CHICAGO — Bondholders will learn later this month how much they stand to recoup from a settlement that ended a trial accusing Morgan Keegan & Co. Inc. of misleading them on a bond deal that soured after the failure of an artificial sweetener plant project in Moberly, Mo.
A jury was selected Tuesday in the federal class action accusing the firm of securities fraud for its role in underwriting $39 million of defaulted bonds for the failed sucralose factory.
With the jury seated, the trial was set to move into full gear Wednesday when the settlement was announced by U.S. District Court Judge Nanette K. Laughrey at the federal courthouse in Jefferson City.
"We are very pleased with the global settlement that settles all claims with all parties," said Andrew Campbell, an attorney at Campbell, Guin, Williams, Guy & Gidiere LLC, which represents the plaintiffs who filed the lawsuit in October 2012. "We are not liberty yet to discuss the details."
Law firm Armstrong Teasdale LLP, which served as legal counsel on the deal, and the plant project's head, Bruce Cole, were also named as defendants.
The judge is expected to issue an order preliminarily approving the settlement later this month at which time the details will be distributed to investors who participated in the class. Members will then have the chance to vote whether to accept the deal. Campbell said class members numbered in the dozens but was under 100.
The parties entered into court-ordered mediation about two weeks ago but were unable to strike a settlement, Campbell said. Negotiations continued on and off and heated up late Tuesday after the jury was chosen.
"All parties negotiated in good faith but it took until the start of the trial to get to a final" accord, he said.
Bondholder John W. Cromeans Jr., banking entity Elkton Bank and Trust Co., and Robert Benisch were the lead plaintiffs. They say the former Morgan Keegan, now part of Raymond James Financial, and Armstrong Teasdale misrepresented and omitted key information about the bond issue and the company, Mamtek US Inc., that was behind the project, in violation of state securities laws. Raymond James declined comment on the settlement Thursday.
Morgan Keegan was also charged with negligence, a charge not leveled at Armstrong Teasdale.
The complaint accused Morgan Keegan of failing to review the information in the bond offering statement and alleges the firm had no basis for believing that the information was accurate or complete.
It also accused Morgan Keegan of making false statements by email and in conversations with potential buyers and argued that if the firm and Armstrong Teasdale had conducted proper due diligence they would have discovered misrepresentations made by Mamtek US about its Chinese operations.
The firms countered that they performed their respective duties as required, that investors were sold on the bonds based on a Standard & Poor's investment grade rating, and that Mamtek US's Cole and Pelligrino & Associates, which provided a property valuation, are to blame for supplying information now contested as false.
Laughrey had agreed with the bondholder arguments that class certification on some of the six counts offered the "most efficient way to resolve the questions of law and fact common to all bond purchasers" and she granted class status in September.
The Moberly Industrial Development Authority sold the bonds, backed by a city appropriation pledge, in 2010. Mamtek, which billed itself as a subsidiary of a Chinese firm that makes sucralose, defaulted in August 2011 on a payment to Moberly needed for debt service.
The city then informed trustee UMB Bank that it wouldn't honor its pledge to repay the debt. Mamtek US then abandoned the half-built factory. Creditors forced the company into bankruptcy and the plant's assets have since been sold off to benefit creditors.
The federal class action is just one in a series of lawsuits, enforcement actions, or arbitration proceedings filed by investors or authorities in the wake of the default.
Cole, the former chief executive officer of Mamtek US, recently pleaded guilty to two criminal counts of securities fraud and one criminal count of theft under a plea deal with Missouri Attorney General Chris Koster for misusing some bond proceeds for personal gain and was sentenced to seven years in prison.
Bankruptcy trustee Bruce Strauss has filed litigation against Cole and other key figures in the company. Cole is also the subject of Securities and Exchange Commission civil fraud charges accusing him of scheming to defraud potential investors.
Morgan Keegan and other firms in the deal are the subject of at least four lawsuits filed in state court by some of the 133 bondholders. One led by Shelter Insurance Cos. is set for trial as soon as July.
The Missouri Secretary of State in 2012 filed a civil enforcement action against Morgan Keegan accusing the firm of securities fraud. It accuses the firm of defrauding clients by misrepresenting material facts about the offering.