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Barbara J. Riesberg

Archive for March, 2011

The Bureau of National Affairs, Inc.  By Phyllis Diamond

Arbitration

Memphis, Tenn.-based Morgan Keegan & Co. Inc. must pay more than $250,000 in compensatory and punitive damages to a Florida couple whose money it invested in a now failed Connecticut hedge fund that funneled its assets to Bernard L. Madoff Investment Securities, a Financial Industry Regulatory Authority arbitration panel directed March 3 (In re Arbitration Between Lieberman and Morgan Keegan & Co. Inc., FINRA, Case No. 10-00009, 3/3/11).

The panel concluded that the brokerage “did very little due diligence on the hedge fund in question and certainly did not perform substantial due diligence,” as the firm’s own procedures require for alternative investment products.

Rather, the panel cited “clear and convincing evidence that … Morgan Keegan was grossly negligent,” and that accordingly, it “fraudulently misrepresented the risk of this investment” to its customers, who lost their entire investment with the firm.

Investment Objectives.

Specifically, claimants Jeffrey and Marisel Lieberman charged the firm and one of its registered representatives, Julio Almeyda, with investing all of the money in their accounts with Greenwich Sentry LLP, a Madoff feeder fund. They sought to hold the firm liable for fraudulent misrepresentation, breach of fiduciary duty, and negligence, and for Tennessee and Florida statutory violations.


“[A]t the end of the day, as a FINRA-regulated institution, the brokerage was required to do due diligence on unregulated investments, and hedge funds are not regulated,” Miami attorney Barbara Riesberg said.


In its decision, the panel noted that in a 2009 memo to financial advisers and branch managers, Morgan Keegan’s compliance department directed that before recommending a hedge fund to a client, advisors must review the client’s new account form to ensure that the investment is suitable. “The memorandum also goes on to say that if the account is predominantly composed of this investment …, ‘speculation’ should be one of the primaryobjectives.”

Red Flags.

In this case, however, the panel noted that the Liebermans’ new account form indicated that speculation “was the last (not primary)” of their investment objectives. The Liebermans, who had less than a year’s experience in options and other investments, such as hedge funds, also testified to that effect.

Concluding that the firm did little due diligence regarding the investment, the panel said that among other deficiencies, Morgan Keegan admittedly failed to request an audit report on BLMIS, which implemented the fund’s investment strategy and served as sole custodian of the hedge fund’s assets. Doing so, according to the claimants’ expert, “would have led to Red Flags,” the panel wrote. It also said the brokerage “did not even produce any evidence of any follow-up review to indicate ongoing monitoring required as part of its due diligence.”

For these and other reasons, the panel ordered Morgan Keegan to pay $200,000 plus interest in compensatory damages; $50,000 in punitive damages; $14,000 in various in hearing fees; and $300 representing the non-refundable portion of the initial claim filing fee.

However, the panel dismissed the Liebermans’ claims against Almeyda, who it said “was not aware of the lack of due diligence performed by his firm and did not know that his representations to [the LIebermans] as to the level of risk were false and misleading.”

Due Diligence Obligation.

In a telephone conversation, Miami attorney Barbara Riesberg, who represented the Liebermans, said her clients “are extremely pleased with the decision. “Professionally,” she added, “it’s very exciting because this is not a common theory,” inasmuch as the alleged wrongdoing was “two steps removed” from Madoff–i.e., from Madoff to the fund to Morgan Keegan.

Riesberg emphasized that “[l]iability was based upon Morgan Keegan’s failure to perform substantial due diligence, as opposed to holding Morgan Keegan liable for Madoff’s fraud. … However, at the end of the day, as a FINRA-regulated institution, the brokerage was required to do due diligence on unregulated investments, and hedge funds are not regulated.”

Riesberg acknowledged that the arbitrators’ decision was unusually detailed, “which may be one reason the award generated a lot of interest” in the press. Another reason, she speculated, is that the panel awarded punitive damages, a relatively rare occurrence. “We got everything we asked for,” Riesberg stated. She said the next step is to go to court to seek attorneys’ fees based on the panel’s conclusion that the brokerage violated Florida law governing securities transactions.

Riesberg added that the defendants argued “that ‘nobody knew Madoff was a fraud.’ Whether they did or didn’t,” she stated, “it doesn’t absolve them of the duty to do due diligence.”

“We disagree with the panel’s findings in this case and plan to appeal the award,” a Morgan Keegan spokesperson told BNA.

The arbitration panel included two public arbitrators, Bernard A. Becker, the presiding chairman, and David M. Levine; and one non-public arbitrator, Bernard (Bob) L. Loring. Morgan Keegan and Almeyda were represented by Reva D. Campbell, Greenebaum Doll & McDonald PLLC, Louisville, Ky. The Liebermans were represented by Barbara J. Riesberg, RiesbergLaw, Miami.

Morgan Keegan Liable In Madoff Feeder Case FINRA – Law360

By Erin Coe

Law360, New York (March 7, 2011) — A Financial Industry Regulatory Authority arbitration panel held Thursday that Morgan Keegan & Co. Inc. should pay more than $250,000 to a Florida couple after placing their entire investment in a now-bankrupt hedge fund that steered investments to Bernard Madoff’s Ponzi scheme.

The panel ruled that the Regions Financial Corp. subsidiary did very little due diligence on the investment to Greenwich, Conn.-based Greenwich Sentry LP, a feeder for Bernard L. Madoff Investment Securities LLC that sought bankruptcy protection in November.

