Monday, August 11, 2008

Morgan Keegan Sold Toxic Debt To Seniors

The subprime securities that created carnage on Wall Street are bringing new pain to Main Street. Regulators in five states are investigating whether Memphis brokerage Morgan Keegan failed to disclose the risks of seven mutual funds stuffed with toxic debt and whether it inappropriately sold them to seniors and other small investors. Six lawsuits and dozens of arbitration cases claim it did.

Three years ago Katherine and Lester Poer needed a safe place to tuck away $250,000, part of a windfall from a land sale. With no investing experience, the retired couple from Gulf Shores, Ala., sought advice from Morgan Keegan, which manages $80 billion in assets. Lester Poer, 81, says he told the adviser "not to take any chances." The recommendation: an in-house fund, RMK Select Intermediate Bond.

But that portfolio was loaded with risky securities, including some backed by subprime mortgages. Collateralized debt obligations, the same investments that have wiped out billions on Wall Street, made up a quarter of the holdings. RMK Intermediate has lost 86% in the past year, making it the worst-performing fund in its category, according to research firm Morningstar (MORN). When the Poers sold the fund earlier this year, the account had $37,000 left.

The investigations, lawsuits, and arbitration cases focus on bond funds formerly run by Keegan's James C. Kelsoe, once a star manager. Unlike many peers, Kelsoe sidestepped the problems in the bond market when WorldCom imploded in 2002. His RMK Select High Income ranked in the top 1% of its category every year but one between 2000 and 2005, according to Morningstar.
Morgan Keegan promoted Kelsoe's funds as a stable source of income. Sales materials for the High Income fund noted its "relative conservative credit posture" without "excessive credit risk."

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