CHICAGO — Morgan Keegan & Co. Inc. denies any wrongdoing and attacks as overtly biased Missouri Secretary of State Jason Kander’s petition alleging securities fraud in its role as underwriter of Moberly, Mo.’s $39 million of defaulted bonds.
Morgan Keegan seeks the dismissal of administrative procedures launched by the Secretary of State’s office in pursuit of $6.5 million in restitution for Missouri holders of the bonds issued to finance a failed artificial sweetener plant. If denied, it seeks a hearing on the charges.
Morgan Keegan’s filing marks the first formal response by Morgan Keegan — now doing business under the Raymond James name — in the case announced early last month. Kander’s securities division issued a cease-and-desist for alleged securities fraud and demanded restitution for 33 in-state investors. Lawyers working on behalf of Morgan Keegan responded within the 30-day deadline seeking dismissal or in the alterative requesting a hearing on the charges.
The order was issued against Morgan Keegan, which merged with Raymond James Financial in April 2012, along with current and former Morgan Keegan/Raymond James employees William Kevin Thompson, Richard Temple Murray; and Kevin Lee Edwards.
The secretary of state’s order lays out a stinging assessment of Morgan Keegan’s performance as underwriter of the bonds issued in 2010 for the sucralose plant being developed by Mamtek US Inc. — a subsidiary of a Chinese firm.
The Moberly Industrial Development Authority sold bonds backed by a city appropriation pledge to help finance the plant in 2010. The company in August 2011 defaulted on a payment to Moberly needed for debt service and the city informed trustee UMB Bank that it wouldn’t honor its pledge to repay the debt.
Mamtek then abandoned the factory. UMB sold off the plant’s assets last year raising about $2 million. The city lost its investment-grade rating from Standard & Poor’s. The trustee has not tapped remaining reserves for recent debt service payments due to rising legal costs.
Kander’s April petition alleges that Morgan Keegan failed to adequately investigate the feasibility of Mamtek’s business plan, failed to adequately disclose investor risks, and made fraudulent statements to investors. In addition to allegedly violating securities laws, the company violated its own internal due diligence policies in failing to provide adequate financial information in the offering statement about the company material to assessing the investment.
“Companies have a duty to disclose the risks of stocks and bonds before their clients invest, and our Securities Division will continue to make sure that these companies do business in a responsible, ethical way in Missouri,” Kander said at the time.
Morgan Keegan denies it is responsible for investor losses citing the city’s default on bond payments and notes that the bonds were originally rated in the single A category based on the city’s backing.
The firm in its formal filing responding to Kander’s order objects to the jurisdiction of the securities commissioner to conduct proceedings in the case. The firm denies the existence of any factual evidence to warrant the cease-and-desist order and challenges the commissioner’s authority to impose any civil fines or order restitution.
The filing described the findings laid out in the order as “excessive, punitive, non-remedial, cumulative, objectively unreasonable, arbitrary, capricious, disproportionate, unwarranted, unsupported and unsupportable sanctions, penalties and relief that fair-minded, objective and unbiased jurists operating a fair and unbiased tribunal would never impose.”
The filing charges that the firm’s due process rights under state and federal constitutions would be violated in such a setting. If the securities division denies the dismissal request or demand to have the case adjudicated “in a court of competent jurisdiction,” the firm requests a hearing to dispute the charges.
If Kander’s office eventually finalizes the order, Raymond James could appeal to the Cole County Circuit Court.
The cease-and-desist order prohibits Morgan Keegan from omitting material facts when selling bonds and the petition seeks full restitution, civil penalties, fees and costs. Morgan Keegan made approximately $2.5 million for its role on the transaction.
The involvement of Kander’s office marks the latest action by a regulator. Civil and criminal actions have been filed by local, state, and federal authorities alleging theft, fraud, and securities violations against former Mamtek head Bruce Cole.
The case has raised the ire of bondholders and local, state and federal authorities all angry over the lack of due diligence done ahead of the bond issue or before state incentives were awarded. The trustee and other creditors forced the company into involuntary bankruptcy and various lawsuits and other legal claims have been lodged against Cole, Morgan Keegan, and legal counsel Armstrong Teasdale LLP.
In a recent development in the bondholder lawsuit, Cole Circuit Court Judge Patricia S. Joyce granted Moberly and its development authority’s request to be dropped as defendants in the case. The investors had not originally named the issuers as defendants but Raymond James and Armstrong Teasdale sought to include them. The city successfully argued that under state laws, an industrial development bond offering is a “governmental” activity, aimed at promoting “the economy of the state” as a whole and as such, the doctrine of sovereign immunity bars claims against the city. The city further argued that it was not legally responsible for repaying the bonds and the investors did not allege fraud on the city’s part.