Since December, class action lawsuits and arbitration filings have increased against Regions Morgan Keegan mutual funds. Of the seven Regions Morgan Keegan funds, six have lost more than 75% of their value in the past year. Morningstar analyst Lawrence Jones faulted James Kelsoe, the funds’ manager, for this shocking decline. According to Mr. Jones, who is a respected analyst, the funds’ manager took on too much risk and failed to adequately communicate with investors as the asset priced declined.
Kelsoe established the Select High Income Fund in 1999. Over time he developed what has been labeled an “intoxication” for securities backed by subprime mortgages. A regulatory filing indicated that bonds backed by suprime mortgages reached as high as 25% in 2005. The fund was toppled by the subprime crisis that began in 2007. Chief among the risky investments by Kelsoe were mortgage-backed bonds, collateralized debt obligations and aircraft-leasing obligations. His Select High Income Fund fell a staggering 60% in 2007 and another 30% this year; ranking it last among all high-yield funds two years in a row. This obviously caused huge problems for investors in the fund.
Because of the dismal failure of the funds, an agreement was reached between the Regions Morgan Keegan funds’ directors and Hyperion Brookfield Asset Management for the directors to step down and hand the management over to Hyperion. Shareholders will vote on the management change at a meeting on July 11th and it’s expected to pass. The handoff highlights the extreme nature of the situation, as it is very unusual for an asset management firm to give up assets this way.
Roman Shaul and Scarlette Tuley from our firm continue to talk to devastated shareholders on a daily basis. The full extent of this disaster is not in the aggregate. Instead, it is the toll it has taken on an individual basis to investors. These funds were marketed, particularly to retirees, as being as safe as CD’s, but with the extra advantage of an income stream. Many retirees transferred the bulk of their life savings into these funds on the assurance that there was no more risk than a CD. Now these people face an uncertain retirement future with their principal cut by an average of 67%. With the future of the fund uncertain, shareholders should seek to recover their losses through arbitration rather than hoping on a market upswing to restore their life savings. We have heard some real horror stories from victims. If you need additional information concerning these claims, feel free to contact Roman or Scarlette at 800-898-2034.
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