How much is your investment worth?

That might seem like a simple question on Wall Street, where the price of everything from Apple to zinc flickers across computer screens every day. But inside Bear Stearns, the answer was anything but clear last spring for investors who put their money into two giant, but ultimately doomed, hedge funds.

Two executives who oversaw the funds, Ralph R. Cioffi and Matthew M. Tannin, did not disclose that the funds were plunging in value until it was too late, the authorities say. On Thursday morning, the pair surrendered to federal agents and were charged with nine counts of securities, mail and wire fraud.

Whatever the outcome, the case spotlights one of the most vexing problems confronting Wall Street as the credit crisis plays out: How to value tricky investments linked to subprime mortgages and other risky debt.

As the mortgage market slumped last spring, authorities say, Mr. Cioffi valued one of his funds as having lost 6.5 percent in April. But colleagues at Bear placed far lower values on investments in that fund. They said the fund had lost 18.97 percent.

All across Wall Street, similar battles are playing out inside banks, albeit without the legal drama. Many banks are struggling to value the assets they hold, raising doubt among many investors about those companies’ financial health.

“It’s a humongous problem for Wall Street,” said Michael Young, a lawyer with Willkie Farr & Gallagher. “These days these valuation obstacles are at the core of the write-downs.”

Mr. Cioffi and Mr. Tannin are the first Wall Street executives to face criminal charges linked to the credit mess. But many other bank executives are grappling with far bigger financial worries. Worldwide, banks have written down the value of assets by $380 billion, as high-flying markets have crashed back to earth. Some banks suggest that the write-downs have been conservative and that some assets may be written back up in the future. Others say the bill will keep mounting.

Bankers like to say that valuing complex investments is part art and part science, but four large firms have said recently that some employees have not been honest.

In February, Credit Suisse found a group of employees who had bumped up the value of mortgage assets by $2.65 billion during the fourth quarter last year and through the start of this year. The employees were fired.

In March, Lehman suspended two traders on its equity derivatives desk for overpricing bets in the market by tens of millions of dollars. In May, Merrill Lynch disclosed a similar incident that cost it about $18 million.

Morgan Stanley was the latest to find misconduct. On Wednesday, the investment bank said it had lost $120 million this year because of a rogue trader. The trader, Matt Piper, is British and has worked for Morgan Stanley in London for four years. He was suspended while Morgan Stanley continued investigating his trades in credit-index options.

“In this sort of environment of stressed markets, one would expect to see people trying to behave improperly,” said Colm Kelleher, Morgan Stanley’s chief financial officer, on a conference call. “We’re very angry about it.”

The level of losses industrywide is sure to raise questions about how values were assigned in the first place. Banks generally look at prices in the market first. But when no market price is available, they turn to internal computer models. The practice is similar at hedge funds, though in some instances, banks give pricing out to hedge funds, allowing price levels to trickle through in nebulous asset classes like mortgage bonds.

Now, bank executives are increasingly scrutinizing their employees and trying to catch them if they are too optimistic - or downright dishonest - about valuations.

But it is not simply a question of catching rogue traders. Marking the book, as the industry calls the pricing process, has become one of the more controversial topics among finance executives, even in instances where no fraud has been alleged. On Thursday, the chief financial officer of Citigroup said the company would use internal models to price mortgage bundles known as collateralized debt obligations rather than use the dismally low market prices as the only factor. On the other end of the spectrum, firms like Goldman Sachs say that market prices should be the driving factor in pricing.

Different computers models often use different data and produce different valuations. Investors have complained recently that Wachovia and Washington Mutual are modeling values with a housing price index that is more optimistic than the index used by their competitors.

“There’s almost a definitional issue of what you mean by value,” said Rick Antle, an accounting professor at the Yale School of Management. “You’re really kind of behind the eight ball.”

Away from Wall Street, plaintiffs’ lawyers are circling. Suits over losses in funds like Charles Schwab’s YieldPlus Select assert that managers were irresponsible in not knowing how risky the mortgage assets would turn out.

A spokesman for Charles Schwab said the company does not comment on pending legal cases.

“I don’t know if I could tie it to some kind of widespread conspiracy. Certainly the fact that the write-downs have been so massive would mean that somebody was optimistic,” said Ryan Bakhtiari, a lawyer who has filed an arbitration on behalf of investors against Schwab. “It was true from the beginning to the end of the food chain: everybody made inflated money.”

Banks are sometimes forced into write-downs because of selling in the market. Lehman Brothers, for instance, said that the collapse of the hedge fund Peleton Partners in February forced Lehman to write down the mortgage assets it owned similar to ones held by Peleton. Some banks say the write-downs caused by fire sales may be overkill.

“There is a bit of this atmosphere that says, ‘Let’s just mark it down, no one is going to question it if we mark it down,’ ” said Christopher Hayward, the finance director at Merrill Lynch, at a recent industry conference.

Not all banks are eager to take their hits. In the fall, for example, a large city in the Southeast asked Bank of America to write down the C.D.O.’s the city held, said Mr. Bakhtiari, who represents the city but was not authorized to identify it.

Bank of America refused to mark down the C.D.O.’s, Mr. Bakhtiari said, because it did not want to create a mark-down domino effect in its other holdings. A spokesman for Bank of America declined to comment Thursday.

Investors are increasingly complaining that banks have become too opaque about the assets they own and the trades that make - or lose - them money. Financial companies flocked en masse in recent years to trading assets that are far harder to value than, say, shares of Microsoft.

And the problem may be exacerbated by the way traders are compensated. Bank employees from lowly associates to chief executives are paid bonuses each year based on performance. But there is little recourse if their bets lose money the following year, so long as the employee is deemed to have made an innocent mistake.

Some banks are considering expanding the period in which traders are evaluated to longer than a year, said Chip MacDonald, a partner in the capital markets group at the law firm Jones Day.

“We have our health and families,” Cioffi told fellow portfolio manager Matthew Tannin and two other co-workers the next day. “We are not a 19-year-old Marine in Iraq.”

It was the first monthly loss in the 3 1/2 years that Cioffi had managed the Bear Stearns High Grade Structured Credit Strategies funds, which he founded in October 2003. Even as Cioffi celebrated, he worried in an e-mail that a “meltdown” was coming in the subprime mortgage market.

By June 2007, the funds collapsed, touching off broader subprime mortgage-related losses that now total $396.6 billion worldwide. Cioffi and his deputy Tannin were arrested yesterday and charged with mail and securities fraud. The indictment portrays a pattern of misleading investors as losses mounted. Civil suits further allege incomplete record-keeping and conflicts of interest going back to the summer of 2006.

Attorneys for Cioffi, 52, and Tannin, 46, said their clients were guilty of no wrongdoing.

“Because his funds were the first to lose might make him an easy target, but doesn’t mean he did anything wrong,” said Cioffi’s attorney, Edward Little.

The nine-count indictment filed in New York by U.S. Attorney Benton Campbell adds detail to the Bear Stearns manager’s unsuccessful efforts to rescue the funds. He allegedly transferred $2 million of his personal wealth out of the fund three weeks after the vodka salute.

Massachusetts Suit

The criminal complaint shows “damning evidence,” says lawyer Ryan Bakhtiari, whose Beverly Hills, California, law firm of Aidikoff, Uhl & Bakhtiari represents hedge funds and institutional investors that allegedly lost tens of millions of dollars after putting money into Cioffi’s funds in March 2007.

The two Bear funds filed for bankruptcy in July 2007, at a cost to investors of $1.6 billion, according to a securities- fraud lawsuit filed in U.S. District Court for the Southern District of New York by Barclays Bank Plc against Cioffi, Tannin and Bear Stearns. The London bank helped finance the funds.

The Massachusetts Securities Division, the first regulator to act, alleges in a November administrative complaint that the Cioffi-managed funds pushed through thousands of trades without legally required approvals and documentation. Many of the transactions were Bear Stearns investments and other deals Cioffi managed.

Independent Directors

By September 2006, Cioffi’s bet on subprime mortgage securities was falling short of the 10 to 12 percent annual returns he’d promised, and he faced the threat of investor withdrawals, according to the federal lawsuit.

That month, Cioffi carved off 37 percent of the fund’s $1.53 billion in assets into the newly created Enhanced Leverage fund, according to the Barclays suit.

“What I was thinking was to build up six (months) of returns and then send a letter to all the remaining investors and tell them we are closing the (high-grade fund) and ask everyone to convert to the Enhanced Fund,” Cioffi said in a Sept. 17, 2007, e-mail to Tannin that is included in the Barclays lawsuit.

Almost immediately, Cioffi discovered he didn’t have the independent directors needed to sign off on some of the related- party trades he wanted to make, according to e-mails attached to the Massachusetts complaint.

