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Securities Arbitration Orders Morgan Keegan to Repurchase $1.95m

Friday, February, 24, 2012


A securities arbitration panel ordered Morgan Keenan & Co. to repurchase $1.95 million worth of auction rate securities from William Featheringill, an investor from Birmingham, Alabama. The panel denied Featheringill's claim of $5.9 million in punitive damages. Strangely, the FINRA panel did not offer an explanation for their decision.

 

Events Leading to the Commercial Arbitration

 

In 2005, AmSouth Investment Services, Inc. sold Mr. Featheringill sewer bonds in Jefferson County, Alabama. According to the claims, AmSouth told him that these were a safe, liquid investment comparable to money-market funds, but slightly more profitable. Morgan Keenan absorbed AmSouth in 2007.

 

The auction-rate market went bust in 2008, leaving thousands of investors with about $330 billion in non-liquid securities. In 2011, Jefferson County filed the largest municipal bankruptcy in US history chiefly from the $3.14 billion worth of sewer bonds.

 

Featheringill's Claims in the Financial Arbitration

 

Mr. Featheringill's initial investment was a total of $3.5 million. At first, the sewer bonds delivered as AmSouth promised, and he cashed out $1.5 million. When the investment became illiquid, he still had $1.95 million in these securities. The crux of his claims is that Morgan Keenan knew of the auction rate securities freeze before it happened, and did not warn its customers.

 

This foreknowledge was evidenced by the transfer of investors from AmSouth to its own brokerage system in 2007. In an event where a brokerage firm knows that a market has become high risk, they have the responsibility to effectively communicate this to its investors.

 

While the reason for the FINRA securities arbitration panel's decision is unclear, their decision to compel Morgan Keenan to repurchase the securities at full balance, but not award punitive damages indicates the reasoning is in a gray area. For one thing, they were held responsible for Featheringill's loss, but their oversight was apparently not deemed significant or deceptive enough to justify punitive damages. It is also notable that Morgan Keenan is being purchased by Raymond James Financial, Inc., who would ultimately take the brunt of the damages in this case.