Worst In Its Class

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There are two stories about "juicing" in the national news this month. One is about major-league baseball players who allegedly used steroids and human growth hormone to juice their statistics.

The other one got less attention, but, unfortunately, Memphis and Regions Morgan Keegan are at the center of it. It's about a mutual-fund manager named James Kelsoe Jr., who juiced investment returns to Barry-Bonds-like proportions before the funds "crashed and burned," as a columnist for Kiplinger.com put it this week.

A few days earlier, Morgan Keegan's mutual funds were the subject of The Wall Street Journal's "Money & Investing" column headlined "Morgan Keegan Sued Over Mutual-Fund Woes." The funds and Kelsoe were also written up in a Wall Street Journal page-one story on October 17th.

The lawsuit filed in U.S. District Court in Memphis on December 6th by Richard Atkinson and his wife Patricia seeks class-action status and names as defendants Morgan Keegan, Regions Financial Corporation, funds manager Kelsoe, and 13 directors of the funds, including Morgan Keegan co-founder Allen Morgan Jr.

Why are a southeastern regional brokerage firm and a couple of its mutual funds getting so much attention? Because the funds are "worst in class" at a time when the phrases "credit crisis" and "sub-prime lending" have become household words and moved from the financial news to mainstream news. In 2007, the funds lost 50 percent or more of their value, while other funds in their peer group either had positive returns or losses of 8 percent or less.

"Of 439 other intermediate bond funds and 253 other high-income bond funds, none suffered losses of this magnitude," the lawsuit says.

It claims the defendants omitted or misrepresented important facts about the funds and made them appear less risky than they were. Morgan Keegan does not comment on pending litigation, a spokeswoman said.

Silence only whets the appetite of investors and reporters. The danger for Kelsoe and Regions Morgan Keegan is that they will become the symbol — à la Bernie Ebbers and WorldCom and the telecom crash, Mississippi lawyer Dickie Scruggs and class-action lawsuits against tobacco and insurance companies, and former Arkansas governor Mike Huckabee and evangelical Christians — for a regional story that becomes a national story. Fat chance, you scoff; this is just a one-day story. Well, three "one-day stories" in national publications in two months are pretty unusual for a regional financial firm. As The Wall Street Journal wrote last week, "Fund managers and others on Wall Street will be closely watching this case." That's journalese for "test case."

Since its founding in 1969 by Morgan and James Keegan, Morgan Keegan has been a Memphis success story. In 1970, Morgan Keegan purchased a seat on the New York Stock Exchange. In 1978, the company attached itself to Federal Express by making the first trade when it became a public company. And in 1983, Morgan Keegan itself became a public company. Two years later, it moved into its downtown headquarters, which is still the centerpiece of the Memphis skyline. Morgan Keegan was bought out by Birmingham-based Regions Financial in 2001. Allen Morgan has announced that he is retiring at the end of this year.

The sub-prime story has legs, as we say. In other words, it will be around awhile. Class-action lawsuits — and the Atkinson lawsuit has not yet been granted class-action status — can take years to unwind. And that means more publicity as the plaintiffs and their attorneys (the Apperson Crump law firm in Memphis, plus outside counsel) and public-relations firms keep the story alive. Plaintiffs are seeking a jury trial.

The bigger story is homeowners, foreclosures, and a possible recession. Investors and their adventures are a part of that. Thousands of downtown condos and suburban homes in Memphis were financed with sub-prime mortgages with low teaser interest rates that will be reset to higher rates in 2008. Webb Brewer, a lawyer with Memphis Legal Services, said he believes there will be 12,000 to 15,000 foreclosures in Shelby County in 2008, with half of them related to sub-prime loans.

Regions Morgan Keegan isn't the only one hurting. First Horizon, the last big independent bank with headquarters in Memphis, is down more than 50 percent in the stock market in 2007, and its dividend, now 7 percent, may be in jeopardy.

Why didn't we all just invest in Hannah Montana concert-ticket futures instead?

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