Daniels v. Morgan Asset Mgmt. Inc.

• Decision Date: 30 September 2010
• Docket Number: Case No. 09–CV–02800.
• Citation: 743 F.Supp.2d 730
• Parties: C. Fred DANIELS, as Trustee ad Litem in substitution for Regions Bank dba Regions Morgan Keegan Trust for the Juanita H. Schaffer Irrevocable Trust, et al., Plaintiffs,v.MORGAN ASSET MANAGEMENT, INC., et al., Defendants.
• Court: U.S. District Court — Western District of Tennessee

743 F.Supp.2d 730

C. Fred DANIELS, as Trustee ad Litem in substitution for Regions Bank dba Regions Morgan Keegan Trust for the Juanita H. Schaffer Irrevocable Trust, et al., Plaintiffs,

v.MORGAN ASSET MANAGEMENT, INC., et al., Defendants.

Case No. 09–CV–02800.

United States District Court, W.D. Tennessee, Western Division.

Sept. 30, 2010.

Albert C. Harvey, Justin E. Mitchell, Justin Edward Mitchell, Thomason Hendrix Harvey Johnson & Mitchell PLLC, Memphis, TN, R. Carlton Smyly, Cabaniss Johnston Gardner Dumas & O'Neal LLP, Birmingham, AL, for Plaintiffs.David E. Swarts, David B. Tulchin, Margaret E. Bartlett, Sullivan & Cromwell, LLP, New York, NY, Matthew M. Curley, Michael L. Dagley, W. Brantley Phillips, Jr., Bass Berry & Sims PLC, Nashville, TN, for Defendants.

ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS PLAINTIFFS' FIRST AMENDED TRUSTEE CLASS ACTION COMPLAINT AND DENYING PLAINTIFFS' MOTION FOR PERMISSION TO FILE SECOND AMENDED COMPLAINT

SAMUEL H. MAYS, JR., District Judge.

Before the Court are Motions to Dismiss filed by Defendant Regions Financial Corporation (“Regions Financial”) and Defendants Morgan Asset Management, Inc. (“Morgan Management”), Morgan Keegan & Company, Inc. (“Morgan Keegan”), MK Holding, Inc., James C. Kelsoe, Jr., Allen B. Morgan, Jr., J. Kenneth Alderman, Brian B. Sullivan, Joseph C. Weller, J. Thompson Weller, Charles D. Maxwell, Michele F. Wood, David H. Tannehill, John Boston, Charlie A. Murray, Matt R. Smith, Doug Williams, Gary Partridge, Jenny Johns, and Guillermo R. Araoz (collectively, “Defendants”) on February 22, 2010. (Regions Financial Corporation's Mot. to Dismiss, ECF No. 10; Defs.' Mot. to Dismiss, ECF No. 11.) (collectively, “Motions to Dismiss”) Plaintiffs responded on March 26, 2010. (Pls.' Resp., ECF No. 13; see also ECF No. 14.) Defendants replied on April 12, 2010. (Reply Mem. of Law in Supp. of Defs.' Mot. to Dismiss, ECF No. 17; see also ECF No. 16.)

Also before the Court is Plaintiffs' Motion for Permission to File Second Amended Complaint filed on May 10, 2010. (ECF No. 18.) Defendants responded in opposition on May 24, 2010. (ECF No. 19.) Plaintiffs replied on June 7, 2010. (ECF No. 22.) Plaintiffs then filed a proposed Second Amended Complaint reflecting corrections on June 10, 2010. (ECF No. 24.) (“Second Am. Compl.”)

On July 27, 2010, Defendants filed a document entitled “Defendants' Notice of Filing Supplemental Authority,” which informed the Court of a recent opinion by the United States Court of Appeals for the Second Circuit. (ECF No. 27.) Plaintiffs responded on August 3, 2010. (ECF No. 28.)

Taking all facts alleged by Plaintiffs as true, amending the First Amended Complaint would be futile. Thus, the Court DENIES Plaintiffs' Motion for Permission to File Second Amended Complaint. Under the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. §§ 77p(b), 78bb(f)(1)(A), Plaintiffs' claims in the First Amended Complaint are precluded. Therefore, the Court GRANTS Defendants' Motions to Dismiss the First Amended Complaint. The First Amended Complaint is DISMISSED WITH PREJUDICE.

I. Background

Plaintiffs are suing on behalf of all trusts, custodial accounts, and their respective trustees, representatives, and fiduciaries, for which Regions Bank d/b/a Regions Morgan Keegan Trust (“Regions Trust”) is or was a trustee or a directed trustee, custodian, or agent and which owned or held shares in any of the following investments between November 9, 2006, and November 9, 2009: Regions Morgan Keegan Select Short Term Bond Fund; Regions Morgan Keegan Select Intermediate Bond Fund; Regions Morgan Keegan Select High Income Fund; RMK Multi–Sector High Income Fund, Inc.; RMK Advantage Income Fund, Inc.; RMK Strategic Income Fund, Inc.; or RMK High Income Fund, Inc. (collectively, the “RMK Funds”). (First Am. Compl. ¶ 1, ECF No. 7.) Regions Trust successfully petitioned the Probate Court of Jefferson County, Alabama, to appoint a Trustee ad Litem to participate in litigation in substitution for Regions Trust on behalf of trusts and custodial accounts that owned or held shares in the RMK Funds. ( Id. ¶ 3.) The Probate Court appointed C. Fred Daniels Trustee ad Litem. ( Id. ¶ 4; Ex. A, ECF No. 7–1.)

