Labaton Sucharow has already wrested $100 million from OppenheimerFunds over mutual funds stuffed with subprime mortgage-backed securities. Now the firm has gotten the go-ahead to pursue similar claims against the investment bank Morgan Keegan.
On Friday, Memphis federal district court judge Samuel Mays, Jr. rejected motions to dismiss Labaton’s proposed class action on behalf of Morgan Keegan mutual fund investors. The ruling allows the firm to press on with securities fraud claims against Morgan Keegan and several of its individual directors, including now-disgraced portfolio manager James Kelsoe (The Wall Street Journal has chronicled Kelsoe’s downfall here).
After being named sole lead counsel in 2010, Labaton brought an amended complaint in February 2011 on behalf of investors in four closed-end Morgan Keegan mutual funds. The complaint alleges that Morgan Keegan loaded the funds with dubious subprime mortgage-backed securities and then concealed the risks from investors. Labaton pegs damages at $400 million.
Defense lawyers moved to dismiss the case on statue of limitations and standing grounds last April. Bass Berry & Sims represents Morgan Keegan. Sullivan & Cromwell is representing Morgan Keegan’s former parent company, Regions Financial, which has reportedly set aside a $300 million provision for Morgan Keegan lawsuits. Kelsoe, the now-disbarred investment wizard at Morgan Keegan, and several other individual directors and officers are represented by Sutherland Asbill & Brennan. (As we previously reported, Sutherland guided Morgan Keegan to a $210 million settlement with regulators last June.)
In his ruling Friday, Judge Mays upheld all of Labaton’s securities fraud claims against Morgan Keegan and Kelsoe. The judge did, however, dismiss fraud claims against three individual directors and officers after determining that the plaintiffs hadn’t adequately alleged scienter.
Labaton’s Joel Bernstein called Mays’s ruling “a very well-thought out and detailed order that vindicates the rights of the investors in these funds.”
Michael Dagley of Bass Berry, who represents Morgan Keegan, did not return a call seeking comment. We also didn’t immediately hear back from Sutherland’s S. Lawrence Polk, who represents a group of individual directors.
Morgan Keegan isn’t the first brokerage firm to face a class action over MBS-laced mutual funds. Charles Schwab agreed in 2010 to pay $200 million to settle a class action Hagens Berman Sobol Shapiro brought on behalf of jilted investors in the Schwab YieldPlus fund. OppenheimerFunds agreed to pay $100 million last May to partially resolve a class action brought by a bi-coastal team of lawyers from Hagens Berman and Labaton.
