Thursday, March 6, 2008

Morgan Keegan CEO to “Retire” Amid Bond Fund Collapses, SEC Investigation

Euphemism: (noun) a mild or less direct word substituted for one that is harsh or blunt when referring to something unpleasant or embarrassing.

Regions Financial Corp. took this word to new heights on Thursday when it announced that, Doug Edwards, the CEO of Morgan Keegan & Co. (Regions’ brokerage and investment banking unit), was “retiring” after more than 30 years with the company. Edwards’ “retirement” comes on the heels of an investigation by the U.S. Securities and Exchange Commission (SEC) into the collapse of several Morgan Keegan bond funds and lawsuits filed by defrauded investors seeking to recover their losses in these funds.

By all accounts, Edwards’ “retirement” appears to have come at the hands of onetime industry darling James C. Kelsoe, the chief fixed-income investment officer at Morgan Keegan’s asset management unit. Until recently, Kelsoe was considered to be something of a golden child in the world of fixed income funds. From 2000 to 2005, Regions MK High Income fund was in the top 1% of all high yield bonds funds every year except 2003, according to Morningstar. As one reporter put it “For years... Kelsoe soared. Then, like Icarus, Kelsoe strayed too close to the sun and came crashing back to earth...”

Unlike that lovably incoherent old man at the Oscars last month.

At the heart of these funds’ failures is Kelsoe’s gamble on the sub-prime mortgage industry. “Sub-prime” is another one of those Wall-Street euphemisms we discussed a moment ago. It translates roughly to “warm sewage”. Stefan Apotheker, a South Florida securities attorney with whom Bertolino LLP works very closely on securities matters, says that “Kelsoe’s funds were very heavily invested in extraordinarily risky sub-prime mortgage backed securities, such as collateralized mortgage obligations (CMO’s). Unfortunately, Morgan Keegan failed to inform their investors of this fact, and instead chose to tout these funds as “conservative” and “safe” investments. Basically, Morgan Keegan told its investors that this was a safe place to put their money. These investors found out the hard way that just wasn’t so.” Apotheker is currently representing more than a dozen Morgan Keegan investors in lawsuits against Morgan Keegan to recover their losses in these funds.

Despite all of this, for the time being it appears that Kelsoe has not yet been asked to “retire”. Although one thing is certain, Morgan Keegan’s reputation in the industry now appears to be “sub-prime”.