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The Daily News, which covers Memphis, reported yesterday that class action cases against Regions Morgan Keegan (RMK) pending in U.S. District Court for the Western District of Tennessee may be consolidated under U.S. District Judge Hardy Mays. The paper reports Judge Mays issued a ruling Tuesday that answers some questions about the request, and which group or groups could be selected as lead plaintiff in that event.
After seven Regions Morgan Keegan investment funds took a nose dive because of their ties to the subprime mortgage lending crisis, stockholders found themselves holding greatly devalued portfolios. Because the funds had been initially represented as low-risk, when in actuality they were tied to the volatile subprime lending market, stockholders are bringing suit against Regions Morgan Keegan for their losses. Now, the investment portfolios have a new manager, Hyperion Brookfield Asset Manager.
A combination of defaulted loans in the plunging housing market and unique woes with its Morgan Keegan & Co. investment arm caused shares of Regions Financial Corp. stock to plunge 73 percent in the past year, according to a report in The Birmingham News. The company is headquartered in Birmingham.
It was discovered their investments were tied to these funds, termed mortgage-backed securities (MBS) or collateralized debt obligations (CDO).
What does this mean, and how does it affect investments?
The fundamental problem, according to BBC News reporter Steve Schifferes is the new model of mortgage lending, in which banks don’t give home loans directly to customers, but borrow money from credit markets and distribute risk for these loans across a broad spectrum of third-party investors.
Through securitization, rights to mortgage payments - classified as assets - were offered as collateral for third-party investment. These were categorized as MBS or CDO. Due to securitization, investor appetite for mortgage-backed securities, and the tendency of rating agencies to assign investment-grade ratings to them, loans with a high risk of default could be originated, packaged and the risk readily transferred to others. The securitized share of subprime mortgages (i.e., those passed to third-party investors) increased from 54 percent in 2001, to 75 percent in 2006[1].
The valuation of these assets is subject to the collectibility of subprime mortgage payments and the existence of a viable market into which these assets can be sold. As a result, when borrowers became increasingly unable to meet the mortgage payments, and began defaulting on these subprime loans, the delinquency rates reduced demand for MBS or CDO assets, and banks and institutional investors began to see substantial losses as a result of the devaluation of these types of assets[2].
The problem for Regions Morgan Keegan investors was that MBS or CDO funds are actually high-risk investments. However, fund managers for RMK presented the portfolios that included these types of investments to its clients as extremely low risk.
According to the BBC’s Schifferes, subprime mortgage bonds issued in early 2007 have dropped between 20 percent and 80 percent, depending on their bond rating. It is estimated that they have lost at least half their value, or $625 billion.
Schifferes says this goes back again to the fundamental problem, that the new subprime system of lending broke the link between the lender and the borrower. As a result, he says, the institutions who owned the loans, and the people who bought the bonds, had too little information about how dangerous they were.
The Birmingham News reported this week that Regions Financial Corp. may cut its dividend to shareholders as a result of defaulting real estate loans and a series of lawsuits in relation to Morgan Keegan investment fraud. Morgan Keegan is a subsidiary of Regions, as a brokerage unit. The dividend reduction was predicted by Standard & Poor’s Corp.
Currently, the News reports, Regions’ 38-cent quarterly dividend yields around 11 percent. The paper said banks are reducing dividends across the industry, largely due to the crisis in the housing market, as losses from home loans continue to climb.
An arbitration claim against Morgan Keegan was filed May 22 with the office of the Financial Industry Regulatory Authority (FINRA) and their Office of Dispute Resolution on behalf of an investor who lost an astounding $4 million. The plaintiff alleges damages relating to the sale of unsuitable bond funds.
In February, the Indianapolis Business Journal reported one of its locally based companies, CountryMark Cooperative, was joining the lawsuit against Morgan Keegan, which it says fraudulently invested funds in high-risk mortgaged-based securities. CountryMark alleges misrepresentation of funds, saying Morgan Keegan presented its investment portfolio as low-risk.