The state alleges that the directors hired by the Cioffi funds, Scott Lennon and Michelle Wilson-Clarke, both senior vice presidents at Walkers Fund Services Ltd. in the Cayman Islands, routinely approved trades for which Cioffi and his staff produced insufficient documentation, often after the fact.

Related-Party Transactions

“The Walkers directors approved more than 165 related-party transactions whose applications were incomplete or were submitted after the transactions were completed,” according to the state.

Massachusetts enforcement attorney Michael Regan says in the complaint that the directors “do not appear to have been entirely independent.” They didn’t comply with a civil subpoena, contending the state lacked jurisdiction in the Cayman Islands, Regan says.

“The independent directors properly reviewed every trade that was presented to them,” said spokesman Michael Robinson, a senor vice president at Levick Strategic Communications LLC in Washington, in an e-mail. The directors offered to meet with Massachusetts officials and remain available, he said.

The Barclays lawsuit outlines why the alleged conflicts might be important. It alleges that Cioffi’s employer, Bear Stearns, used the Enhanced Fund “to dump” hundreds of millions of dollars of its riskiest assets, sometimes with no independent third party to value them.

`Awesome Opportunity’

According to the federal complaint, Cioffi e-mailed an unidentified colleague on March 15.

“I’m fearful of these markets,” Cioffi said in the e-mail. “Matt said it’s either a meltdown or the greatest buying opportunity ever. I’m learning towards the former.”

Publicly, he was more upbeat.

“We have an awesome opportunity,” Cioffi told a Bear Stearns co-worker on March 7, according to the criminal complaint. The colleague allegedly had more than 40 clients invested in Cioffi’s two subprime mortgage-dominated hedge funds.

Then, on March 23, Cioffi began transferring a third of his $6 million personal investment to another Bear Stearns vehicle, federal prosecutors say.

Rather than disclose the funds’ growing losses and shut them down, Cioffi and Tannin misled investors into June, according to the federal criminal complaint.

By June 9, 2007, Cioffi may have resigned himself to an unpleasant end. The federal complaint says Cioffi told a confidante then that if he couldn’t turn around the funds, “I’ve effectively washed a 30-year career down the drain.”

Instead, some regulators and investors’ lawyers argue, brokerage firms are responsible. The firms had a bird’s-eye view of the now-frozen auction-rate securities market and should have foreseen the failure, they believe.

Also, some say, it is reasonable to expect brokers to rely on their firms’ descriptions of products; they aren’t obligated to research an investment if their firms had explained it to them.

“The brokerage firms bear the responsibility, and they know it,” says Phil Aidikoff, a Beverly Hills, Calif., lawyer who is former president of the Public Investors Arbitration Bar Association. “I don’t think the industry representatives understood the risk. I think [they] simply told customers what they were told by the firm.”

Even if brokers are legally blameless, their reputations may be tarnished. As the business attempts to shift to a more-relationship-based model, many investors are disappointed that their financial advisers were caught off guard by the collapse of the auction market.

The market was estimated at $330 billion, held by individuals and institutions, when it collapsed in February. Many individual investors say they received no disclosure of risks when they purchased these products. Brokers never gave them prospectuses to read, they say, and they were never told auctions could fail.

“Our investigation indicates that officials at Bear Stearns engaged in a concerted effort to conceal the true state of affairs at this hedge fund, for an extended period of time before it imploded and that the victims of this nefarious scheme included both individual investors and professional money managers from around the world,” said Steven Caruso of Maddox Hargett & Caruso, one of the law firms.

The claims were filed with the Financial Industry Regulatory Authority on behalf of investors in Bear Stearns’ High Grade Structured Credit Strategies Fund. Last summer the fund failed along with the company’s High-Grade Credit Enhanced Leveraged Fund, costing investors $1.6 billion.

Since then, a variety of entities have started investigations, or filed suit alleging malfeasance, including the Securities and Exchange Commission and the states of New York and Massachusetts.

Representatives of Bear Stearns and J.P. Morgan Chase & Co., which closed its $1 billion acquisition of the brokerage last week, were not immediately available for comment.

The proposed rule, released April 24, would require reporting of an unnamed broker if his or her identity can be deduced from the arbitration or court filings. The firm employing the unnamed broker would have 30 days to make the disclosure to the Central Registration Depository (CRD) on forms U4 and U5, the standard securities industry registration forms.

Philip M. Aidikoff, an attorney with Aidikoff, Uhl & Bakhtiari in Beverly Hills, CA, said the rule proposal would close a “huge loophole” that should “provide more transparency in the dispute resolution process” for investors and regulators.

According to Aidikoff, his firm and many others tend to name only the securities firm as the party because it has a duty to supervise. Also, not naming the broker can expedite reaching settlements, he said.

Steven B. Caruso, an attorney with Maddox, Hargett & Caruso in New York, explained that his firm does not name the broker to avoid having to face additional lawyers and because it is more efficient for the arbitration process.

The rule proposal should give investors and regulators a “much more complete picture,” Caruso said.

FINRA said it was hard to reconcile requiring named brokers to be reported but not unnamed brokers whose identity could be ascertained because, in both situations, a sales practice violation is at the heart of the complaint.

“[T]his reporting inconsistency, FINRA said, “raises practical concerns because the practice of making a firm the sole respondent in an arbitration claim is becoming more prevalent in circumstances where the allegations involve sales practice violation(s) against a registered person.”

FINRA is seeking comment on the proposed rule change. The comment period is open until May 27.

Published last week by the Financial Industry Regulatory Authority, or Finra, the rule would require brokers to include on their records arbitration claims that allege misconduct in how they sold products - even if the brokers themselves aren’t specifically named in the complaints.

The change would reconcile an inconsistency that has existed for years. Presently, if a customer lodges a written complaint about sales practices to a firm but doesn’t name the broker involved, the firm must try to identify the employee involved, and that complaint then goes on the broker’s public record. Currently, if an arbitration claim doesn’t name a broker - even if it refers to the broker’s bad behavior - there’s no need to put the complaint on the broker’s record.

The timing of the proposed rule change is causing some consternation among brokers who worry that it may be hard to draw a distinction between claims alleging sales practices complaints and those alleging product failures, such as the rising tide of complaints caused by the failure of the auction-rate securities market.

In 2001, 25% of arbitration complaints didn’t name brokers, according to Finra. Now that number is closer to 50%.

The change is due to legal strategy, according to people who represent different sides in customer disputes. The idea is that making a broker a respondent ropes in a person who may fight aggressively to prevent a black mark from appearing on his or her record. A firm on its own may be more willing to offer a settlement for the sake of expediency.

Those who favor the rule change say that legal strategies shouldn’t impede public disclosure.

The fact that “it’s more efficient for an investor to get something resolved if the representative isn’t a party shouldn’t dictate whether other investors should know there was a complaint,” said Melanie Lubin, Maryland securities commissioner.

Investors’ advocates argue that full disclosure gives investors access to information that can help them pick a broker. Some brokers are upset by the potential change, saying that putting allegations on their records results in an “innocent until proven guilty” standard.

But with waves of arbitration claims over auction-rate securities coming in, some brokers and the lawyers who represent them are even more nervous than they would otherwise be.

“It’s not fair to mark up a broker’s record in a toxic product case, if the broker is as ignorant as you are,” said David Robbins, a Manhattan lawyer who represents both brokers and investors in arbitration claims. “Under this rule, it will.”

Because brokers are the customer’s main contact at a firm, they were the ones who sold auction-rate securities to their clients. But some industry observers argue that the on-the-ground sales team wasn’t responsible for the market’s collapse, and had no way of knowing it would occur. Brokers don’t want to see their records marred for selling what they say they understood to be perfectly safe products.

Even some investors’ advocates who think the rule serves an overall good acknowledge that it could prove unfair to brokers when it comes to product failure cases.

“I have no problem pointing fingers at brokers when I believe there has been wrongful conduct ,” said Phil Aidikoff, an investors’ attorney in Beverly Hills, Calif.,who said he’s spent the last six weeks working on auction-rate securities claims. But “when it’s a massive product failure, it’s rarely if ever the fault of the broker.”

Regulators point out that brokers have an opportunity to share their side of the story on their public records. And Lubin said the new version of the paperwork that brokers and firms must fill out would specifically ask whether the broker was alleged to have been involved in sales practices violations. That leaves room for brokers and firms to determine whether a case is ultimately a sales practice issue.

“The question dictates what needs to be disclosed,” she said. “They parse very carefully whether or not a yes answer is appropriate.” When it comes to how to categorize auction-rate securities complaints, she said, “It’s going to take a while to unwind.”

Finra is accepting comments on the proposed rule until May 27.

That’s the hard lesson learned by thousands of consumers just now finding their savings are irretrievably stuck in something called auction rate certificates, or ARCs.

