonds backed by sub-prime home loans are starting to shut-off cash payments to investors. Such cash flow cutoffs are expected to accelerate, as observers speculate whether this will cause a new round of panic in the battered mortgage securities market.

Owners of collateralized obligations, including investment banks, hedge funds, insurance companies and public pension funds continue to write down mortgage investments beyond the billions they have already written off. Some of the securities may, for example, fall from 70 percent of face value to almost worthless overnight, bankers and analysts say.

The extent of the chain reaction this could cause is hard to predict. Such adjustments will adversely affect individuals sold such securities and could further disrupt their lives as the availability of credit to homebuyers and consumers could dry up and stock prices (and thus pension funds) fall in value. A resulting recession would cause many to lose jobs, which would result in new mortgage delinquencies which would fuel a repeat of this cycle.

“At this point, it’s fair to say that everybody expects this shoe will drop,” said Mark Adelson, an independent mortgage securities consultant and analyst. “It’s a foregone conclusion. But when it happens, there will be a market reaction to it.”

Standard & Poor’s recently lowered the ratings on $22 billion in bonds backed by mortgages made to people with weak credit in 2006, citing the continued deterioration in the housing market. Another credit rater, Moody’s Investors Service, lowered a similarly large group of bonds earlier in the month. Congress is investigating why so many securities were rated so highly in the first place.

Meanwhile, lawyers are evaluating cases for investors based on lack of, poor and even fraudulent information given to them at the time of purchase. Credit rating agencies will likely fall in the legal category established by the so-called "Good Housekeeping Seal" line of cases, which held that opinions are usually not actionable.

The question is, rather, why those selling the securities relied upon the inflated ratings in the first place. The ultimate issue is whether a credit rating alone is a "reasonable basis for a recommendation" and/or whether proper "due diligence" was performed concerning these investments prior to the sales.

Even after early warning signs and discussions of sub-prime mortgages emerged, in 2006 and 2007, investment banks issued and sold an additional half-trillion dollars in new debt obligations linked to mortgages. Sellers of these securities apparently chose to ignore the risks in order to peddle their wares. In any event, whether it be a case of commission or omission, sellers can be held liable under the law for their failures to properly appropriately disclose risks.

Comparing this situation to the "tech bubble burst" in early 2000, the few who advised clients early to reduce holdings avoided disaster. Most instead refused to admit their mistakes and told their clients to hold on as the majority of their clients' losses occurred in 2001 and 2002.

Most mortgage securities have not yet experienced significant internal losses, recorded when homes are foreclosed and sold. Up to two years can pass between a borrower’s falling behind on payments and an auction. Such securities usually have a reservoir of excess cash to draw upon to pay bondholders when borrowers do not make monthly payments.

"It’s only once the property is effectively sold that a loss is recorded,” said Nicholas Weill, chief credit officer at Moody’s. “The process of foreclosure is a long process. It doesn’t just happen overnight.” John Schiavetta, a group managing director at Derivative Fitch, which rates the debt obligations says “[The mortgage securities market] is still the early stages of a very significant stress.”

Investment brokers and advisors who sell their clients securities which then fall in value typically tell their clients to hold on, rather than heed warnings and act responsibly to advise clients to get out. If these brokers listened to credit agencies when saying the securities were safe, how can they now ignore those same credit agencies which are lowering ratings and warning of worse to come?

Shepherd Smith and Edwards represents institutional and individual investors nationwide in claims against securities firms. We have represented investors in more than 1,000 securities cases, including many involving mortgage securities. To learn whether we may be able to assist you with a claim contact us to arrange a free consultation with one of our attorneys.

Last month, when Brookstreet Securities suffered a flame-out over high risk mortgage investments, its second in command, also the son of its founder, joined Wedbush Morgan and invited Brookstreet brokers to join him at that firm. Some thought it an odd fit, but the firms may have more in common than earlier believed.

Recently, a group on nuns, who claim they were led to believe they were making safe investments, apparently had their funds invested by Wedbush into mortgage-backed CMO securities which were just pools of mobile home loans. They soon lost $1 million, according to a complaint filed by The Sisters of St. Joseph of Carondelet in California against Wedbush Morgan in arbitration through the National Association of Securities Dealers.