Another class-action lawsuit related to issues regarding the disclosure of subprime debt obligations surfaced in early February when the law firm of Chitwood, Harley, Harnes LLP filed against certain mutual funds offered by Morgan Keegan Select Fund Inc.
On December 19, 2000, Regions Financial Corporation agreed to purchase Memphis, Tennessee based securities brokerage firm Morgan Keegan for $789 million. Morgan Keegan took over investment banking Responsibilities from Regions Investment Company, Inc. (RICI) and eventually also was given control of Regions Trust Company. The Combined Subsidiary is now known as Regions Morgan Keegan Trust, Inc.
Regions Financial Corporation NYSE: RF is a publicly held company based in Birmingham, Alabama, with the corporate headquarters at the Regions Center. A member of the S&P 100 Index, the company provides retail and commercial banking, trust, securities brokerage, mortgage and insurance products and services.
Regions has more than $144 billion in assets as of 2008, making it one of the top 10 banks in the United States. Its banking subsidiary, Regions Bank, operates some 2,000 branches and 2,400 ATMs across a 16-state network in the South, Midwest and Texas. Its securities brokerage and asset management subsidiary, Morgan Keegan & Company, Inc., provides services in over 450 offices across 19 states.
Investors have filed class action lawsuits as well as individual arbitrations against Regions Morgan Keegan. The suits allege that the Funds and defendants misrepresented or failed to disclose certain material facts related to investments in the Select Intermediate Bond Fund (”MKIBX”) and the Select High Income Fund (”RHIIX”).
Investors who purchased or acquired shares of Regions Morgan Keegan Select Intermediate Bond Fund or Select High Income Fund from December 6, 2004 through October 3, 2007, may have a claim to recover for their losses.
The relevant Morgan Keegan Funds are as follows:
(RMH) RMK High Income Fund
(RHY) RMK Multi-Sector High Income Fund
(RMA) RMK Advantage Income Fund
(RSF) RMK Strategic Income Fund
(RHICX) Regions MK Select High Income-C
(MKHIX) Regions MK Select High Income-A
(RHIIX) Regions MK Select High Income-I
(RIBCX) Regions MK Select Intermediate Bond Fund-C
(MKIBX) Regions MK Select Intermediate Bond Fund-A
(RIBIX) Regions MK Select Intermediate Bond Fund-I
The allegations are that the Funds misrepresented or failed to disclose material facts relating to (i) the nature of the risk being assumed by an investment in the Funds, (ii) the illiquidity of certain securities in which the Funds invested, (iii) the extent to which the Funds’ portfolios contained securities that were highly vulnerable to suddenly becoming unsalable at the prices at which they were being carried on the Funds’ records, (iv) the extent to which the Funds’ portfolios were subject to fair value procedures, (v) the extent to which the values of such securities, and, consequently, the net asset values of the Funds, were based on estimates of value and the uncertainty inherent in such estimated values, and (vi) the concentration of investments in a single industry in excess of investment restrictions to which the Funds were subject.
The extraordinary losses in share value were allegedly caused by the Funds’ heavy investment in relatively new and untested types of manufactured or structured fixed income securities and by the failure of the Funds to comply with required and disclosed procedures relating to the manner in which the Funds’ assets were invested.
These failures rendered the Funds extraordinarily vulnerable to changes in market conditions, far more vulnerable than other intermediate bond and high income funds affected by the same events and conditions in the subprime and other markets in 2007.
The Funds revealed, for the first time, on October 3, 2007 that, as of June 30, 2006, and June 30, 2007, the magnitude of the Funds’ securities that were fair valued and were, therefore, illiquid securities. For MKIBX, it was disclosed that 55.8 percent of its investment securities were fair valued at June 30, 2006, and 50.4 percent at June 30, 2007. For RHIIX, it was disclosed that 49.5 percent of its investment securities were fair valued at June 30, 2006, and 59.7 percent at June 30, 2007.
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