They were told the obscure investments were as safe and liquid as money markets, T-bills and CDs, but with bigger returns. Now they’re wondering if they’ll ever seen their money again.

We’re talking lots of money - $330 billion to be exact - much of it not even earning interest. This could be the next big shoe to drop on an already stumbling economy.

“It’s a huge problem,” said Philip M. Aidikoff, past president of the Public Investors Arbitration Bar Association, one of dozens of lawyers hearing from desperate consumers.

Missouri is one of nine states that are part of a regulatory task force now investigating whether consumers got duped.

Once again you can thank in part big Wall Street brokerage houses that helped turn the subprime mess into a national calamity by slicing up high-risk loans and selling them like securities.

Auction rate certificates are basically long-term bonds of 20 to 30 years. They’re issued by municipalities and institutions, including hospitals and state student loan agencies.

But they are sold as short-term investments at weekly or monthly “auctions,” where investors can sell certificates they own or buy more, depending on the prices set at the auctions.

Many consumers were sold ARCs through their local bank. Because of the frequent auctions, the banks touted ARCs as being safe and liquid. And customers could squeeze a little more out of their investment.

For instance, a money market might return 3.5 percent in interest, while an ARC might return 4 percent.

Couples used ARCs as a way to save up for taxes or to buy a house. Congregations relied on them to save contributions to remodel their churches. Small businesses invested their payrolls.

But the promise of liquidity proved fleeting - and illusory. In reality, the auctions were little more than some big Wall Street banks getting together and trading paper, officials say.

Sales “depended on a few banks trading these investments back and forth,” said Kansas City investment attorney Diane Nygaard. Without the banks propping them up, there could be no auctions.

So when Wall Street experienced its own liquidity problems in 2007, the big brokerage banks began pulling out of the auctions.

Some auctions failed last fall. But most failed in February, when consumers started receiving letters saying, in essence, oops, your money is no longer available to you - at least not for 20 to 30 years.

And by the way, your account is losing value and your interest has dropped, too.

Some lucky consumers were able to sell off their ARCs. But attorneys and experts estimate that, with the auctions now all but dead, 50 to 80 percent of consumers are stuck.

Some Kansas City customers have seen interest rates on their ARCs fall from 4.78 percent to a flat zero. As the accounts lose value, some banks are even assessing customers a custodial fee.

So, should brokers and bankers have known better? There’s evidence to think so.

Back in May 2006, the Securities and Exchange Commission alleged that 14 brokerage firms had added capital to hide risks that the auctions could freeze up. The firms paid $13 million in fines, without admitting wrongdoing. Indeed, even as the auctions began failing last year, banks sent promotional letters to customers touting ARCs as “ultra high quality investments” for “your liquid funds.”

A secondary market has started to develop to buy ARCs from consumers - but at 50 to 80 cents on the dollar.

Consumers also have the option of suing or seeking redress through arbitration proceedings, experts say. There are already a couple of class-action lawsuits brewing. Congress is sure to notice, too.

Rest assured there is more to this story.

“We are investigating the decline of fixed income portfolios that Citibank sold. The Falcon, ASTA and MAT funds employed leverage to purchase municipal bonds,” said attorney Ryan K. Bakhtiari of Aidikoff, Uhl & Bakhtiari. “Falcon appears to have lost more than 30% of its value while ASTA and MAT appear to have suffered losses in the range of 60% to 80%.”

The lawyers have established a website, www.subprimelosses.com, to explain the implications for investors who have been hurt in the subprime crunch.

“Many investors relied on Wall Street and the rating agencies assignment of investment grade relative to these investments prior to investing,” the firms say. “The Wall Street underwriters and the teams they assembled in the structuring, rating, accumulating collateral and managing the investment pools which make up these investments may be liable to investors under a number of legal theories including but not limited to: negligence, breach of fiduciary duty, breach of contract, violation of state and federal securities laws and fraud.”

Citigroup reportedly placed $661 million in ASTA and MAT hedge funds in recent weeks and devised a restructuring plan that would allow investors potentially to recoup some of their money.

Attorney Phil Aidikoff, whose Beverly Hills firm is representing San Luis Obispo County investors who were clients of Forrest and lost millions in a failed equity investment fund, said the first hearing begins Dec. 1 in Los Angeles.

The claims are being sought against Forrest and Associated Securities, an El Segundo-based broker-dealer with which Forrest was registered until last year.

Investors claim Forrest —charged in the civil cases with breach of fiduciary duty and fraud— told them the principal they invested in the APEX Equity Options Fund, a $46 million equity fund, would be protected. Attorneys say that wasn’t the case and allege Forrest sold investments in several businesses that were unsuitable for some of his clients.

The first claim, filed with the Financial Industry Regulatory Authority in October 2007, represents seven households that collectively invested $5 million in the APEX Equity Options Fund, which was wiped out in August 2007.

In all, the losses stemming from the four claims now total nearly $24 million, Aidikoff said. In some instances, clients had used their savings or borrowed against the value of their homes to invest, according to legal documents.

Keith L. Griffin, of Maddox, Hargett & Caruso PC, said in a telephone interview on Monday [Feb. 18] that the firm is aware of the difficulty that pension funds and other institutional investors have had finding law firms both willing and qualified to file lawsuits against such
institutions.

Mr. Griffin said that he had seen a column on the subject in the Financial Times last week. According to that column, which cited unnamed sources: “At least three big London law firms have turned away clients seeking to recover money they put into complex derivative products that later lost money. Though the would-be plaintiffs are mid-sized institutions that regularly hire London law firms, their potential targets are the leading international banks on which the biggest law firms depend for their daily bread.”

U.S.-based securities lawyers reached over the weekend on the subject of the FT column generally agreed that the author was on to something - at least in the specific context of the London bar, where bankers and securities lawyers are part of a close-knit community disinclined to the sort of rift that accepting such a client would require.

Some U.S. lawyers said that although the point was a valid one in the context of the United Kingdom, it doesn’t extend to the United States, where there are smaller but high-quality securities firms that don’t rely upon good relations with the large banks or broker- dealers and where the class-action lawsuit provides another format for airing such grievances.

Other U.S. lawyers, though, said that the problem also exists on the western shore of the North Atlantic. One of them compared a lawsuit by a securities lawyer against a broker-dealer to a claim of legal malpractice - such claims do get brought, but rarely, because there is
a powerful stigma that works against it.

Maddox, Hargett & Caruso, Mr. Griffin’s law firm, is one member of a new alliance of firms that propose to represent institutional investors harmed by the subprime crisis and the collapse of mortgage-backed securities. The other firms involved are Aidikoff, Uhl & Bakhtiari of Beverly Hills, Calif.; Page Perry LLC of Atlanta; and David P. Meyer & Associates Co., of Columbus, Ohio.

In a statement issued Friday [Feb. 15], the members of this alliance made special reference to the fact that Citigroup Inc., New York, has stopped investor redemptions in its London-based hedge fund, CSO Partners.

Steven Caruso, one of the named partners of MH&C, said investors in the CSO Partners hedge fund investors “may have a variety of remedies that they should discuss with qualified counsel.”

The list of people who got caught up in the mutual fund debacle unfolding at the Memphis-based brokerage firm has included retirees, institutional investors, the well-to-do and small-business owners, to give but a few examples. The latest addition to that list: Morgan Keegan employees themselves.

Over the past several months, scores of lawyers from around the country have sought out and researched claims from one investor after another, nearly all of whom have told variations of the same story.

Whether it was their retirement nest egg, rainy-day savings or large chunks of their net worth, much of it that was tucked away in the RMK funds seemed to evaporate overnight.

Now, those same lawyers are hearing from clients who were exposed to the RMK funds in a different way. Some of the affected mutual funds were part of the Morgan Keegan employees’ pension plans, meaning that a number of employees have now found themselves in the same boat as the unlucky investors.

A figure as high as $10 million has been mentioned as the amount of employee money invested in the group of RMK funds that sustained massive losses over the course of 2007. One of the reasons for the large losses is the funds’ over-concentration of investments in a small number of industries, according to various lawsuits that have since been filed in West Tennessee.

“We’ve been speaking to employees of Morgan Keegan who may have (Employee Retirement Income Security Act) claims against Morgan Keegan for the handling of their retirement funds,” said attorney Ryan Bakhtiari, a partner at Aidikoff, Uhl & Bakhtiari in Beverly Hills, Calif.

More disclosure needed?

The Employee Retirement Income Security Act of 1974, or ERISA, is a federal law that sets minimum standards for pension plan management in the private sector. Bakhtiari said his firm is considering filing a class action suit representing Morgan Keegan employees who lost money in their pension plans because of the RMK exposure.

