Butterworth v. Morgan Keegan & Co.

CHARLES E. BUTTERWORTH, JR. Family Trust by Joyce Butterworth-Engler,Trustee, JOYCE BUTTERWORTH-ENGLER, WILEY L. ESTES, T.J. KASSOUF,MARY JO KASSOUF, SHIRLEY A. KELCE, KIMBERLY GLASGOW, MARY K. LEWIS,ELLEN DAVIES ROGERS, DARCIE A. SIMMONS, BONNIE FAE SPARKS-MITCHELL, Plaintiffs,

v.MORGAN KEEGAN & COMPANY, INC. Defendant.

Case No. 2:12-cv-00337-TMP

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION

Dated: September 28, 2012

MEMORANDUM OPINION

This case is before the court on two interrelated matters: (1) plaintiffs' application to confirm an arbitration award pursuant to 9 U.S.C. § 9 (doc. 1), and (2) the defendant Morgan Keegan & Company, Inc.'s motion to vacate the arbitration award that plaintiffs seek to confirm. (Doc. 3). The parties have filed briefs and evidentiary materials in support of their respective positions and the court has considered fully the submissions of both parties, including the transcript from a two-week evidentiary hearing in the underlying proceedings. Accordingly, the plaintiffs' application to confirm the arbitration award and the defendants' motion to vacate the award are ripe for resolution.¹

BACKGROUND AND PROCEDURAL HISTORY

This is a case that resembles a number of other actions that have been filed across the country against defendant Morgan Keegan regarding certain investment funds (referred to collectively as the "RMK Funds") that it marketed and sold over the course of several years beginning as early as 1999. The collapse of the funds spawned nationwide litigation alleging the impropriety of the funds being invested in the risky, "lower tranches"² of asset-backed securities. Lawsuits of this genre typically allege that the collapse of the funds was not attributable to market downturn or even the financial crisis of 2007-2008, as evidenced, plaintiffs allege, by the fact that the "tremendous losses" of the RMK funds were not suffered by other "comparable" bond funds during the same period of time.³ How the funds operated and why the funds collapsed involves expertise and an explanation of structured finance, complex investment models, and fluency in financial acronyms.⁴ Such expertiseand explanation was offered at the underlying arbitration and considered by the court in its review of the transcript from the proceedings. For purposes of this matter, however, where this court must either confirm or vacate the arbitration award, the intricacies of structured finance need not be parlayed, debated, or otherwise conveyed beyond mention. Here, it is sufficient to note that the funds at issue in the underlying arbitration were allegedly invested, unbeknownst to the plaintiffs, in high-risk sectors that resulted in the funds losing allegedly more than 90% of their value.

On or around August 27, 2010, plaintiffs filed with the Financial Industry Regulatory Authority ("FINRA") a Statement of Claim against defendant Morgan Keegan that commenced the underlying arbitration.⁵ The Statement of Claim asserts several causes of action including breach of fiduciary duty, breach of contract, unsuitability, failure to supervise, violations of securities regulatory rules, violations of the Alabama Securities Act, intentional and negligent misrepresentation, unjust enrichment, breach of duty of good faith and fair dealing, gross negligence, and reckless disregard. In support of these claims, plaintiffs make a number of factual allegations that include the following:

• All of the Claimants herein, with the exception of Mark K. Lewis, James W. Nabors and Wilma H. Nabors, Darcie A. Simmons, and Bonnie Fae Sparks-Mitchell were sold the RMKfunds through the Morgan Keegan Branch office located at 2900 Highway 280, Suite 100, Birmingham, Alabama.⁶

• The claimants fully relied on Morgan Keegan to oversee their investments and to provide them with sound investment strategies. Morgan Keegan represented to the Claimants that these Funds were relatively safe and conservative investments that would protect their investment principal and provide income. The claimants trusted Morgan Keegan to make a suitable recommendation.

