Investors in six Regions Morgan Keegan (RMK) bond funds lost $2 billion in 2007. The RMK funds held concentrated holdings of low-priority tranches in structured finance deals backed by risky debt. We provide five examples of the asset-backed securities RMK invested in: IndyMac 2005-C, Kodiak CDO 2006-I, Webster CDO I, Preferred Term Securities XXIII, and Eirles Two Ltd 263.

RMK did not disclose the risks it was taking until after the losses had occurred. In fact, RMK misrepresented hundreds of millions of dollars of highly leveraged asset-backed securities as corporate bonds and preferred stocks thereby making the funds seem more diversified and less risky than they were. RMK and Morgan Keegan also materially misled investors by comparing these funds to indexes which only contained corporate bonds despite the fact the RMK fund held three times as much asset backed securities as they held corporate bonds.

The RMK funds held roughly 2/3rds of their portfolios as of March 31, 2007 in structured finance securities and only 22% or 23% in corporate bonds. RMK’s structured finance holdings were roughly 90% in mezzanine and subordinated tranches and only 10% in senior tranches. The vast majority of tranches by market value are classified as ‘senior’ and so the RMK funds were overwhelming invested in the bottom of structured finance deals’capital structures. The attached Excel file contains SLCG’s classification of securities in the RMK by senior versus mezzanine/subordinated.

Download SLCG’s Classification

Roughly 90% of the losses suffered by the RMK funds identifiable from their public filings during the last three quarters of 2007 when the funds collapsed were from the funds’ holdings of structured finance securities. The attached slides summarize SLCG’s classification of losses in the RMK funds in the last three quarters of 2007.

Download the RMK Losses Due to Structured Finance and Internally Priced Securities slide

Download the RMK Losses Due to Structured Finance and Internally Priced Securities backup

The Reg D offering market is similar to the public offering market in capital raised and has been growing rapidly over recent years. The proceeds from Reg D offerings sold between 2021 and 2023 total $6.2 trillion, 23% more than the capital raised in registered offerings over the same period and a 86% increase over the proceeds from Reg D offerings sold during 2011-2013. Reg D securities have recently been sold to more investors per offering with a less amount sold per investor, suggesting an increasing retail preference for unregistered securities. Intermediaries play an important role in reaching retail investors. Offerings sold by broker-dealers with more retail clients and offerings sponsored by investment advisers with more wealthy individual clients are purchased by more investors per offering and raise less capital per investor. Investors of unregistered offerings must be wary of intermediariy misconduct and conflicts of interest. Broker-dealers that receive more commissions and specialize in selling unregistered offerings tend to receive more customer complaints stemming from unregistered securities. Investment advisers with non-fund clients are more likely to disclose conflicts of interest in regulatory filings when they sponsor Reg D offerings, indicating that they allocate client funds in self-sponsored unregistered securities.

SLCG publica su Informe de Arbitraje de Valores de Puerto Rico actualizado que muestra más de $600 millones pagados hasta el momento en acuerdos y adjudicaciones con una cantidad similar que probablemente se pagará en los próximos años como resultado de las pérdidas de clientes de la firma de corretaje en Puerto Rico.