CHICAGO — Jury selection began Tuesday in a federal class action lawsuit accusing the former Morgan Keegan & Co. Inc. of securities fraud for its role in underwriting $39 million of defaulted bonds for a failed artificial sweetener plant in Moberly, Mo.
The Jefferson City trial, in which law firm Armstrong Teasdale LLP and the plant project's head, Bruce Cole, are also named as defendants, opened with jury selection Tuesday before U.S. District Court Judge Nanette K. Laughrey, who presides in the Western District of Missouri, Central Division. The complaint was first filed in October 2012.
Laughrey 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 lead plantiffs are bondholder John W. Cromeans Jr., banking entity Elkton Bank and Trust Co., and Robert Benisch. 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.
Morgan Keegan is also charged with negligence, a charge not leveled at Armstrong Teasdale.
The complaint accuses 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 accuses 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.
The firms have 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.
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 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 or actions filed by investors or authorities.
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 about 33 of the 133 bondholders, according to federal court documents. About 30 buyers were from Missouri.
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.
Some holders involved in other complaints have opted 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.
The class status is limited 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.
Laughrey previously upheld a bankruptcy court-imposed judgment against Cole, finding he fraudulently obtained bond funds from the bond sale.
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.