His firm is not the only one. A cursory check revealed at least a handful of other law firms from around the country who’ve announced similar investigations.

“The company owes the employees a fiduciary duty to manage the plan in a prudent manner, the same way the company owes a fiduciary duty to customers of Morgan Keegan,” Bakhtiari said.

“And as part of that fiduciary duty, the company would have to tell the truth to its employees, to not make any misstatements or hold back any material information in connection with the investments in the plan.

“We believe that Morgan Keegan didn’t tell people about the true nature of the risks of these particular funds.”

That’s a claim individual investors are continuing to lodge against the brokerage firm, where the mutual funds in question are overseen by Jim Kelsoe. He’s a once-high-flying money manager who’s responsible for about $3 billion worth of assets at Morgan Keegan.

More suits coming

The credit crunch that knocked the economy back on its heels starting last year did the same to several of the funds Kelsoe manages. One of those mutual funds, the RMK Select High Income Fund, lost more than 60 percent of its value in 2007. The fund already is down 13 percent this year.

Four separate lawsuits are pending in the U.S. District Court for the Western District of Tennessee. They were filed on behalf of investors from across the country whose portfolios took varying degrees of loss in the RMK funds.

A similar complaint also was filed recently in Shelby County Chancery Court. Memphis attorney Scott Beall, representing three local-area family trusts, filed suit Tuesday against Regions Financial Corp., the parent company of Morgan Keegan, according to The Daily News Online.

Also named in the suit is David Franks, a senior vice president and regional trust manager for Regions in Memphis. The basic argument in the Chancery suit is that the family trusts originally had been managed by Union Planters Bank, which was acquired by Regions in 2004.

Within months of Regions’ taking over management of the trusts, according to the suit, the bank began selling off some of the trusts’ existing assets to generate cash that was then used to buy into the volatile RMK funds. Those purchases were made for the benefit of Regions rather than for the trust beneficiaries, according to the suit.

A Morgan Keegan spokesman declined to comment on the mutual fund situation. On a conference call with analysts last month, Regions’ chief financial officer Al Yother said the bank had made a recent investment in two of the RMK funds to provide some liquidity to support them.

Like many aspects of the debate over arbitration, the argument over explained decisions presents a juxtaposition between efficiency and fairness. While arbitration is meant to be faster and cheaper than the court system, many have argued that those advantages have eroded over the years. At the same time, some say they wish arbitration had some characteristics of court that they view as more fair.

Into the fray comes new numbers from a survey released last week in which 55% of customers and nearly 44% of non-customers said they’d like to understand the reasoning behind their arbitration awards. The study was commissioned by the Securities Conference on Arbitration, and more than 2,000 people answered the question about explained awards.

But a pending rule proposal to do just that has drawn protests from both sides, who argue that explanations could open the door to endless appeals, eliminating the efficiency that even critics see as a benefit to arbitration.

An explanation “lets the parties know…why it turned out that way,” said Tom Fehn, a Los Angeles lawyer who represents brokers and firms. “When people can understand things without an aura of mystery, they feel better.”

In 2005, the National Association of Securities Dealers - a predecessorto the Financial Industry Regulatory Authority, which now runs the industry’s arbitration forum - sent a rule to the Securities and Exchange Commission that if passed would require arbitrators to provide a written explanation of their decisions if either side requests it. The proposed rule drew nearly 200 comments, and is still pending as Finra reviews the responses, a spokeswoman for the self-regulator said.

Currently, arbitration awards must contain only basic information: the parties’ and lawyers’ names, a summary of issues, the damages and other relief requested and awarded and similar information.

Another pending Finra rule would require arbitrators to provide an explanation in instances where they grant a defense motion to dismiss before the claimant makes his case. But if the SEC approves the rule, arbitrators would only be able to grant such motions for three fact-based reasons, so the explanation wouldn’t provide great insight into the panel’s thinking.

It is rare for arbitrators to explain their decisions. Even though Finra has made awards publicly available online, the limited information that arbitrators typically include makes it difficult to glean any telling information from them.

“You need to know how the sausage is made,” said David Robbins, a New York City lawyer who represents investors and brokers in arbitration claims. “Cases aren’t black and white, cases are gray. You have a right to know” how the decision came to be.

Both investor and industry advocates acknowledge that it can be frustrating to receive an award that bears no resemblance to a party’s understanding of the case.

But some argue that providing explanations for awards, even if it made participants in arbitration feel better, wouldn’t necessarily improve the process.

“It’s understandable, it’s human nature” for people to want to have awards explained, said Kevin Carroll, managing director and associate general counsel at the Securities Industry and Financial Markets Association. “But the costs of implementing it are just too high.”

Chief among detractors’ concerns is the prospect of the losing party appealing - or threatening to appeal - a ruling. The grounds for which someone can appeal an arbitration award are narrow, but include an arbitration panel’s manifest disregard for the law. Large numbers of appeals would slow down the resolution of arbitration cases, negating the speed that is a key benefit of arbitration compared to courts of law, critics fear.

A written explanation “creates more opportunities for broker-dealers to file petitions to vacate, not because they know they’re going to win, but they can use it as a negotiation tool,” said Phil Aidikoff, an investors’ lawyer in Beverly Hills, Calif.

Along the same lines, Sifma’s Carroll and others are worried that arbitrators - who aren’t necessarily lawyers - wouldn’t know how to write explanations that could withstand legal scrutiny.

But Robbins sees a simple solution to that potential problem: training. Also, Fehn argues that the risk of endless appeals isn’t so daunting.

“If it seems clear they made a mistake, shouldn’t it be corrected?” Fehn asked. “Is the god of finality superior to the devil of wrongness? I don’t think so.”

There are a lot of portfolios - held by non-profits, governments and companies - with bonds backed by subprime mortgages.

With the burst housing bubble and subprime meltdown roiling the markets, Maddox and his partner Tom Hargett think there will be a lot of come-to-Jesus moments.

They’ve already had success in a case involving the Indiana Children’s Wish Fund and its investment adviser, Morgan Keegan.

Hargett filed an arbitration claim to recover nearly $50,000 the wish fund said it lost when it switched investments on the advice of Morgan Keegan.

The case closed late last month when Morgan Keegan agreed to pay the fund an undisclosed sum.

“Eight months ago, Mark and I saw the rumblings of this avalanche coming from the subprime loan mess,” Hargett said.

Maddox, Hargett and New York-based partner Steven Caruso have made a name for themselves in arbitration cases against brokers.

Maddox was Indiana securities commissioner under Gov. Evan Bayh, while Hargett worked as a stockbroker before becoming a lawyer. Caruso was general counsel for a national brokerage.

They’ve had some big wins in arbitration cases, but the subprime problem is so big and so new, they decided not to go it alone.

Over four days in August, Maddox and Hargett hammered out an unusual alliance between their firm and three others that specialize in securities law. The new affiliation “makes a lot of sense,” said Craig McCann, an expert witness in securities cases across the country.

“I don’t know of any other group that has organized the way these guys have,” he said.

It would be hard for the firms to take on the cases individually, McCann said, but together they can.

The other firms are Aidikoff, Uhl & Bakhtiari in Beverly Hills, Calif.; David P. Meyer & Associates in Columbus, Ohio; and Page Perry in Atlanta. They launched a Web site, www.subprimelosses.com, and then filed a lawsuit against New York-based Bear Stearns, which has lost billions on the loans.

Regular investors soon will see the problems that big investment banks like Bear Stearns have had since last fall. “There are a lot of people who don’t see the problem yet,” Hargett said. “But trust me, its coming.”

Those come-to-Jesus moments, that is.

Terms of the settlement between Morgan Keegan & Co. and the Indiana Children’s Wish Fund, a group that grants wishes to children with terminal illnesses, include a payment by the firm to the charity. That payment, the amount of which remains private, was made a little more than a week ago.

The Indiana charity, which lost almost $50,000 investing in the Regions Morgan Keegan Select Intermediate Bond Fund, was one of the first investors in the group of bloodied RMK funds to file a claim or lawsuit recently saying the funds’ volatility had not been fully disclosed.

Morgan Keegan spokeswoman Kathy Ridley could not be reached for comment.
Other investors in the various RMK funds followed soon after the Indiana charity. Two separate lawsuits were filed in U.S. District Court for the Western District of Tennessee in December alone, both making claims similar to the charity’s.

For its part, Morgan Keegan denied the notion it glossed over risks associated with the charity’s investment in an October letter sent to the group’s executive director. That letter also included an offer to settle the claim for a little less than $15,000.

The 23-year-old, wish-granting charity turned that offer down but now has agreed to a new deal.

“I’m informed that the parties have agreed to settlement terms including confidentiality,” said Ryan Bakhtiari, a partner at the Aidikoff, Uhl & Bakhtiari law firm in Beverly Hills, Calif.

