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mutual funds proprietary trust company Regions Morgan Keegan Anthony class action A.M. Publishing Proprietary Mutual Funds -- Driven by Fees and Fears of Reprisal

(July 13, 2010 --Chicago, IL) -- In proprietary mutual fund litigation, plaintiffs usually paint banks as fee- hungry mercenaries with no regard for rules. State and federal securities regulators in recent filings similarly portray executives of Regions Bank’s Morgan Keegan subsidiary. They accuse executives of loading six proprietary mutual funds with junk bonds, promoting them as investment- grade securities, and hiding losses, all in an effort to earn higher fees.

Key to regulators’ allegations is a deposition taken of Carter Anthony, former head of the asset management division, who was also responsible for trust investments. Regions Bank’s trust services were managed through Regions Morgan Keegan Trust, F.S.B.

Anthony’s deposition, while focused on who authorized the junk bond investments, gives a behind-the-scenes glimpse into the pressure that trust bankers say they often feel to invest in proprietary funds.

According to regulators, Anthony, who considered the six funds below trust investment grade, tried to discourage use of the funds by trust accounts but had to be “discreet” in his discouragement for fear of reprisals.

“If I stand up and beat on the table and say we are not putting any of those [mutual] funds in our trust accounts, I’m fired, I’m gone,” Anthony states in a deposition taken by Alabama regulators last October.

The proprietary mutual funds in 2007 lost over $2 billion, regulators say, primarily from investments in subprime mortgage securities.

Prior to those losses, the six mutual funds often reported above average returns. What Morgan Keegan failed to disclose to mutual fund shareholders, including Regions Bank’s trust customers, regulators allege, is that investments in junk bonds were driving those returns. Regulators say investors were intentionally misled regarding the type of securities the funds were investing in and the underlying risks.

“The misrepresentations, omissions, and sales practices,” say state regulators in their 60-page complaint, were intended to “entice investors.”

The losses have spawned scores of individual and class action lawsuits, as well as numerous arbitration cases.

For more on this story, see the current issue of Trust Regulatory News. 

No statement in this issue is offered as or should be construed as legal opinion or advice or as an indicator of future performance.

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