Jeffrey and Marisel Lieberman’s entire account of $200,000 was invested in Greenwich Sentry, and they brought a claim in December 2009 accusing Memphis, Tenn.-based Morgan Keegan and their financial adviser of engaging in a Ponzi scheme. They alleged fraudulent misrepresentation, breach of fiduciary duty, negligence, negligent misrepresentation and negligent supervision, among other claims.

“The panel believes that there is clear and convincing evidence that respondent Morgan Keegan was grossly negligent in not performing substantial due diligence, and as a result it fraudulently misrepresented the risk of this investment to claimants,” according to the ruling. “The panel believes that this resulted in the total loss of claimants’ investment.”

The panel indicated that Morgan Keegan failed to produce the PricewaterhouseCoopers audited report of Greenwich Sentry that it allegedly relied on and did not do an available Internet search.

Morgan Keegan admitted that it did not even request the audited report of the Madoff firm, which, according to the claimants’ expert witness, would have led to red flags, and the company did not produce a detailed report indicating the extent and results of its due diligence, the panel said.

The panel directed Morgan Keegan to pay the Liebermans $200,000 in compensatory damages, in addition to interest at the rate of 6 percent a year accruing from May 2007. The company was also ordered to shell out $50,000 in punitive damages and $14,000 in expert witness fees.

Claims against Julio Almeyda, the couple’s financial adviser, were dismissed with prejudice, and the panel recommended that all references to the case should be expunged from his registration records.

The panel noted that Almeyda was not aware of the lack of due diligence performed by his firm and did not know that his representations to the Liebermans about the level of risk of the investment in the hedge fund were false and misleading.

Barbara Riesberg, an attorney who represented the plaintiffs, said her clients were extremely pleased with the decision and that they would file a bid to confirm the award and seek attorneys’ fees.

A representative for Morgan Keegan was not immediately available for comment. In October a FINRA arbitration panel awarded about $9.2 million to a group of investors who claimed Morgan Keegan fraudulently recommended they buy “highly risky” bond funds backed by illiquid mortgage-backed loans and collateralized debt obligations.

The award included more than $1.1 million in legal fees for attorneys representing more than 30 named claimants. The claimants had sought $10.4 million from Morgan Keegan over losses stemming from their purchase of investment products with names like RMK High Income Fund Inc. and RMK Advantage Income Fund Inc.

Morgan Keegan faces numerous claims stemming from the funds, which took a beating in 2007 and 2008 amid the collapse of the U.S. real estate market. The plaintiffs are represented in this matter by RiesbergLaw.

Morgan Keegan and Almeyda are represented by Greenebaum Doll & McDonald PLLC. The case is In the Matter of: Lieberman et al. v. Morgan Keegan & Co. Inc., case number 10-00009, in the Financial Industry Regulation Authority.

–Additional reporting by Pete Brush. Editing by Lisa Uhlman.

Morgan Keegan ordered to pay over $250,000 to couple

* Invested clients’ entire account in Madoff feeder fund

* Failed to do adequate due diligence on fund-FINRA panel (Adds information on panel’s findings of due diligence failures)

By Helen Kearney

NEW YORK, March 7 (Reuters) – A Financial Industry Regulatory Authority arbitration panel has ordered Morgan Keegan to pay more than $250,000 to a Florida couple after the firm invested all of their portfolio in a hedge fund that channeled its money to Bernard L. Madoff Securities.

The arbitration panel found that Morgan Keegan, a unit of Regions Financial Corp (RF.N), failed to do adequate due diligence on Greenwich, Connecticut-based Greenwich Sentry LP, which was a feeder fund for Madoff.

Morgan Keegan clients Jeffrey and Marisel Lieberman invested their entire account of $200,000 in the fund, which filed for bankruptcy in November 2010.

“There is clear and convincing evidence that … Morgan Keegan was grossly negligent in not performing substantial due diligence and as a result it fraudulently misrepresented the risk of this investment,” the panel wrote.

The panel ordered Memphis, Tennessee-based Morgan Keegan to repay the Liebermans their $200,000 investment, plus 6 percent annual interest from when the investment was made in May 2007. The firm was also ordered to pay $50,000 in punitive damages and $14,000 for expert witness fees.

“We are very pleased with the decision,” said Barbara Riesberg, the Liebermans’ lawyer. “My clients got everything we asked for.”

A Morgan Keegan spokeswoman said the firm disagreed with the panel’s findings and planned to appeal the award.

The panel said that under Morgan Keegan’s internal compliance rules, clients should not be invested in hedge funds unless they list “speculation” as one of their primary investment objectives when they open an account. The Liebermans had listed speculation as their last investment objective.

Morgan Keegan did very little due diligence on the fund, failing to request an audited report of Madoff’s firm or to even do a basic Internet search on the fund, the panel said.

The Liebermans’ financial adviser, Julio Almeyda, was cleared of wrongdoing and the panel recommended that references to the case be removed from his registration records. The panel found that Almeyda was not aware of the lack of due diligence performed by his firm and did not know that the information he gave to the Liebermans about the riskiness of the investment was false and misleading.

Morgan Keegan has faced hundreds of arbitration proceedings over the past year from clients who had invested in mutual funds that lost more than 50 percent of their value from exposure to subprime mortgage debt. (Reporting by Helen Kearney; Editing by Richard Chang, Maureen Bavdek and Bernard Orr)

http://www.reuters.com/article/2011/03/07/morgankeegan-finra-idUSN0710496020110307