A loose affiliation of lawyers from across the country, including Bakhtiari, is currently investigating the performance and management of the six RMK funds whose values plummeted this year partly as a result of the mortgage market meltdown. More suits and investor claims are expected to be filed soon.
By way of highlighting the effect of the RMK losses for investors on an individual level, Bakhtiari said the nearly $50,000 loss the Indiana charity took from its mutual fund investment could have funded about 10 wishes of children the group serves.

For some San Luis Obispo County investors who collectively lost millions of dollars in an equity investment, 2007 meant dealing with financial trouble.

Many clients of Jeffrey Forrest and Wealth Wise LLC had used their savings and, in some cases, borrowed against the value of their homes to invest in the APEX Equity Options Fund, a $46 million fund that was wiped out in August, according to legal documents.

Three arbitration cases have been filed with the Financial Industry Regulatory Authority against Forrest and Associated Securities, an El Segundobased broker-dealer, and a fourth case is under way, said Phil Aidikoff, an attorney with Aidikoff, Uhl & Bakhtiari in Beverly Hills. A civil suit has been filed as well by a Hunting-ton Beach investor.

Attorneys are also pursuing Associated Securities, where Forrest had been registered until this year, for not supervising or controlling his actions, which is required by the regulators.

Investors allege that Forrest, who is charged in the cases with breach of fiduciary duty and fraud, assured them that the principal they invested in the APEX fund would be protected. But attorneys say that wasn’t the case. They also allege that Forrest sold investments in five businesses -Kennedy Club Fitness, San Luis Trust Bank, Florida Capital Real Estate, BOOMj, an online social networking site for baby boomers, and Estate Financial, a hard-money lender based in Paso Robles - that were unsuitable for some of his clients.

Aidikoff said an unsuitable investment does not mean that the investment itself is of poor quality; rather, it’s an investment that may not be advisable for some people. According to the case filings, Forrest had a responsibility to know his clients’ goals and risk tolerance, and to act in their best interest.

Aidikoff said FINRA will appoint arbitration panels, and hearing dates will be set. The first hearing could be in the fall, Aidikoff said.

Forrest was reached by The Tribune on Wednesday, but he declined to comment.

Calls are coming in from investors who have lost millions of dollars in the battered funds. And attorneys with the four-firm legal team such as Ryan Bakhtiari expect to file a flurry of lawsuits soon on behalf of some of those investors.

“I would guess the (collective) losses of people we’ve been speaking to may be north of $15 (million) or $20 million right now,” said Bakhtiari, a partner at Aidikoff, Uhl & Bakhtiari in Beverly Hills, Calif. “I don’t know if we’ll take all the cases. But I can tell you I think, right now, that we’ve spoken to investors who have lost somewhere in the neighborhood of $15 (million) to $20 million.”

Values plummeting

The funds are overseen by Morgan Asset Management, a Memphis-based arm of Morgan Keegan & Co. Since the beginning of 2007, the values of at least six of the company’s mutual funds have been hit especially hard because of their inclusion of assets tied to the subprime mortgage market. Once the mortgage meltdown unfolded late this summer in full force, those values plunged further still.

One of the six Regions Morgan Keegan funds that has seen the sharpest loss is the RMK Select High Income Fund. To use that fund as one example, it most recently reported assets valued at $190 million, according to data from Chicago-based Morningstar Inc.

At the beginning of this year, the value of its assets topped $1 billion.

“That fund’s return through (Tuesday) was a loss of 56 percent,” said Morningstar analyst Lawrence Jones, “which is about as bad as you’re ever going to hear in the bond market.”

Now, the lawyers are circling. Already, almost a dozen people have retained the four-firm team, which includes Aidikoff, Uhl & Bakhtiari; Maddox, Hargett & Caruso PC, which has offices in Indiana and New York; Page Perry LLC, of Atlanta; and David P. Meyer & Associates Co. LPA, of Columbus, Ohio.

That team is expected to file several complaints in the near future contending that, among other things, the risks associated with the various Regions Morgan Keegan funds were not fully spelled out to investors. Bakhtiari recalled one man he spoke to in the last few days who said he’d lost $600,000 of his retirement savings in one of the funds.

The funds’ performance since the beginning of this year has led to several recent actions. Morgan Properties LLC, a subsidiary of Morgan Keegan, recently gave two of the funds some much-needed cash when it bought about $55 million of securities in the RMK Select High Income Fund in the third quarter.

Morgan Properties also bought about $30 million of securities in the Select Intermediate Bond Fund, according to Region’s most recent quarterly report.

Action taken

Last month, an Indiana charity filed an arbitration claim with the Financial Industry Regulatory Authority against one of the funds. The Indiana Children’s Wish Fund said in the claim it filed that the group lost about $50,000.

Meanwhile, a federal lawsuit has been filed by two investors in Memphis, according to The Daily News Online. The lawsuit filed in U.S. District Court for the Western District of Tennessee seeks to become a class action covering investors who bought shares of the Regions Morgan Keegan Select Intermediate Bond Fund and Select High Income Fund between Dec. 6, 2004, and Oct. 3, 2007.

“It’s going to take a lot for these funds to come back,” Bakhtiari said. “It’s going to take a miracle, in my opinion.”

Jim Kelsoe, the chief fixed income investment officer of Morgan Asset Management who manages the funds in question, sounded a similar note in a recent update to shareholders.

“During my 20-year career,” he wrote, “these are truly unprecedented times.”

As a result of that investigation, as many as a dozen complaints are expected to be filed in the near future on behalf of investors who’ve seen the value of their investments in those funds plummet dramatically. If other investigators and lawyers are looking into the funds too, still more complaints could be on the way.

Losses

Last month, an Indiana charity filed an arbitration claim with the Financial Industry Regulatory Authority against one of the funds. A federal lawsuit was filed by two investors last week in Memphis, according to The Daily News Online, www.memphisdailynews.com.

The lawsuit filed in U.S. District Court for the Western District of Tennessee last week seeks to become a class action covering investors who bought shares of the Regions Morgan Keegan Select Intermediate Bond Fund and Select High Income Fund between Dec. 6, 2004, and Oct. 3, 2007.

“We make it a policy not to comment on litigation matters,” said Kathy Ridley, a spokeswoman for Morgan Keegan, responding to the suit Friday afternoon. “We just received a copy of the complaint today and our legal department is reviewing it.”

Because of their exposure to the battered subprime mortgage market, many of the funds in question have lost at least half their net asset value this year. The funds are overseen by Morgan Asset Management, a Memphis-based arm of Morgan Keegan & Co.

The chief fixed income investment officer with Morgan Asset Management who manages the funds is Jim Kelsoe. For years, the funds managed by Kelsoe produced investment returns rivaled by few of their top-tier competitors.

“But they outperformed everything for a reason,” said Thomas Hargett, an Indianapolis lawyer with Maddox Hargett & Caruso PC, one of the firms now investigating the battered Regions Morgan Keegan funds for allegedly glossing over their investment risks, among other reasons.

“This is one of the most important truths on Wall Street: When you outperform your peers, it means you’re taking on more risk than they are.”

Complaints coming

The four-firm legal team looking into the funds includes Aidikoff, Uhl & Bakhtiari of Beverly Hills, Calif.; Maddox, Hargett & Caruso, with offices in Indiana and New York; Page Perry LLC, of Atlanta; and David P. Meyer & Associates Co. LPA, of Columbus, Ohio.

“We’ve been retained by almost a dozen people to bring complaints, and a couple dozen other people are talking to us now about the same thing,” Hargett said.

Ultimately, several class actions will be filed on behalf of investors in the troubled mutual funds, he added.

“A stockbroker, when you boil it all down, has two duties,” Hargett said. “They need to assess what investments are appropriate for their clients, and they need to then select the investments that those requirements dictate.

“In that investment selection process, the law requires that you accurately and adequately explain the investment to those investors so they have the ability to make informed decisions. Where Regions Morgan Keegan unequivocally fell down is they did not describe to the public the risks associated with investments in these funds, period.”

Lawrence Jones, an analyst with Chicago-based investment research firm Morningstar Inc., echoed that sentiment in an earlier interview with The Daily News.

“Regions Morgan Keegan has not been quite as open and forthcoming with information during this whole period as we would have liked them to be,” he said. “This should be front and center. Investors want to know what’s going on.”

Judging by action taken so far and by the lawsuits soon to be filed, investors by and large either have been kept in the dark or generally were unaware of the types of risky securities and investments that made up a large part of the funds in question.

“I spoke to a gentleman last week who lost about $600,000 in one of the closed-end funds, and that represented a good portion of his retirement savings,” said attorney Ryan Bakhtiari, another member of the legal group investigating the Regions Morgan Keegan funds.

