CHICAGO — A federal judge granted class action status to an investor lawsuit accusing the former Morgan Keegan of securities fraud for its role in underwriting $39 million of defaulted bonds for a failed artificial sweetener plant in Moberly, Missouri.
U.S. District Court Judge Nanette K. Laughrey, who presides in the Western District of Missouri, Central Division, 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."
Bondholder John W. Cromeans Jr. and two others say the former Morgan Keegan, now part of Raymond James Financial, misrepresented and omitted key information about the bond issue and the company, Mamtek US Inc., that was supposed to build the plant.
The Moberly Industrial Development Authority sold the bonds, backed by a city appropriation pledge, to help finance the artificial sweetener plant 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 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.
Bruce 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.
Cole faces a sentence of between five and seven years at a hearing scheduled for Nov. 3 in St. Charles Circuit Court.
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's civil fraud charges accusing him of scheming to defraud potential investors.
In addition to the federal lawsuit filed in 2012, Morgan Keegan and other firms in the deal are the subject of at least four lawsuits filed in state court by about 33 of the 133 bondholders, according to federal court documents. About 30 buyers were from Missouri.
The Missouri Secretary of State last year 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.
Holders pursuing their own action can opt out of the class in the federal litigation. The class certification will most benefit smaller, retail holders without the means to pursue litigation on their own, according to one lawyer following the cases.
In the federal lawsuit, Cromeans and his fellow plaintiffs accuse Morgan Keegan of failing to review the information in the bond offering statement and allege the firm had no basis for believing that the information was accurate or complete.
They also accuse Morgan Keegan of making false statements by email and in conversations with potential buyers and argue if the firm and legal counsel Armstrong Teasdale had conducted proper due diligence they would have discovered misrepresentations made by Mamtek about its Chinese operations.
"Under the circumstances, and given the predominance of common questions, the alternatives to class litigation are more burdensome for individuals than participating in the class litigation," the judge's ruling said.
Morgan Keegan had argued against class action status, saying the three defendants are "not typical" of the broader class. The three include an individual investor, a bank, and a representative of an estate. The judge rejected that argument.
The judge did limit the class status to the counts of negligent underwriting against Morgan Keegan, which Armstrong Teasdale is not subject to, and a count against both firms alleging violation of the state's Blue Sky Law. Other counts such as accusations of unjust enrichment and misrepresentation were excluded from class representation as they fail some factors in the class test given the divergent reasons behind bondholder purchases.
"The class action device is the superior method for adjudicating the claims of the proposed class members," the judge wrote.
Laughrey recently upheld a bankruptcy court-imposed judgment against Cole, finding he fraudulently obtained bond funds from the sale and ordered Cole to return $904,000 transferred to his personal accounts and another $360,000 used to pay off personal creditors.
The bonds were sold with Standard & Poor's A rating based upon the city's pledge. Moberly lost its investment-grade rating after it declined to make good on its pledge. The sucralose plant bonds are rated D.
Raymond James, on behalf of Morgan Keegan, declined to comment on the class action development.