* Appeals court reinstates $9.2 million ruling
* Says district court erred in throwing out award
By Suzanne Barlyn
Oct 23 A federal appeals court on Tuesday
reinstated a $9.2 million securities arbitration ruling against
Morgan Keegan & Co stemming from a group of bond funds that
became the subject of a civil fraud action by regulators.
The U.S. Court of Appeals for the 5th Circuit ruled that a
district court's decision to throw out the arbitration award was
made in error, according to an opinion released on Tuesday.
U.S. District Court Lynn Hughes in Houston ruled in
September, 2011, that the arbitration ruling should be thrown
out because, in part, it was obtained through the alleged
"fraudulent" testimony of Craig McCann, an expert witness and
former U.S. Securities and Exchange Commission economist.
The federal appeals panel, however, noted that there was a
"total absence of any evidence" to support that finding. The
evidence "supports nothing more than a conclusion that a member
of Dr. McCann's staff made a calculation error that he did not
discover until after he testified," the court wrote.
Investors filed more than 1,000 arbitration cases for losses
stemming from the bond funds, which declined as much as 80
percent in value during 2008. Morgan Keegan agreed to a $200
million civil fine to resolve the SEC's enforcement action
against the brokerage.
The $9.2 million arbitration ruling on behalf of a group of
investors was the largest to date against Morgan Keegan in the
bond fund cases. The brokerage has been aggressively defending
the claims, including going to court in efforts to overturn
certain arbitration rulings.
Arbitration rulings are typically binding, but courts can
overturn them in unusual circumstances, such as when arbitrators
are biased. Investors typically agree, when signing documents
for opening a brokerage account, to resolve any legal disputes
with the firm through arbitration.
Earlier in October, lawyers for Morgan Keegan argued in a
California appeals court that an award to former NBA all star
Horace Grant, who arbitrators awarded $1.46 million over the
same bond funds, should be overturned because of arbitrator
bias, among other things. [ID nL1E8LBG4J]
"We're thrilled. I'm thrilled for the clients and for Dr.
McCann in particular," said Paul Dobrowski, a Houston-based
lawyer who represented the investor. "It's a full vindication of
the lack of merit in Morgan Keegan's position," he said.
Dobrowski and Morgan Keegan argued the appeal last month in
A spokesman for Raymond James Financial Inc, which
acquired Morgan Keegan from Regions Financial Corp,
declined to comment. A spokesman for Regions Financial Corp,
which retained financial responsibility for the bond fund cases,
also declined to comment. A Morgan Keegan spokeswoman also
The federal appeals court opinion is a relief to economist
Craig McCann, who heads Virginia-based Securities Litigation and
Consulting Group Inc. McCann has said the earlier ruling by
Judge Hughes hurt his business and damaged his reputation.
"The feeling that I have is that this nightmare is over,"
McCann said in an interview on Tuesday. "Morgan Keegan and its
lawyers were able to convince Judge Hughes that I testified
falsely about a topic that Morgan Keegan and its lawyers know I
never said a word about," McCann said.
Morgan Keegan, Regions, and Raymond James declined to
comment on McCann's remarks. A lawyer who represented Morgan
Keegan in the case, Terry Weiss of Greenberg Traurig LLP in
Atlanta, directed Reuters to a Morgan Keegan spokeswoman.
McCann's testimony, for years, has helped seal huge wins for
investors, including a $54 million ruling against a Citigroup
unit and a $15 million ruling against three former executives of
Lehman Brothers Holdings. But after Judge Hughes ruled that he
gave allegedly fraudulent testimony, brokerage lawyers tried to
use the opinion to damage McCann's credibility as a witness, he
The federal appeals court ruling on Tuesday could also
undermine Morgan Keegan's position in other securities
arbitration rulings it is trying to overturn, said Ryan
Bakhtiari, president of the Public Investors Arbitration Bar
Association, a group of lawyers who represent investors in
securities arbitration cases.
"This sends a clear message to Morgan Keegan to stop
engaging in bad behavior in appealing investor wins. It's a
direct message to start playing by the rules," said Bakhtiari,
who is also a securities arbitration lawyer in Beverly Hills,
The appeals court ruling could lead to weakening arguments
by Morgan Keegan in other appeals about who may be considered a
"customer" in securities arbitration cases, Bakhtiari said. [ID
In the case leading to Tuesday's ruling, Morgan Keegan
argued that two investors in the group of claimants were not
eligible to participate in the arbitration process because they
bought the bond funds from a different brokerage and were,
therefore, not Morgan Keegan customers.
Morgan Keegan, nonetheless, agreed to arbitrate with those
investors and was bound by that agreement, the court ruled.
The "high standard" for overturning an arbitration ruling
"was unmet here," the court wrote.