FINRA Orders Morgan Keegan to Pay Investor for ARS

These bonds were actually auction-rate securities and the ARS market collapsed and froze during the financial crisis, leaving investors holding the securities they had purchased.

In an order from FINRA issued Feb. 17, the panel awarded the payment to William W. Featheringill, a Birmingham investor and venture capitalist. The amount of damages equals the amount of ARS Featheringill was left holding.

Mr. Featheringill complained to FINRA in 2010 that staff at AmSouth Investment Services Inc., which became a part of Morgan Keegan in 2007, misrepresented the risks associated with investing in auction-rate securities. Featheringill purchased $3.5 million worth of the sewer bonds in 2005 from AmSouth. That company was acquired by Morgan Keegan’s parent, Regions Financial Corp.

Morgan Keegan said that it is considering an appeal of the decision.

Hemmerdiner writes that Mr. Featheringill said he was unfamiliar with investing in bonds and purchased the securities on the advice of AmSouth staff, who assured him the bonds were safe and that he could get his money every 35 days if he wanted to. Featheringill later sold $1.5 million of the bonds. His holdings totaled $1.95 million in 2010 when he filed the complaint against Morgan Keegan.

The Bond Buyer article goes on to say that auction-rate securities are long-term bonds with interest rates that reset regularly at auctions. ARS are similar to short-term paper because investors can hold them for short periods. But if the auctions fail, as they did when the financial crisis was unfolding in 2008 and dealers stopped supporting the auctions, investors may be stuck holding them indefinitely.

“Unfortunately, the sewer bonds were, in risk and suitability terms, the exact opposite of what they were represented to be,” said Featheringill’s complaint. “This type of investment — auction rate securities — had and still has huge risk of illiquidity and price depreciation.”

Rediker said staffers at Morgan Keegan were aware of problems with ARS in 2007, but failed to notify investors.

“They knew in the fall of 2007 that there was severe risk of failure,” he said.

“The principal amount at issue in this case may seem relatively small, but the securities principles involved were large. They go to governing the fundamental relationship between broker-dealers and their clients,” said Joseph S. Fichera, chief executive officer of Saber Partners LLC, who served as an expert witness for Featheringill. “While each case is fact-specific, the sheer number and variety of ARS cases, even four years after the market dislocation, suggests there were fundamental problems in this market.”

Although the FINRA panel gave Featheringill all of the damages that he asked for, it took no action on the his demand for $5.85 million in punitive damages.