CHICAGO – Investors holding about $27 million of bonds issued for a failed Missouri artificial sugar plant have reached settlements with the financial firms they sued for negligence and fraud.
The parties are expected in the coming weeks to file a motion to dismiss their pending lawsuits, said Joseph Kronawitter of Horn Aylward & Brandy LC, which is representing the plaintiffs in three cases filed by investors in Missouri state court. All three named the underwriter of the 2010 bonds, the former Morgan Keegan & Co. LLC, as a defendant.
"The three cases have been amicably resolved and the terms of the resolution are confidential," Kronawitter said in an interview Monday. The settlements resolve the claims of 20 institutional investors represented by the firm.
The settlements follow the recent resolution of a separate federal class action brought by other investors in the bonds issued to finance a sucralose factory in Moberly, Mo. That case was settled for $8.25 million.
Terms of that settlement were disclosed because of its status as a class action.
The new settlement announcement came with one of the lawsuits -- led by Shelter Insurance and involving a par value of $15 million of bonds – headed for a Nov. 30 trial date in Cole County Circuit Court at Jefferson City. The Shelter case also named underwriter's legal counsel Armstrong Teasdale as a defendant. Bondholders also added Raymond James Financial Inc. which acquired Morgan Keegan in 2012, as a defendant.
Raymond James officials declined to comment on the new settlement.
A second case involving about $2 million of bonds filed in Jackson County, home of Kansas City, was moving toward a January trial date and one in St. Louis County involving about $10 million of bonds, was set for trial in April.
In the federal class action, the distribution of about $5.2 million to the class holding about $6 million represented a roughly 86 % recovery rate, according to attorney J. Timothy Francis of Francis Law LLC, one of the firms representing bondholders in that case. U.S. District Court Judge Nanette Laughrey last month entered an order approving the settlement.
Kronawitter declined to comment on whether the terms of the new settlements were comparable, citing the confidentiality agreement.
Resolution of the lawsuits leaves only ongoing bankruptcy trustee action and a state-filed enforcement still pending that could result in additional payouts to bondholders.
The Moberly Industrial Development Authority sold the bonds, backed by the city's appropriation pledge, in 2010. The project also qualified for state tax credits, although the credits were never received. 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 the city 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.
Shelter's lawsuit and others filed by bondholders accused Morgan Keegan of securities violations for allegedly misleading potential investors about the viability of the plant and city pledge. The investors accused the firm of fraud and fraud by silence and negligent misrepresentation.
"Morgan Keegan knew Mamtek was important and started to investigate Mamtek, but halted that effort before the investigation was complete, despite its obligation to do due diligence, simply because some other party allegedly told it to stop raising concerns about Mamtek," the Shelter complaint said.
The lawsuit also accused Morgan Keegan of misleading investors about the ability of Moberly to cover payments.
"Morgan Keegan knew, however, that Moberly did not have the ability to pay the bond debt without revenue payments from Mamtek's sale of sucralose made at the plant," the lawsuit charged.
Missouri Secretary of State Jason Kander in 2013 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.
Andrew Hartnett, securities commissioner in Kander's office, seeks full restitution for Missouri bondholders and a $15 million civil penalty from the firm. The action also asks that civil penalties be imposed on 10 individually named defendants who are charged with various counts of state securities violations tied to their work on the bond sale.
Missouri attorney general Chris Koster in 2012 filed charges alleging securities fraud and stealing against former Mamtek executive Bruce Cole, and the Securities and Exchange Commission filed a civil complaint accusing Cole of scheming to defraud potential investors. As part of a settlement with Koster's office, Cole is serving a seven-year prison sentence.
Morgan Keegan has denied any wrongdoing or responsibility for investor losses, saying it did its job on the sale and that ultimately the bonds were guaranteed by the city.
The bonds carried an A rating from Standard & Poor's 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.
An August notice 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 but has not provided an update.