• Morgan Keegan misrepresented or failed to disclose material facts relating to the funds including, but not limited to:

(1) Failure to disclose the true speculative nature of the securities;

(2) Failure to disclose the nature of the risk of investment in the funds;

(3) Failure to disclose that the funds were not typical bond funds;

(4) Failure to disclose the illiquidity of the underlying securities held by the funds;

(5) Failure to disclose the extent of the funds' vulnerability to lack of marketability;

(6) Failure to disclose the extent to which the value of the funds was based on mere estimates of value and the uncertainty inherent in such estimated values;

(7) Failure to disclose that investors would be exposed to extraordinary credit risk;

(8) Failure to adequately disclose the imminent risks of default associated with the portfolio assets as Morgan Keegan became aware of the risks;

(9) Failure to disclose the concentration of investments in a single industry;

(10) Failure to disclose that the fund's assets were concentrated in the lowest-priority tranches of asset-backed securities, CDOs, CMOs, and CLOs and derivative investments;

(11) Failure to disclose that an investment in the lowest-priority, highest-risk tranches of asset-backed and mortgage-backed securities carries extraordinary risk compared tothe average interest rate risk, prepayment risk, and credit risk of the underlying assets;

(12) Failure to disclose that the credit ratings reported do not incorporate the risks associated with the low priority tranches of the CDOs that dominated the funds' portfolios;

(13) Failure to disclose that the consistent dividend return of the funds was a result of fraudulently smoothing the valuation of the portfolio holdings; and

(14) Failure to disclose that the Lehman Brothers Ba Fund was not a proper benchmark for the RMK Funds.

• Given these misrepresentations and omissions, there is simply no way that the Claimants could have foreseen the risks and subsequent losses to their accounts. As a result of the fraudulent disclosures or lack of disclosures, the Claimants did not understand what they were investing in, or the true risks.

• The claimants were customers of Morgan Keegan, and were simply looking for advice from Morgan Keegan on how best to invest their money. Morgan Keegan lied to the Claimants and failed to explain to them the nature of their investments.

(Doc. 3-1, Exh. A).

Before commencing the actual evidentiary hearing in the underlying arbitration, both parties filed pre-hearing motions with the FINRA panel including a motion to sever, where the defendant argued that the arbitration should be severed into "seven separate arbitration proceedings" because "each Claimants' case requires the Panel to focus on the relationship between the Claimant and financial advisor." (Doc. 8-12, Exh. B, p. 2). The motion to sever was denied by the arbitration panel at a pre-hearing conference and the arbitration proceeded as it was originally filed. (Doc. 8-13, Exh. C). Prior to the evidentiary hearing, the defendant moved in limine also to preclude the plaintiffs from presenting evidence of certain regulatory matters and the alleged mismanagement of the RMK Funds. (Doc. 8-14, Exh. D). The panel deferred ruling on the motion until the final, arbitration hearing. (Doc. 3-7, p. 4). Morgan Keegan did not pursue this motion in limine at theunderlying arbitration and, consequently, the "Panel deemed the motion moot." (Doc. 3-7, p. 4). The arbitration took place in Birmingham, Alabama, over the course of two weeks in January 2012, and was conducted by a FINRA arbitration panel. After the evidentiary hearing was concluded, and after the panel considered the pleadings, testimony, and evidence presented at the hearing, it found that Morgan Keegan was liable and it awarded compensatory damages and attorneys fees to each individual claimant.⁷

On January 31, 2012, the plaintiffs filed with this court an application to confirm the arbitration award. (Doc. 1). The defendant filed a motion to vacate the arbitration award on February 29, 2012, and thereafter moved for an extension of time to file an amended brief in support of its motion to vacate. (Docs. 3, 6). The extension was granted and the amended brief was filed on April 30, 2012. The plaintiffs have filed a response to the motion to vacate and, on June 8, 2012, filed supplemental case authority in support of their application to confirm the arbitration award. (Docs. 8, 9). On August 7, 2012, the court entered an order advising that both the application to confirm the arbitration award and the motion to vacate the arbitration award were being taken under submission. (Doc. 10).

DISCUSSION

The disposition of this case is straightforward. The plaintiffs seek confirmation of an arbitration award that was rendered in their favor by a FINRA arbitration panel after a two-weekevidentiary hearing. The defendant, Morgan Keegan, opposes confirmation and has moved the court to vacate the award, primarily, on grounds that the arbitrators exceeded their powers under 9 U.S.C. § 10(a)(4). Plaintiffs assert that section 9 of the Federal Arbitration Act ("FAA") provides the authority, indeed the mandate, to confirm their award, while the defendant relies on section 10 of the FAA to persuade the court otherwise -- that this is a case where vacatur is warranted. While both parties argue that they have a statutory foothold to buttress their respective positions, the defendant's challenge is more daunting. This is due, in no small measure, to the fact that "[t]here is a presumption under the FAA that arbitration awards will be confirmed, and 'federal courts should defer to an arbitrator's decision whenever possible.'" Frazier v. CitiFinancial Corp., LLC, 604 F.3d 1313, 1321 (11th Cir. 2010), citing B.L. Harbert Int'l, LLC v. Hercules Steel Co., 441 F.3d...