Nashville At Law: Investors sue over mutual fund meltdown

Monday, August 4, 2008 at 2:41am

A prominent local restaurant entrepreneur and a well-known Nashville construction company are among those suing brokerage house Morgan Keegan & Co. over huge investment losses they have reportedly suffered.

The lawsuit, filed July 24 in Davidson County Circuit Court, cites nearly $30 million in high-income bond funds that have headed south during the past year’s market turmoil.

The plaintiffs, including 18 families from Middle Tennessee, Alabama, Florida, North Carolina, Virginia and Texas, accuse Morgan Keegan of selling them mutual funds whose investment strategies were “far more risky than was disclosed.”

The funds are all down more than 80 percent from their July 2007 prices.

Joe Ledbetter, who co-founded Houston’s restaurant in 1977 and later originated the Bricktops chain, invested some $4.3 million in Morgan Keegan's bond funds. Robert G. Anderson and his Nashville construction firm, R. G. Anderson Company Inc., invested $300,000.

Other Nashville-area investors listed in the complaint include Donna Freeman Kelley of Belle Meade ($1.3 million invested), Ronda L. Hardwick of Brentwood ($500,000) and Miriam E. Woods of Franklin ($500,000), and Ernest and Patricia A. Fitzgerald of Gallatin ($265,000).

Suffering the largest losses among the plaintiffs has been the family of the late State Sen. Carl Koella Jr. (R-Maryville). Family members and their company, Rockford Manufacturing Co., as well as the company’s 401(k) savings plan, have invested more than $10 million between them in the troubled Morgan Keegan funds.

The “enormous losses” incurred by the funds “were not caused primarily by an economic downturn, the subprime crisis or other general market forces,” asserts the lawsuit, filed by Nashville attorney H. Naill Falls Jr. The complaint argues that Morgan Keegan’s funds have fallen much more dramatically than most other high-income bond funds.

“The astonishing meltdown of the funds was caused by their extreme over-concentration in securities that were very high-risk and illiquid, by the funds' failure to value their assets at reasonable fair value prior to the third quarter of 2007, and by the failure of the funds to disclose properly all material risks and the true facts,” the lawsuit asserts.

Although the funds were marketed as value-oriented investments, they turned out to include considerable amounts of subprime mortgage debt, as well as “new and complex structured investments that had never been tested in a down market cycle,” according to the complaint.

It claims that “misrepresentations and omissions” in Morgan Keegan’s filings with the Securities and Exchange Commission helped fund managers conceal those issues.

Several lawsuits seeking class-action status have been filed previously against Morgan Keegan and the funds' directors. The company has had no comment on the cases, and an official at Regions Financial Corp., which owns the brokerage, said the company does not comment on pending litigation.

Last month, Morgan Keegan handed off management of the troubled funds to an outside firm. A Morningside analyst welcomed the change, but wrote that “it's an open question as to whether the funds are ultimately salvageable.”

Other cases of note (July 21-25)

United States District Court:

Travis Tritt v. Category 5 Records LLC et al. Case dismissed July 23. In a dispute between country star Tritt and manager Raymond Termini, Judge William J. Haynes Jr. ruled that the contract between them required any litigation to be fought out in New York courts. He granted summary judgment in favor of Termini.

Plaintiff's attorneys: Robert E. Boston and Heather J. Hubbard of Waller Lansden Dortch & Davis LLP. Defendant's attorneys: Aubrey B. Harwell Jr. and Philip D. Irwin of Neal & Harwell PLC.

United States Bankruptcy Court:

Commissary Operations Inc. Chapter 11 reorganization petition filed July 22. Food service company Commissary Operations, spun out from Shoney's Inc. in 2001, cites both assets and liabilities between $50 million and $100 million.

The company lost a client worth almost a fifth of its revenues last year and saw a restaurant client go bankrupt this year owing it “several million dollars.” It blames rising fuel costs as well. Attorneys Glenn B. Rose, Craig V. Gabbert Jr., Barbara D. Holmes and David P. Cañas of Harwell Howard Hyne Gabbert & Manner P.C. represent COI, which paid the firm a retainer of $100,000 to take on the work.

Davidson County Chancery Court:

Psychiatric Solutions Inc. v. Ameris of Arkansas LLC. Filed July 25. Behavioral hospital operator Psychiatric Solutions, based in Franklin, was under contract to manage the psych ward of an Arkansas hospital owned by Nashville-based Ameris Health Systems. The lawsuit claims Ameris is $159,000 behind on its payments. Plaintiff's attorneys: W. Travis Parham and S. Keenan Carter of Waller Lansden.

Davidson County Circuit Court:

Civil Constructors Inc. v. Brice Building Co. Inc and Shreve Land Construction. Shreve, a unit of Brice, subcontracted work to Nashville-based Civil on the Hickory Point at Brentwood apartment complex. Civil claims it is owed $708,000. Plaintiff's attorney: Ronald G. Harris of Neal & Harwell.

Jane Doe M.D. v. Tennessee Department of Health. Filed July 25. An anonymous Nashville physician says the Division of Health Related Boards is pursuing her unfairly on charges of over-prescribing, after dogging her with two other investigations in the past year. She seeks a court declaration that the authorities are making "unreasonable and unlawful" demands in the course of their probe. Plaintiff's attorney: Rachel C. Nelley of Nelley & Co. PLLC.

Filed under: City Business