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Award Date: July 13, 2022
Hearing Site: Birmingham, Alabama
Respondent Firm: Morgan Keegan & Company, LLC and Raymond James & Associates, Inc.
Claimant Representative: Harris Freedman, J.D.
Two advisors — a husband and wife — each had two customer dispute disclosures on their records, all of which related to the same investment. They came to AdvisorLaw to seek expungement together through FINRA Dispute Resolution.
In and prior to 2007, Regions Morgan Keegan (RMK) bond funds were recommended and promoted by Morgan Keegan. The bond funds had a strong performance history and were highly rated by Morningstar. However, in 2007, as a result of the subprime mortgage market collapse, the RMK bond funds declined dramatically.
TV and print ads placed by lawyers encouraging investors in RMK bond funds to sue RMK became ubiquitous, and numerous lawsuits were filed, alleging misrepresentation of the bond funds’ risks. In April of 2010, the SEC charged Morgan Keegan and two fund directors with fraudulently overstating the value of securities backed by subprime mortgages. Our two advisors, however, were not among the employees charged in that proceeding. In June of 2011, FINRA, the SEC, and five state regulators settled enforcement proceedings against Morgan Keegan, ordering the firm to pay $200 million to investors in seven affiliated bond funds, including the RMK bond funds. FINRA found that Morgan Keegan had marketed and sold the bond funds with sales materials that contained exaggerated claims, failed to provide a sound basis for evaluating the facts regarding the bond funds, and did not adequately disclose the impact of market conditions in 2007 that caused the substantial losses to their value. Additionally, FINRA’s settlement with the firm included findings that it had failed to establish, maintain, or enforce an adequate supervisory system with respect to the bond funds’ sale.
Each of our advisors ended up with customer disputes from two investors who had invested in RMK bond funds — for a total of four claims. All four investors filed for FINRA arbitration, with allegations ranging from failure to supervise to unsuitability, to misrepresentation. The cases were settled for amounts as little as $7,500 and as massive as $325,000.
The firm participated in the expungement hearing and did not oppose the expungement of the disclosures. None of the customers who had made the claims opted to participate. The Arbitrator reviewed the documents submitted, including some of the marketing materials for the RMK bond funds and articles about them that had been published in Money Magazine and The Wall Street Journal. He listened to the advisors’ testimony and arguments presented by Harris Freedman, J.D.
In his award, the Arbitrator pointed out that the industry had considered RMK bond funds “as investment grade” and that they had offered “conservative and steady income.” The Arbitrator noted that the advisors “stated that they had explained all risks and benefits to the Customers and that each Customer was given a prospectus and other market information” which explained the risk that, ”as interest rates went up, the value of the bond went down.” The advisors had conducted due diligence and ensured that the investors were suitable for the RMK bond funds, and none of the investors had complained about any other investments that the advisors had recommended. Our advisors “had no prior knowledge” of the fund directors overstating the bond funds’ value. They “were not named in any of [the] actions, did not take part in the negotiation and settlement of the claims, and did not pay any part of the settlement funds.” The advisors had actively supervised when it was their role to do so, and they had played no part in the misrepresentations made by the firm and fund directors.
The Arbitrator found that all four of the claims met FINRA’s standard for expungement. Thanks to Harris Freedman, J.D. these advisors will soon be able to move forward, free of four claims of wrongdoing with which they had no involvement.
If you’d like to learn more about AdvisorLaw’s FINRA Disclosure Expungement services, please fill out the contact form below. Our consultations are complimentary, and our services were created exclusively for financial advisors.
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