CORRECTED-Morgan Keegan loses $1.95 mln auction-rate case

By Suzanne Barlyn

Feb 22 (Reuters) - Morgan Keegan & Co. must repurchase $1.95 million in auction rate securities from a Birmingham, Alabama investor, a securities arbitration panel ruled.

William Featheringill, an investor and venture capitalist, filed a claim in 2010 alleging that the brokerage that sold him the securities in 2005, AmSouth Investment Services Inc, was negligent and misled him, among other things. AmSouth became part of Morgan Keegan, a unit of Regions Financial Corp,, in 2007.

The claims stem from Jefferson County, Alabama sewer bonds that Featheringill bought from AmSouth, which the company marketed as a safe and liquid investment, according to his lawyer, Michael Rediker in Birmingham.

Auction rate securities were sold as highly liquid short-term instruments similar to money-market funds, but with slightly higher returns. When the $330 billion auction-rate market failed in 2008, as large investment banks that ran the auctions ran into liquidity crunches, thousands of investors were left with securities that could not be sold.

Last year, Jefferson County, which issued the securities, filed the biggest U.S. municipal bankruptcy case, driven mainly by $3.14 billion of sewer debt.

The securities Featheringill bought in 2005 initially worked they way they were intended. In 2006, Featheringill was able to cash out $1.5 million of his total $3.5 million investment, according to Rediker. But his remaining investment, which totalled $1.95 million at the time of the arbitration claim, became illiquid when the auction rate market froze.

The FINRA panel's $1.95 million ruling against Morgan Keegan represents the full value of Featheringill's outstanding securities. He must sign over the securities to Morgan Keegan in exchange for the sum.

Morgan Keegan completed its transfer of AmSouth clients to its brokerage system by February 2007, before the auction rate market failed, according to Rediker. Featheringill argued that Morgan Keegan knew of escalating trouble in the auction rate market. A brokerage that knows of such risks has a duty to make sure they are "communicated effectively to its customers," Rediker said.

The panel did not provide any reasons for its decision, as is typical of arbitration rulings. It declined the investor's request for $5.9 million in punitive damages.

Morgan Keegan is in the process of being purchased by Raymond James Financial Inc.

"We do not agree with the decision of the panel and are considering an appeal," said Morgan Keegan spokesman Eric Bran in an emailed statement.

He pointed to an unrelated federal court decision in 2011 that dismissed a suit against Morgan Keegan by the U.S. Securities and Exchange Commission because its auction rate disclosures were adequate and did not amount to securities fraud.

The story was reported earlier on Wednesday by The Bond Buyer.