Ed Wedbush, president of the firm that handled the nuns' investments, said in an interview that the losses in this and other cases came on the riskier portions of mortgage investments and were the result of "clients being very aggressive and wanting high yields." They should have understood, he said, that "high yield is high risk." (The statement resembles another recently made by Oppenheimer & Company, which claimed an elderly widow “only has herself to blame” for losses in a joint account as her husband lay dying. Oppenheimer was subsequently fined $1 million and ordered to reimburse over a million to the widow by the state of Massachusetts.)

Wedbush has been named in over 40 complaints over CMO products. It was ordered to pay over $1 million to the Narramore Christian Foundation, a nonprofit mental-health organization in Arcadia, Calif. In another case, it was ordered to pay $3.8 million in damages and fees to 22 investors. Wedbush blames these problems on one broker who it says has since the left the firm.

These are among several broker-fraud complaints involving risky mortgage investments that have been filed with regulators and in securities arbitration actions. Some cases involve sub-prime loans while others are in “interest only”, “inverse floaters” and other high-risk, difficult to understand and dificult to price mortgage investments.

Samco Financial Services is another firm accused of defrauding a "novice investor" into investing her funds, which she wanted to be safe, into “inverse floater CMOs.” The complaint states that her $100,000 was wiped out before she even started, since the securities purchased in her account were worth $100,000 less than she even paid for them. The firm gave up its brokerage license last year, according to the NASD.

Just as multi-billion dollar portfolios such as hedge funds, including those managed by Bear Stearns Cos, have been hit hard by losses in sub-prime and other high-risk mortgage securities, so also have smaller institutional portfolios and even individuals' accounts endured losses. Such losses have come through CMO and other mortgage-backed securities, but also through certain partnerships, REITs shares, mutual funds and other investment vehicles.

Shepherd Smith and Edwards represents institutional and individual investors nationwide in claims against members of the securities industry. We have served thousands of victims of misconduct by investment firms and their representatives, including those at Brookstreet and at Wedbush Morgan. To learn whether our firm can assist you, contact us to arrange a free consultation with one of our attorneys.

H&R Block reported a loss of $433.7 million for its fiscal year 2007, compared to a gain of $490.4 million a year ago, and it lost $85.6 million in the fourth quarter vs. a gain of $587.5 in the year earlier period. The losses can mostly be attributed to Option One, its subprime mortgage unit, which the company hopes to soon sell.

The nation's largest tax preparer was started in Kansas City by Henry and Roger “Bloch” brothers when the IRS stopped preparing tax returns free in 1955. The firm has been hugely successful in that business – for a few months out of the year. Yet the firm has been mostly unsuccessful in other ventures seeking to earn revenues the rest of the year.

Its investment subsidiary, H&R Block Financial Advisors, arose from the Block’s purchase of Olde Financial Company in 1998 for $850 million. At the time Olde and its founder were in the midst of many regulatory and other woes, many of which Block inherited.

The parent firm’s latest report states: “Conditions in the non-prime mortgage industry continued to be challenging during the 2007 fourth quarter. Mortgage operations were particularly impacted by deteriorating conditions in the secondary market, where reduced investor demand for loan purchases, higher investor yield requirements and increased estimates for future losses reduced the value of non-prime loans,” the report adds.

Block hopes to receive over $1 billion from sale of this subsidiary, but some analysts are doubtful this can be accomplished and others believe any sale would be at a fraction of Block’s asking price.

Shepherd Smith and Edwards is a securities law firm which represents investors nationwide in claims against investment firms. To learn whether our firm can assist you or your firm, contact us to arrange a free confidential consultation with one of our attorneys.

The U.S. District Court for the District of Columbia dismissed class action claims against Goldman Sachs & Co. stemming from two Real Estate Mortgage Investment Conduit--or REMIC--deals with Fannie Mae.

Judge Richard Leon said that the plaintiffs--Fannie Mae investors–-failed plead a case which involved "direct acts" of securities fraud by Goldman. (In a court system friendly to those accused of securities fraud, claims are not allowed for aiding and abetting Federal Securities violations and class action claims involving securities fraud can no longer be filed under state laws.)

However, this court's decision does not prevent members of the former class action from now seeking their own claim against Goldman in court or arbitration. Clients of Goldman who purchased shares of Fannie Mae during this period would likely have the stronger claims. Such claims could include aiding and abetting, conspiracy and other claims under state laws which were not allowed in the class action. Fortunately, statutes of limitations on individual claims are usually preserved while a class action case is pending in court.