Nationally, subprime-related litigation is starting to swell, but the small number of Atlanta plaintiffs’ firms that handle securities litigation limits local suits.

Page Perry has joined forces with three other plaintiffs’ securities firms with offices in California, New York, Indiana and Ohio to take on subprime suits, and the group filed its first two arbitration demands for individual investors last month-one against Morgan Keegan & Co. for a fund that lost value and the other against Bear Stearns Cos. for losses in one of its offshore hedge funds that collapsed in July. The arbitrations are filed with the Financial Industry Regulatory Authority (until July, the National Association of Securities Dealers).

Meanwhile, Chitwood Harley Harnes filed a shareholder class action at the beginning of November against Merrill Lynch & Co., prompted by the firm’s late October stock drop after a last-minute announcement of an $8.4 billion write-off in the third quarter.

Lawyers at both firms say they are considering additional action against investment firms and residential mortgage lenders.

“These are pretty symbolic of what is obviously a very serious problem,” said J. Boyd Page of Page Perry. “We’ve gotten tons of phone calls over the last couple of weeks from a lot of people in very similar situations.”

“I really started following subprime about 15 months ago,” Page said. “Now I have 12 notebooks full of documents and another 10 or 12 boxes full.”

The coalition gives the plaintiffs’ firms the resources needed for the complex litigation, said Page, by creating a team of 26 attorneys. The other firms are Maddox, Hargett & Caruso of Indianapolis, Cleveland and New York; Aidikoff, Uhl & Bakhtiari of Beverly Hills, Calif., and David P. Meyer & Associates of Columbus, Ohio.

He said the four firms started talking about joining forces last winter because “we felt like this subprime situation was getting ready to explode when, suddenly, over the summer months, it did explode.”

Page Perry’s group filed an arbitration action Nov. 2 against Morgan Keegan for the Indiana Children’s Wish Fund, which gives dying children a final wish, after the charity lost almost $50,000 in two months in a Morgan Keegan bond fund.

According to the pleading, the charity had been depositing its donations into savings accounts, CDs and money market funds at an Indianapolis branch of Regions Bank for years, when a broker for Morgan Keegan suggested that it invest in one of the firm’s bond funds, the Regions Morgan Keegan Select Intermediate Bond C. Both Regions Bank and Morgan Keegan are subsidiaries of Regions Financial Corp., based in Memphis, Tenn.

In late July, the charity placed about $223,000 in the fund. In late September, it closed the account after loosing $48,500-almost 22 percent of its investment, and enough money, according to the pleading, to grant wishes to 10 children.

Page emphasized that the charity had been looking for a very conservative investment. “It was marketed as being this completely safe and smart business decision. Safety was discussed at length in meetings between the Wish Fund and Morgan Keegan,” he said.

But upon closer inspection, said Page, it turned out the fund was “loaded to the gills with subprime debt.” By June 30, subprime mortgage-related investments made up 55 percent of the fund, according to the complaint.

A spokesperson for Morgan Keegan said the firm does not comment on pending litigation.

Page Perry’s group filed another arbitration action Nov. 30 against Bear Stearns for an Irish fund manager, whom Page said did not want to be named, to recover $1 million invested in one of the two Bear Stearns subprime hedge funds

that went belly up in July-less than a year after launching in August 2006.

The fund (called the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund) invested heavily in triple-A and double-A rated collateralized debt obligations, called CDOs, and mortgage-backed securities, which are put together from pools of subprime residential mortgages.

In July, Bear Stearns informed the hedge fund’s investors that the fund was virtually worthless and would be shut down. “The fund’s reported performance, in part, reflects the unprecedented declines in the valuations of a number of highly-rated (AA and AAA) securities,” said the firm in a July 17 letter to investors.

The Wall Street Journal has estimated that the fund lost as much as $1.6 billion.

Bear Stearns did not respond to requests for comment.

From writedown to class action

Chitwood Harley’s shareholder class action against Merrill Lynch, filed Nov. 6, represents those who bought Merrill’s stock between Feb. 26 and Oct. 23-the day before the firm announced that it would take a third quarter writedown of $8.4 billion from subprime-related investments instead of $5 billion, as previously announced, making it the only major Wall Street investment bank to end the quarter with a net loss.

Merrill had been the biggest CDO underwriter on Wall Street. The company’s recently ousted CEO, Stan O’Neal, said

Oct. 24 that it was “overexposed to subprime” and that “both our assessment of the potential risk and our mitigation strategies were inadequate,” according to The Wall Street Journal.

A spokesperson for Merrill said the suit has no merit.

Chitwood Harley’s Nov. 6 filing in U.S. District Court for the Southern District of New York followed a similar class action against Merrill filed Oct. 30 by Coughlin Stoia Geller Rudman & Robbins-the firm started three years ago by class action king William S. Lerach-plus several other plaintiffs’ securities firms.

Chitwood Harley is representing individual investors, said Martin D. Chitwood. He predicted that big pension funds will join the suit by the end of the year, when the lead counsel will be decided.

Chitwood said his firm is considering additional class actions against Citigroup and Washington Mutual, among others.

“There are a lot more out there,” he said.

In addition to the Merrill class action in late October, four new subprime-related class actions were filed in the Southern District of New York in November, against Citigroup Inc., ACA Capital Holdings Inc., the Federal Home Loan Mortgage Corp. (Freddie Mac) and Washington Mutual Inc.

Coughlin Stoia is involved in all five New York class actions and has also filed subprime-related class actions against Countrywide Financial Corp. and American Home Mortgage Investment Corp.

Chitwood Harley also is lead counsel in a subprime-related shareholder class action filed last spring against Beazer Homes USA Inc. in U.S. District Court for the Northern District of Georgia accusing the homebuilder, which also made home loans, of shoddy lending practices to low-income borrowers that artificially inflated sales and, thus, the stock price. By the spring, sales had dropped and foreclosures had shot up, causing stockholders to lose money, according to the suit.

Beazer is under federal investigation for lending and investment fraud.

Other firms in on the class action against Beazer include Coughlin Stoia and the local firms Motley Rice and Holzer & Holzer.

Motley Rice, based in South Carolina, recently closed its Atlanta office but its local lawyers handling plaintiffs securities litigation plan to stay put. One of them, David J. Worley, said he and his colleagues are considering several subprime-related suits but haven’t yet filed anything.

Corey D. Holzer of Holzer & Holzer also filed a shareholders’ derivative action in August against Countrywide in California state court, in conjunction with a California and a Pennsylvania firm.

New to Georgia

The 11th U.S. Circuit Court of Appeals historically has not attracted a lot of securities class actions, said a securities litigator on the defense side, J. Allen Maines of Paul, Hastings, Janofsky & Walker.

Maines said most of his securities cases are in south Florida and New York. “The Southern District of Florida probably gets more securities class actions filed in a year than all the rest of the 11th together,” he said.

For securities class actions locally, he said, Chitwood Harley has seemed to have a “lock on the club.”

“For the past six or seven years, it sure seemed that they were the only game in town,” he said, adding that he thought Motley Rice’s entry into Atlanta almost two years ago “might stir things up the way things are being stirred up in Florida.”

Maines predicted that there will be more subprime-related plaintiffs’ suits if the financial markets continue to drop.

“You’re only going to have securities fraud suits if you have damages, measured as the difference in stock trading at the day ‘the truth came to light’ and the mean the stock was trading at in the prior 90 days,” he said. “If the stock does not drop, it’s pretty hard to establish damages.”

Class action filings nationally have been “way down” over the past couple of years, Maines said, but several have been filed since the Dow Jones Industrial Average dropped about 1,000 points last month.

“Nobody knows how much subprime exposure is out there,” he said. “The derivative instruments that were packaged by

the banks all contained a certain percentage of subprime and high-risk mortgages-and everybody was playing the percentages [as to the risk].”

“When the market trend is up, no one seems to care that they’re operating on the margin. When the trend turns down, excesses come to light. That’s when you get scandals, recrimination, lawsuits and blame,” said Robert R. Prechter Jr., who has been following the securities market for more than 30 years. Based in Gainesville, Prechter publishes the Elliott Wave Theorist, a monthly newsletter providing market forecasts, and is the author of “Conquer the Crash.”

Prechter said investment losses to date from overexposure to subprime mortgages are just the tip of the iceberg-or, rather, the debt pyramid.

“Mortgage brokers had a lot of IOUs that were not triple-A and they had to figure out how to make them attractive,” he said. To mitigate the risk of investing in subprime loans, the banks assembling them into securities did two things: divided them into tranches, with the top, higher-rated tranches paying out before the lower, more risky ones and lined up insurance to cover the bonds if they went bad.

