Morgan Keegan

As an investor, it is important to know that you are not to blame for the decline in the value of your Morgan Keegan Bond Funds. While there is some risk to investing in the market in general, there is no room for misrepresentation, omission or fraud. Moreover, when an investor is led to believe that they are making a safe investment in a bond fund, and subsequently loses 55 to 60 percent of their investment, someone needs to be held accountable.

Throughout the year 2007, numerous individuals, businesses and institutions lost a significant amount of money in Morgan Keegan Bond Funds which were managed by Fund Manager James C. Kelsoe. Moreover, many Morgan Keegan financial advisors were misled by the firm into believing that the Bond Funds were “safe” investments. They too feel betrayed by the misrepresentation and omission of Morgan Keegan.

The primary cause of the losses in the Morgan Keegan Bond Funds was not the market. The tremendous losses in the share value of the Funds were caused, in part, by the Funds’ heavy investment in structured or manufactured fixed income securities that had not been tested through market cycles. Specifically, the Funds improperly invested in various “collateralized debt obligations” (“CDOs”) like collateralized bond obligations (“CBOs”), collateralized loan obligations (“CLOs”), and collateralized mortgage obligations (“CMOs”), or “structured financial instruments.” These securities are usually thinly traded, and market quotations for these securities are not readily available. As a result, the value of these securities can only be estimated, which can lead to inflated and overstated valuations. Unfortunately, an overvaluation and inflation of the value of the securities in the Funds contributed to the losses in the Funds.

In addition to the fact that the Funds invested in risky and speculative securities, the Funds’ Manager misallocated the assets in the Funds. Indeed, on July 19, 2007, Bloomberg News quoted James Kelsoe as having an “intoxication” with structured financial instruments. Bloomberg further reported that an analyst at Morningstar, Inc., the mutual fund research firm, noted that “[a] lot of mutual funds didn’t own much of this stuff” and that the High Income Fund was “the one real big exception.”

The failure of the Funds to comply with the procedures relating to the way in which the Funds’ assets were invested directly led to the demise of the Funds. As the subprime and credit related markets collapsed in 2007, the value of the Funds’ securities, which were tied to these sectors, followed. Many of the Funds were restricted to investing only 25% in a single sector. However, in some instances, Morgan Keegan invested over 50% of the Funds’ assets in mortgage related securities. In doing so, not only did Morgan Keegan imprudently invest the Funds’ assets, but, contrary to the representations made in the Funds’ Registration Statements and Prospectuses, the firm subjected the Funds to an extraordinary amount of risk. Moreover, none of the Funds had in place risk management strategies to protect the Funds in the event of a sharp decline. The feared, sharp decline in the value of the securities in the Bond Funds did ultimately take place, and there was no safety net to protect the Funds’ investors.

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