Federal National Mortgage Association (FNMA or "Fannie Mae") is a federally chartered government sponsored enterprise that provides funds for commercial and residential mortgages. Shares of FNMA trade on the stock exchange. The plaintiffs filed the class securities fraud suit on behalf of investors who purchased shares of Fannie Mae between April 17, 2001 and Sept. 27, 2005. In addition to Fannie Mae, the plaintiffs named three former senior executives; KPMG LLP, Fannie Mae's outside auditor during the class period; and Goldman, which designed and implemented two REMIC transactions in December 2001 and March 2002.

The plaintiffs asserted that Fannie Mae repeatedly violated generally accepted accounting principles, issued false financial statements, and made other actionable public disclosures, thereby " 'engag[ing] in one of the largest financial frauds in U.S. corporate history.'" The plaintiffs then contended that Goldman participated in a securities fraud because it proposed the two REMIC transactions; suggested that they could help Fannie Mae manage its income recognition for GAAP purposes, and performed unspecified functions as underwriter/dealer when the REMIC interests were offered to prospective purchasers of those interests.

The plaintiffs alleged that the two "unorthodox" REMIC transactions shifted $107 million of Fannie Mae's earnings into future years. The allegations stated that Goldman was willing to engage in these transactions because Fannie Mae was one of its largest trading clients, from which Goldman received millions of dollars in fees.

Shepherd Smith and Edwards represents investors nationwide who have been victims of investment fraud. If you have questions concerning claims, including those alleged in the above-described matter against Goldman Sachs, call for a free consultation at 1-800-259-9010 or contact Shepherd Smith and Edwards online.

In the wake of the collapse of the subprime residential mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate as well.

Like residential loans, commercial mortgages are pooled and packaged into bonds that are sliced up into portions carrying different degrees of risk. According to Moody’s, there were $769.6 billion in commercial mortgage-backed securities at the end of last year, representing 26.1 percent of all outstanding commercial mortgages, including apartment buildings.

The agencies that rate these securities have issued warnings in the past, but last month they sounded a new note of urgency, saying that for the first time they would adjust their ratings to reflect their concerns.

“Underwriting has gotten so frothy that we have to take a stand,” said Jim Duca, a group managing director at Moody’s Investors Service. “The industry was heading to Niagara Falls.”

Standard & Poor’s said that in the first quarter of this year, the delinquency rate for such bonds reached its highest level since its delinquency index was created in 1999.

Fitch also predicted a 15 percent increase in defaults of loans being currently written and bond analysts agree that a large number of the loans issued recently could result in large problems down the road.

As was the case in the overheated residential mortgage market, many loans for commercial transactions were designed to be borrower-friendly, including interest-only payments for the first 10 years with balloon payments at the end of the term. The agencies point out that, unlike the vast majority of residential loans, commercial lenders are not requiring landlords to set aside adequate reserves to cover taxes, insurance and other costs. Many lenders are prone to accept overly optimistic projections by borrowers, including occupancy and rental rate growth.

While the agencies are just starting to reflect their new credit-tightening standards, their warnings are already having repercussions in the bond market. Investors are demanding higher rates of return, making the bonds costlier for the dealers, said Rob Brennan, the global head of real estate financing for Credit Suisse. “The fact is that the marketplace forces the change immediately,” he said.

Many investors who own these commercial mortgages and mortgage backed securities have experienced default losses. As recent credit rating warnings have caused interest rates to rise on newer loans this has also caused the value of loans and securities held by these investors to fall in value, in some cases precipitously.
Last month, a new $4.2 billion commercial-mortgage-backed security offered by GE Capital had to be restructured after investors complained. Five loans totaling $226.7 million were removed from the offering, and the investment-grade portion of another loan was further trimmed by $50 million. Most of the loans removed from the offering were originated by Deutsche Bank, which also provided $6 billion in debt financing for the purchase nearly all the Manhattan portions of a portfolio. Deutsche Bank declined a request for comment on the restructuring of the GE Capital bond.

Brenan, a securitization industry veteran, said the changes were necessary even though they would result in higher costs to the investment banks. “We’re trading some short-term pain for long-term gain,” he said. “If we do this right, we’ll stop a level of excess from getting out of hand. We want to avoid the kind of train wreck that the subprime market experienced.”

At Shepherd, Smith, and Edwards our attorneys and staff have more than 100 years of collective past experience in securities regulation and the securities industry. We represent institutional and individual clients who have sustained significant losses in their investments. Phone toll free at (800) 259-9010 or contact us online at Shepherd, Smith, and Edwards to schedule a free consultation with one of our attorneys.