CHICAGO - The Missouri Supreme Court has upheld a lower court decision dismissing the city of Moberly and its industrial development authority as defendants in a bondholder lawsuit targeting the underwriter of $39 million of city bonds issued for a failed artificial sweetener plant.

The lawsuit filed in state courts and led by a large bondholder, Columbia, Mo.-based Shelter Life Insurance Co., accuses bond underwriter Morgan Keegan & Co. Inc. of securities fraud.

The bondholders did not initially pursue the city but Morgan Keegan moved to bring the city into the lawsuit as a third party defendant. The judge dismissed the city from the case, but the firm filed what's known as a writ of prohibition with the Missouri Supreme Court challenging the lower court's decision.

Moberly decided the best course of action was to settle with bondholders given the lengthy challenge that could have ensued as Morgan Keegan sought to bring the city back into the litigation. The city settled with the bondholders late last year for $95,000.

Morgan Keegan was still seeking to keep the city and its industrial development authority in the case but the Missouri Supreme Court in an order issued on Dec. 24 sided with the city ruling "City of Moberly and Industrial Development Authority of the City of Moberly's motion to dismiss due to settlement sustained," the court said. No further reasons were provided by the court.

The Missouri Secretary of State late last year also filed a civil enforcement action against Morgan Keegan accusing the firm of securities fraud. The Moberly Industrial Development Authority sold bonds backed by a city appropriation pledge to help finance the sucralose plant in 2010. The developers - Mamtek US Inc. -- in August 2011 defaulted on a payment to Moberly needed for debt service and the city refused to make good on the appropriation pledge. The company then abandoned the half-built plant.

Morgan Keegan has denied any wrongdoing or responsibility for investor losses, citing the city's backing on the bonds and is fighting several investor lawsuits and regulatory actions. The Secretary of State complaint accuses the defendants of defrauding their clients by misrepresenting the facts about the offerings, including falsely stating that Moberly had promised to pay for the bonds; and omitting material facts, including that the defendants had not thoroughly investigated Mamtek.

The bonds had carried an A rating from Standard & Poor's based upon the city's pledge. Moberly lost its investment-grade rating from Standard & Poor's after it declined to make good on its pledge. The sucralose plant bonds are rated D. The trustee auctioned off the assets for about $2 million last year.

The trustee and other creditors forced the company into involuntary bankruptcy. State lawmakers held hearings on the project in 2012 as it had been in line to receive $17.6 million in state subsidies.

A separate bondholder lawsuit is also pending in federal court and Morgan Keegan has also sought to include Moberly as a third party. Moberly has argued sovereign immunity against being included in that complaint.

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