But “very few people looked into the ability of the insurer to actually cover what the policy covered,” he said. “People did not realize that the triple-A ratings were made on such rosy assumptions about risk.”

The losses might go beyond what the bond insurers can cover, he cautioned. “If there’s nothing left in the fund and if the insurer is bankrupt, who’s left to sue?”

Prechter added that big lawsuits against lenders and investment firms, if successful, could help tip some of them into bankruptcy.

“The current excesses are unprecedented. We’ve never had such a volume of subprime mortgages sold,” said Prechter. “There has never been a time in history when people could buy houses with absolutely no money.”

At the moment, he noted, there is no market for securities based on subprime residential mortgages. “Practically speaking, their value is zero.”

When the bonds can be sold and at what price, he said, largely depends on what happens to the economy. “What people are trying to figure out right now is if the economy is going to recover right away, or if it’s going into a recession.”

If a recession is ahead, he noted, buying subprime mortgage securities “would be useless,” since their value would continue to drop.

At least 11 institutional and retail investors will file arbitration cases with the Financial Industry Regulatory Authority, said Steven Caruso, one of a group of attorneys handling the claims. One was filed this week by a Cayman Islands investment manager seeking $1 million in damages, according to a copy of the complaint, which didn’t identify the plaintiff.

“Officials at Bear Stearns engaged in a concerted effort to conceal the true state of affairs at both of these hedge funds for an extended period of time before they imploded,” said Caruso, a partner at Maddox Hargett & Caruso PC in New York. Client losses ranged from $1 million to $8 million.

Bear Stearns, the fifth-largest US securities firm by market value, sought bankruptcy protection for two hedge funds in July after rising defaults on subprime mortgages led to losses. The funds’ collapse triggered regulatory probes and investor lawsuits. Arbitrators at Washington-based Finra hear cases brought by investors against their brokerages.

The claims announced on Wednesday target two Bear Stearns divisions on behalf of people who suffered losses in the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund. As a so-called feeder fund, it had invested in the two hedge funds that collapsed.

Russell Sherman, a spokesman for New York-based Bear Stearns, said he couldn’t comment on the case because he hadn’t seen the claims.

Cases are being brought by four law firms. The others are Aidikoff, Uhl & Bakhtiari in Beverly Hills, California; Page Perry LLC in Atlanta; and David P. Meyer & Associates Co. in Columbus, Ohio.

The claims, which will be submitted to the Financial Industry Regulatory Authority (FINRA) for arbitration, represent more legal challenges for Bear Stearns, which recorded losses this summer.

The first of at least 11 new claims involves an unidentified Cayman Islands fund-of-hedge funds manager that lost $1 million in the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund.

FINRA keeps the names of arbitration parties confidential. Lawyers for the fund declined to identify their client. Bear Stearns spokesman Russell Sherman declined to comment, saying he had not seen the complaint.

Long considered one of the savviest bond traders on Wall Street, Bear Stearns suffered an embarrassing setback this summer as a rise in U.S. subprime mortgage defaults triggered a broader meltdown in mortgage-backed securities markets.

By the end of July, two funds managed by the bank — Bear’s High Grade Structured Credit Strategies Fund and the High Grade Structured Enhanced Leverage Fund — had collapsed, wiping out about $1.6 billion of investments.

Now a group of lawyers for 11 investors with combined $62 million in losses says that Bear continued to sell shares of the funds this spring, when the subprime market was melting down.

According to the claim filed Wednesday, the unidentified fund-of-funds manager invested $1 million in the Enhanced Leverage (Overseas) Fund in March 2007, when the subprime mortgage market was already showing some signs of strain.

By June there were market rumors that subprime investments in the fund had suffered steep declines. Bear on June 22 confirmed that margin calls were draining needed liquidity, and by the end of July, the two funds filed for bankruptcy.

“Officials at Bear Stearns engaged in a concerted effort to conceal the true state of affairs at both of these hedge funds for an extended period of time before they imploded,” said lawyer Steve Caruso of Maddox, Hargett & Caruso in New York, one of four firms representing the fund-of-funds manager.

The lawyers claim Bear Stearns did not properly disclose “related-party” transactions between the funds and other Bear Stearns divisions, nor did it explain the risks of illiquid securities held by the portfolios.

As one of Wall Street’s top underwriters of mortgage-backed securities, Bear Stearns knew or should have known these markets had become extremely unstable, said Ryan Bakhtiari of Aidikoff, Uhl & Bakhtiari.

“My gut feeling is these funds were used as a dumping ground by Bear Stearns,” said Bakhtiari, whose Beverly Hills, California, firm is also representing the 11 claimants, along with Page Perry of Atlanta and David P. Meyer & Associates in Columbus, Ohio.

The claims come three weeks after Massachusetts Secretary of the Commonwealth William Galvin charged Bear Stearns with engaging in related-party trades without required approvals from independent directors.

Law firms Zamansky & Associates and Rich & Intelisano in August filed the first investor arbitration claim against the High Grade Credit Strategies Fund. Navigator Capital Partners, a limited partner in Structured Credit Strategies Fund, filed a civil lawsuit against Bear Stearns in Manhattan state court.

These allegations add to the numerous complaints already filed, and to the Securities and Exchange Commission and the Brooklyn US Attorney’s investigations into the funds. Both the SEC and the Brooklyn US Attorney declined to confirm or deny investigations, but a source close to the US Attorney’s Office says the investigation is “ongoing.”

“We are declining to comment on this ongoing regulatory matter,” a Bear Stearns spokesman says.

The Massachusetts complaint alleges that Bear Stearns Asset Management (BSAM) violated securities laws by failing to notify the hedge funds’ independent directors that it was trading securities from its own accounts with hedge funds it also advised, and that as such, investors in the BSAM funds were exposed to more conflicts of interest than investors in most other hedge funds.

A spokesman for the Secretary of the Commonwealth of Massachusetts, William Francis Galvin, declined to comment beyond the complaint.

The BSAM funds invested in special purpose vehicles structured by the managers of the funds themselves, bought and sold securities from those special purpose vehicles and bought and sold securities from the affiliated broker-dealer, Bear Stearns & Co., the complaint reads.

Under state and federal securities regulation, consent from independent directors - which at BSAM is called a principal trade letter - is necessary to conduct such transactions.

However, of the transactions that required prior approval by the unaffiliated directors, nearly 79% were missing such approval in 2006, according to the complaint. Bear Stearns subsequently decided to impose a freeze in the early fall of 2006 on all transactions between the High Grade Fund and Bear Stearns, which “reveals the depth and gravity of the breakdown,” the complaint says.

Following the moratorium, the funds’ managers, Ralph Cioffi and Matthew Tanin, began to express concerns about the liquidity of the High Grade funds, the complaint further alleges, citing email communications it used as exhibits.

In an email Tanin sent Cioffi, dated Sept. 17, 2006, he writes: “I think we need to have a very specific idea of how we would raise $100 million in liquidity over a 60-day period. While I do not expect this, I think it is possible.”

The moratorium lasted until May or June 2007, according to the complaint, but neither the liquidity concerns, nor the moratorium itself, were communicated in the High Grade fund’s August 2006 private placement memorandum.

“According to the emails between Tanin and Cioffi they knew they were in danger of being wiped out because of the liquidity problem but they continued to sell the hedge funds through spring of 2007. It’s stunning they continued knowing they would have a lack of liquidity in the fund,” says Ryan K. Bakhtiari, a partner with Aidikoff, Uhl & Bakhtiari, which is part of a consortium of law firms - Maddox, Hargett & Caruso, David P. Meyer & Associates and Page Perry - that are representing investors in the Bear funds and filed claims with the NASD arbitration tribunal.

“I represent investors that bought in the fund in March 2007 and their money was wiped out in a couple of months. I’m sure they would have liked to know there was no liquidity before putting their money in,” Bakhtiari says.

According to Bakhtiari, Bear Stearns, which was deeply involved in the loan origination and the securitization process, used the hedge funds as a conduit for the firm to pass through low-quality securities. Bear Stearns, he says, was at that time the No. 1 underwriter of mortgage-backed securities with an 11% market share, hence “acutely aware of the MBS and housing market issues.”

“I think that the evidence that the state of Massachusetts and private attorneys will uncover may demonstrate that the hedge funds were a dumping ground,” he says. “It seems to me when you are dominating the underwriting market and you know about mortgages and tell people that their investments in the two funds were going be in AAA’ and AA’ credit, knowing what you knew about the market at that time, was very misleading.”

Several industry observers backed the sentiment, saying the Massachusetts Securities Division has taken a different route - concentrating on compliance and approval procedures which were not followed - to get to the same set of facts.

“They may have been dumping allegedly low-quality securities into the hedge funds at unfair prices,” says New York-based lawyer Jacob Zamansky of Zamansky & Associates, who is representing several investors and who filed a complaint with the NASD arbitration tribunal in August. “When people don’t follow procedures, there is generally a reason for it.”

