(Reuters) - A court’s declaration that a former Securities and Exchange Commission economist allegedly gave fraudulent testimony in a case against Morgan Keegan & Co. could have a widespread impact on similar arbitration cases against the brokerage firm, say lawyers.
Houston U.S. District Court Judge Lynn Hughes on September 30 threw out a 2010 ruling by a Financial Industry Regulatory Authority (FINRA) arbitration panel that required Morgan Keegan, a unit of Regions Financial Corp., to pay $9.2 million to a group of investors for losses tied to troubled bond funds.
The $9.2 million award was the largest against the brokerage, which has been slammed with hundreds of arbitration claims from investors for losses in six funds that held risky subprime mortgages. Going to court to overturn an arbitration award is unusual and the cases are rarely successful, say lawyers.
Morgan Keegan scored at least a temporary victory when Hughes, in a controversial opinion, invalidated the arbitration award. Hughes did so partly because he said the $9.2 million ruling was based on allegedly “fraudulent testimony” from a well-respected expert witness for the investors.
The testimony came from Craig McCann, a former SEC economist and certified financial analyst and litigation consultant in Fairfax, Virginia who often testifies on behalf of investors. McCann, Hughes wrote in his opinion, had admitted in another arbitration case that his testimony about Morgan Keegan’s pricing of funds values was “false.”
But a lawyer for the investors said Hughes got the facts wrong. McCann did testify in another case against Morgan Keegan that his figures were inaccurate, but that inaccuracy was actually in favor of Morgan Keegan, not the investors for whom he testified, said Paul Dobrowski, a Houston-based securities lawyer. The judge’s comments “are wholly erroneous,” said Dobrowski, who will appeal Hughes’s decision to the U.S. Court of Appeals for the 5th Circuit.
Even if the calculations were in Morgan Keegan’s favor and the judge’s remarks about McCann are mistaken, lawyers say the troubled brokerage will likely try to use the opinion to its advantage in arbitration cases that are still pending.
The judge’s remarks could also damage McCann’s credibility as an expert, said George Brunelle, a securities lawyer in New York. Lawyers can point to the opinion and say “‘Here’s a case where you were wrong,’” he said.
The dispute in Texas focuses on testimony by McCann about the process Morgan Keegan used for pricing of some subprime securities in the funds. Investors and regulators accused the firm of ignoring lower values, thereby inflating the funds’ share prices. McCann, in a later case, testified that Morgan Keegan mispriced more securities than he initially concluded, according to Dobrowski.
Morgan Keegan used that discrepancy to try to invalidate McCann’s testimony on behalf of the investors.
A Morgan Keegan spokeswoman declined to immediately comment on whether the firm will use the judge’s comments about McCann as evidence in other arbitration cases related to the funds.
Some lawyers are concerned that the allegation about McCann, even if made in error, could hurt their chances of success in other arbitration cases against the firm.
About 1,000 investors filed arbitration cases involving losses they incurred during 2007 and 2008. Many cases are still pending. Morgan Keegan, which was put up for sale by Regions in June, paid a $200 million fine to the SEC and state regulators this summer to settle fraud allegations against the Memphis-based brokerage.
A star fund manager at the firm also agreed to a $500,000 fine and was barred from the industry.
“Is it a fatal blow? No. But are brokerage firms celebrating,” said Andrew Stoltmann, a securities arbitration lawyer in Chicago who has been involved in numerous cases against Morgan Keegan. McCann “is probably the pre-eminent claimant’s expert out there.”
The attack on McCann shocked many securities arbitration lawyers who have relied on him to testify on behalf of investors they represent.
“I’ve worked with Craig on a number of cases for many years. His integrity and competence is beyond reproach,” said Steven Caruso, a New York-based securities lawyer who represents investors.
Two previous decisions by Hughes to overturn arbitration orders have already been reversed. In one of the cases, the appeals court said the judge “improperly substituted his judgment for that of the arbitrator.”
Hughes declined to comment.
Reporting by Suzanne Barlyn in Washington; Editing by Jennifer Merritt and Walden Siew