CHICAGO — A federal class action lawsuit settlement between a group of bondholders that invested in a failed Missouri sucralose plant and the financial firms involved in the $39 million bond deal is nearing final approval.
At a hearing last week, U.S. Magistrate Judge Matt Whitworth said he would recommend to U.S. District Court Judge Nanette Laughrey that she approve a settlement that would allow class participants to recoup about 86% of their losses.
Laughrey will have the final word with an order approving or rejecting the settlement, but has already indicated her support for the agreement by granting preliminary approval.
"We are hopeful it will receive final approval" although the time frame is unclear, said J. Timothy Francis, of Francis Law LLC, which is one of the firms representing bondholders.
The case - Cromeans v. Morgan Keegan & Co. Inc. et al. - is being heard in the U.S. District Court for the Western District of Missouri in Jefferson City.
The lawsuit, filed in October 2012, accused financial firms of violating securities laws in the bond deal, which soured after the failure of the never-finished artificial sweetener project in Moberly.
Underwriter Morgan Keegan & Co. and general counsel Armstrong Teasdale will pay a total of $8.25 million in the settlement. About $5.2 million will eventually be distributed to investors after legal and other fees are paid.
Investors accused the firms of wrongdoing in connection with their roles in the sale of $39 million of defaulted bonds for the failed factory.
Of the bonds, $30.6 million were tax-exempt.
The investors said 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.
The failed plant's project head, Bruce Cole, was also named as a defendant.
The jury was seated for the trial when the settlement was announced in mid-January. Class participants will recoup about 86.49% of their losses. The losses were calculated by taking the par value of the bonds purchased by class members and subtracting any payments received by from the trustee and, in the case of sellers, any proceeds received.
"Class counsel believes that this percentage of recovery is fair, reasonable and adequate and surpasses the percentages of recoveries which are typical in security cases," a court filing says.
Bondholder John W. Cromeans Jr., the Elkton Bank and Trust Co., and Robert Benisch were the lead plaintiffs. Campbell, Guin, Williams, Guy & Gidiere LLC and the McLeod Law Firm PC also represented plaintiffs.
Morgan Keegan was also charged with negligence, a charge not leveled at Armstrong Teasdale.
The litigation 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 Mamtek US made about its Chinese operations.
The firms countered that they performed their respective duties as required. They argued that investors were sold on the bonds based on a Standard & Poor's investment grade rating that was based on the city of Moberly's appropriation pledge, which the city chose not to honor.
The firms also argued that Mamtek US's Cole and Pelligrino & Associates, which provided a property valuation, were to blame for the false information.
The Moberly Industrial Development Authority sold the bonds, backed by the city's 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. Moberly refused to honor its pledge and lost its investment grade rating.
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.
Three lawsuits at the state court level are pending and moving toward trial. All charge the former Morgan Keegan with wrongdoing.
One involving about $2 million of bonds filed in Jackson County, where Kansas City is, is moving toward a January trial date and one in St. Louis County involving about $7 million of bonds is set for trial in April.
The largest of the three, led by Shelter Insurance involving $15 million, was filed in Cole County, home of state capital Jefferson City, and is set for trial Nov. 30, said Joseph Kronawitter of Horn Aylward & Brandy LC, which is representing the plaintiffs in all three cases.
Cole 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 is serving a seven year prison term.
The Missouri Secretary of State in 2012 filed a civil enforcement action against Morgan Keegan accusing the firm of securities fraud.
It accused the firm of defrauding clients by misrepresenting material facts about the offering.
A notice last month posted by trustee UMB Bank reported that the bankruptcy trustee recently filed a notice indicating the estate holds $1.3 million of which $907,000 came from the sale of Bruce Cole's home.
Those proceeds are the subject of dispute as Cole asserts a right to some proceeds to pay taxes on the sale. The bankruptcy trustee also continues to pursue others involved in the project in hopes of raising recovery rates.
UMB said it expected to distribute approximately $644,000 of funds it separately holds on Aug. 25 after determining that funds on hand exceed the amount needed to conclude its role in the case.
Earlier this year, Standard & Poor's revised Moberly's outlook to positive from stable on the city's B issuer credit rating, which remains deep in speculative grade territory.
"The outlook revision reflects our positive view of steps the city is taking to establish a better framework for avoiding future events of non-appropriation," said Standard & Poor's analyst John Sauter.