In addition, this latest development may help the private attorneys’ cases as “the exhibits to the complaint are particularly illustrative of the fact that the true financial difficulties of their hedge funds were known and concealed by the insiders at Bear Stearns,” says Steven B. Caruso, a partner at Hargett & Caruso. “The fact that a state regulator initiated this complaint, and exposed the depth of this apparent scheme, is yet another example of the SEC being a day late and a dollar short when it comes to investor protection.”

The Finish Line is in a legal battle with Genesco over whether it can get out of its agreement to buy the shoe and hat retailer.

UBS, the Finish Line’s bank, has sued Genesco for fraud, saying that Genesco was not honest in disclosing the company’s financial information.

“The U.S. attorney’s subpoena comes on the heels of the baseless fraud allegations made by UBS 10 days ago,” Genesco Chairman and CEO Hal Pennington said. “These allegations are completely without merit and are simply part of UBS’s litigation tactics to avoid their contractual obligations.”

U.S. attorney won’t talk

The U.S. attorney’s office declined to say whether it has launched an investigation.

Other lawyers familiar with securities litigation but not connected to the case said the subpoena was significant, although it would be hard to tell what kind of long-term effect an investigation would have on the companies.

“Any time you hit the radar of a regulator at the federal U.S. attorney’s office, it is a significant event,” said Robert A. Uhl, a partner with the Beverly Hills, Calif.-based law firm Aidikoff, Uhl & Bakhtiari, which represents investors in securities arbitration. “Whether they find any fraud or not, it’s unusual for the U.S. attorney’s office to get involved when litigation is pending.”

Uhl speculated that federal investigators would want to see corporate financial information, plus supporting work documents from independent auditors, e-mails and other communications between Genesco and its auditors and within the company.

Uhl said a federal investigation “could backfire” on UBS, if the U.S. attorney’s office finds nothing improper in company documents. Genesco’s stock fell $3.14 a share, or 9.4 percent, closing at $30.17 in New York Stock Exchange trading Monday. The stock continued to fall in after-hours trading.

Claims recently were filed on behalf of an Indiana charity alleging that the charity was unaware that the Morgan Keegan bond fund recommended by the firm had become highly concentrated in highly risky mortgage and asset-backed securities and collateralized debt obligations (CDOs).

The charity’s legal team includes the firms of Aidikoff, Uhl & Bakhtiari, of Beverly Hills, Calif.; Maddox, Hargett & Caruso, P.C., of Indianapolis, Ind. and New York, N.Y.; Page Perry, LLC, of Atlanta, Ga.; and David P. Meyer & Associates Co., L.P.A., of Columbus, Ohio.

According to Thomas A. Hargett, a partner at Maddox, Hargett & Caruso, P.C., “The charity we represent was induced into investing in the Regions Morgan Keegan Select Intermediate Bond Fund- C because it was purported to be ‘safe.’ The fund was anything but safe and it was not appropriate for the charity.”

“Investors in numerous Morgan Keegan bond mutual funds have experienced losses in net asset value of more than 50 percent since the beginning of 2007, with large losses sustained over the last five months. Recent news reports indicate that mortgage-backed securities and CDOs may constitute significant portions of Morgan Keegan bond fund portfolios,” said Mr. Hargett.

Ryan Bakhtiari, a partner at Aidikoff, Uhl & Bakhtiari, said, “The funds that we’re investigating are managed by Morgan Keegan Asset Management, Inc. Their poor performance appears to be a result of management’s decisions to concentrate investments in highly risky mortgage and asset-backed securities and collateralized debt obligations (CDOs).”

The law firms are investigating the following funds that have been adversely impacted by the collapse of the mortgage markets and subprime crisis:

• Regions Morgan Keegan Select High Income-A, (Sym: MKHIX), Year to Date Return a/o (11/20/07) -54.45 percent
• Regions Morgan Keegan Select High Income-C, (Sym: RHICX), Year to Date Return a/o (11/20/07) -54.66 percent
• Regions Morgan Keegan Select High Income-I, (Sym: RHIIX), Year to Date Return a/o (11/20/07) -54.35 percent
• RMK High Income Fund, (NYSE: RMH), Year to Date Return a/o (11/20/07) -60.83 percent
• RMK Strategic Income Fund, (NYSE: RSF), Year to Date Return a/o (11/20/07) -61.86 percent
• Regions Morgan Keegan Select Intermediate Bond Fund-A, (Sym: MKIBX), Year to Date Return a/o (11/20/07) -42.73 percent
• Regions Morgan Keegan Select Intermediate Bond Fund-C, (Sym: RIBCX), Year to Date Return a/o (11/20/07) -42.96 percent
• Regions Morgan Keegan Select Intermediate Bond Fund-I, (Sym: RIBIX), Year to Date Return a/o (11/20/07) -42.50 percent

J. Boyd Page, of Page Perry LLC, said, “Many investors, from individuals to institutions, are not aware that their portfolios include mortgage-backed securities and CDOs because of how these products were marketed. We believe that many bond funds were aggressively marketed as investment-grade with A, AA or even AAA ratings. Some of the Morgan Keegan bond funds apparently held below-investment grade securities. For example, the Select Intermediate Bond Fund C has 49.7 percent of its portfolio in BBB securities. We urge investors to investigate whether their investment holdings include at-risk bond funds.”

David P. Meyer, of Meyer & Associates, Co., L.P.A., said, “Our legal team’s collective experience is notable. Our group includes the immediate past president and several current and former directors of the Public Investors Arbitration Bar Association (PIABA), the co-chairman of the American Bar Association Securities Arbitration Subcommittee, the current chair and past members of the FINRA National Arbitration and Mediation Committee (NAMC), a former general counsel of a national brokerage company, a former state securities commissioner, and a past member of the NASD Securities Arbitration Policy Task Force.”

More information is available at www.subprimelosses.com

The issue speaks directly to the quality of supervision at Associated Securities, the broker dealer that Forrest was registered with until this year, said Philip Aidikoff of Beverly Hills based Aidikoff, Uhl & Bakhtiari, the lawyer representing the investors in the arbitration case.

Both the Securities and Exchange Commission and the Financial Industry Regulatory Authority have previously ruled that inaccurately representing stock purchase orders violates securities law and is an act that constitutes fraud.

Marking a stock purchase as “unsolicited” - meaning the client requested the trade and the broker did nothing other than execute the trade purchase - is often used to hide unsuitable recommendations, said Jim Eccleston, an attorney at Chicago-based Shaheen, Novoselsky, Staat, Filipowski&Eccleston and an expert on securities law.

Unsuitability does not reflect on the quality or potential of an investment, in this case San Luis Trust Bank shares. It is a subjective analysis based on an individual investor’s risk tolerance, needs and investment objectives.

Securities rules dictate that when an investment adviser recommends a stock to his clients-which is defined as any advice, suggestion or statement that influences a customer to purchase, sell or hold a security-he must designate the trade as “solicited.”

While supervisors at broker dealers are required to oversee all of the trading activity of their registered advisers, trades that are marked unsolicited are typically not studied as closely, Eccleston said. The lawyer is not involved in the arbitration cases against WealthWise and Associated Securities.

Aidikoff said that many of his clients involved in the arbitration cases have records that indicate the trades were marked unsolicited, though the investors allege that Forrest introduced the investment ideas to them.

“We didn’t know about the bank until Jeff told us about it at a general review meeting of our investments. He told us that it was a great opportunity,” said Sherri Parkinson, a claimant in the first arbitration case who lives in San Luis Obispo with her husband and two children. The couple purchased the bank shares in 2005.

Forrest declined to answer questions for this article.

What is known, based on written documents by Forrest, is that the adviser considered the San Luis Obispo-based bank a compelling investment opportunity.

“From time to time in my career I’ve come across a handful of significant investment opportunities, which I feel have superb risk-reward ratio. Two previous ones include Kennedy Club LLC as well as San Luis Trust Bank. APEX is the third,” he wrote in a WealthWise letter sent to many of his clients between the late summer and fall of 2005. At the time, he was explaining the APEX Equity Options Fund to potential investors.

About the same time, in a client letter dated September 2005 to existing San Luis Trust Bank shareholders, Forrest told clients - in large, bold type - that the bank stock was “on sale…buy more!!”

He predicted the stock would increase from $16 a share, where it was trading at the time, to $26 a share a year later. He noted several positive financial performance indicators and explained why he thought the shares were “undervalued.”

The stock closed Friday at $8.50, a 52-week low. The shares hit a 12-month high of $13 last December. The NASDAQ index of bank stocks is off more than 20 percent year-to-date.

Many of Forrest&