On April 1, 2003, Regions Trust entered into a written Investment Advisory Services Agreement (the “2003 Contract”) with Morgan Management for Morgan Management to provide investment services. ( Id. ¶ 41.) On February 5, 2007, Regions Trust entered into a new Investment Advisory Services Agreement (the “2007 Contract”) with Morgan Management for substantially the same services. ( See id. ¶ 42.) The 2003 and 2007 Contracts required Morgan Management to perform those services “with ordinary skill and diligence.” ( See id. ¶ 43.)

In the 2003 and 2007 Contracts, Morgan Management agreed to recommend investments to be purchased for, or sold from, clients' accounts. (Ex. B ¶ 3, ECF No. 7–2; Ex. C ¶ 3, ECF No. 7–3.) Nevertheless, the services provided were more than mere advice. Regions Financial, Morgan Management, Morgan Keegan, and MK Holding, Inc. (collectively, the “Regions Morgan Keegan Entity Defendants”) allegedly caused the trusts and custodial accounts served by Regions Trust “to make, continue, and hold investments in the RMK Funds during the Class Period, rather than to discontinue and liquidate them.” (First Am. Compl. ¶ 48.) The RMK Funds were disproportionately invested compared to peer funds in illiquid securities backed largely by mortgages. ( Id. ¶ 46) During the relevant period, the RMK Funds suffered losses greater than peer funds' losses and did not rebound as well as peer funds after the adverse market events of 2007 and 2008. ( Id. ¶ 49.) Those losses, in turn, caused Plaintiffs to suffer substantial financial losses. ( See id. ¶¶ 56, 61, 68, 74.)

Plaintiffs assert that, by late 2006 and early 2007, information was available about the RMK Funds and their vulnerability that would have caused an investor of ordinary skill and diligence to discontinue investments in the RMK Funds. ( Id. ¶¶ 46–47.) Nevertheless, the alleged nature of Regions Financial, which sits atop a corporate structure that includes the other Regions Morgan Keegan Entity Defendants, required Morgan Management to direct investments in the RMK Funds no matter how unsound they were. ( See id. ¶¶ 5–6.) The Regions Morgan Keegan Entity Defendants allegedly operated Morgan Management “as a mere instrumentality, agent, or alter ego.” ( Id. ¶ 6.) In public filings and statements, they frequently described themselves as performing the services theoretically performed by Morgan Management. ( See id. ¶¶ 7–17.)

The proposed Second Amended Complaint seeks to add a number of details about why the alleged nature of Regions Financial required Morgan Management to direct that RMK Funds be purchased and retained. According to the proposed Second Amended Complaint, the Regions Morgan Keegan Entity Defendants' leading executives during the relevant period reported to executives at theoretically independent corporations. Carter Anthony, the President of Morgan Management from 2001 through 2006, reported to J. Kenneth Alderman, the President and CEO of Regions Trust and a senior officer of Regions Financial. (Second Am. Compl. ¶ 21.) Alderman reported to Doug Edwards, the President and CEO of Morgan Keegan. ( Id.) Edwards reported to Allen Morgan, the Chairman of Morgan Keegan's Board of Directors and Vice Chairman of Regions Financial's Board of Directors. ( Id.) Some executives drew paychecks from corporations different from the corporations that theoretically employed them. For instance, Michele Wood, Morgan Management's Chief Compliance Officer, received a paycheck from Morgan Keegan and never received a paycheck from Morgan Management. ( Id. ¶¶ 27, 40.)

The intertwined corporate structure allegedly made it impossible for Morgan Management to exercise independent judgment in determining whether RMK Funds should be purchased and retained. Because Anthony reported to executives at the other Regions Morgan Keegan Entity Defendants, who worked for entities with a financial interest in the purchase and retention of the RMK Funds, Anthony could be terminated if he did not purchase RMK Funds for the trusts and custodial accounts. ( See id. ¶¶ 21, 25–26.)

Although Morgan Management was to manage the RMK Funds, the other Regions Morgan Keegan Entity Defendants allegedly controlled how the RMK Funds were invested. ( See id. ¶¶ 22–23.) James C. Kelsoe, the Senior Portfolio Manager for the RMK Funds, was an employee of both Morgan Management and Morgan Keegan. ( Id. ¶ 57.) According to Anthony, Kelsoe “was sort of like an island” in Morgan Management. ( Id. ¶ 24.) Kelsoe spoke frequently with Alderman and Edwards. ( See id. ¶¶ 23–24.) Edwards and Morgan allegedly ordered Anthony to “leave Kelsoe alone” and give Kelsoe absolute discretion in investing the RMK Funds because “he's doing what we want him to do.” ( Id. ¶¶ 22–23.) Kelsoe thus made investment choices for the RMK Funds without internal supervision within Morgan Management. ( See id. ¶¶ 21–25.)

Plaintiffs allege four claims. First, breach of the 2003 Contract because the Regions Morgan Keegan Entity Defendants allegedly caused “Regions Trust as trustee of the Trusts and Custodial Accounts to make, continue, or hold investments in the RMK Funds, as opposed to alternative investments, during the periods when collapse of the RMK Funds' share prices, net asset values, and redemption prices was imminent or had begun.” (First Am. Compl. ¶ 55.) Second, breach of the 2007 Contract for the same reasons. ( Id. ¶ 60.) Third, negligent breach by the Regions Morgan Keegan Entity Defendants of the duty to perform, supervise, or direct the investment services Morgan Management agreed to perform with reasonable diligence, skill, and care. ( Id. ¶¶ 66–67.) Fourth, negligent breach of the same duty by the remaining Defendants. ( Id. ¶¶...