In re Regions Morgan Keegan Sec.

• Decision Date: 30 September 2010
• Docket Number: Case No. 07–2784 MDL 2009.
• Citation: 743 F.Supp.2d 744
• Parties: In re REGIONS MORGAN KEEGAN SECURITIES, DERIVATIVE, and Erisa Litigation.In re Regions Morgan Keegan Open–End Mutual Fund Litigation.
• Court: U.S. District Court — Western District of Tennessee

743 F.Supp.2d 744

In re REGIONS MORGAN KEEGAN SECURITIES, DERIVATIVE, and Erisa Litigation.In re Regions Morgan Keegan Open–End Mutual Fund Litigation.

Case No. 07–2784 MDL 2009.

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

Sept. 30, 2010.

Carolyn Glass Anderson, Kirsten D. Hedberg, Timothy J. Becker, Zimmerman Reed, PLLP, Gregg M. Fishbein, Richard A. Lockridge, Lockridge Grindal Nauen PLLP, Thomas V. Seifert, Vernon J. Vander Weide, Head Seifert & Vander Weide, P.C., Minneapolis, MN, Charles Durham Reaves, Jerome A. Broadhurst, Apperson Crump, PLC, Memphis, TN, B. J. Wade, Deal Cooper & Holton PLLC, Memphis, TN, Mark P. Chalos, Lieff Cabrasher Heimann & Bernstein, LLP, Nashville, TN, for Plaintiffs.Matthew M. Curley, Michael L. Dagley, Bass Berry & Sims PLC, Nashville, TN, Michael A. Brady, Shepherd D. Tate, Bass Berry & Sims PLC, Eugene J. Podesta, Jr., Leo Maurice Bearman, Jr., Baker Donelson Bearman Caldwell & Berkowitz, Memphis, TN, David B. Tulchin, D. Andrew Pietro, David E. Swarts, Sullivan & Cromwell, LLP, Kevin C. Logue, Paul Hastings Janofsky & Walker, LLP, Asa R. Danes, Seeger Weiss LLP, New York, NY, Peter S. Fruin, Maynard Cooper & Gale, PC, Birmingham, AL, Steven Lawrence Polk, Sutherland Asbill & Brennan LLP, Atlanta, GA, Jeffrey B. Maletta, Nicole A. Baker, K & L Gates LLP, Washington, DC, Emily Nicklin, Kristopher S. Ritter, Timothy A. Duffy, Kirkland & Ellis LLP, Chicago, IL, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS

SAMUEL H. MAYS, JR., District Judge.

Before the Court are Defendants' February 11 and 12, 2010 Motions to Dismiss the Consolidated Amended Class Action Complaint (“CAC”). ( See ECF. Nos. 222, 226–29, 233.) The Lead Plaintiffs filed a Consolidated Response in Opposition on April 13, 2010. ( See ECF No. 238.) Defendants filed their Replies on May 28, 2010, and June 4, 2010. ( See ECF. Nos. 246–47, 249–51, 253.) Plaintiffs filed a Consolidated Sur–Reply on July 6, 2010. ( See ECF No. 265.) For the following reasons, Defendants' Motions are GRANTED IN PART AND DENIED IN PART.

I. BACKGROUND

Plaintiffs' CAC exceeds four hundred pages, comprising 766 paragraphs and six appendices. The following is a necessarily brief summary of the named parties in this action and the Plaintiffs' claims.

Plaintiffs Kathryn S. Cashdollar Estate, Dajalis Ltd., Jeanette H. Landers, H. Austin Landers, and Frank D. Tutor are the Lead Plaintiffs for the Open–End Fund Litigation. (CAC ¶ 35.) The Lead Plaintiffs allege that they represent a purported class of individuals who purchased one or more classes of shares in the Regions Morgan Keegan Select Short Term Bond Fund (“Short Term Fund”), the Regions Morgan Keegan Select Intermediate Bond Fund (“Intermediate Fund”), and/or the Regions Morgan Keegan Select High Income Fund (“High Income Fund” and collectively the “Funds”) from December 6, 2004 through December 6, 2007 (the “class period”). ( Id. ¶ 2(a)(1).) Plaintiffs also assert that they represent those “[w]ho refrained from redeeming the Funds' shares during the period from March 1, 2007 through April 30, 2008.” ( Id. ¶ 2(a)(2).) Plaintiff John R.S. Robilio seeks to represent a Fiduciary Subclass that includes persons who are members of the primary class and 1) are beneficiaries of trusts or other custodial accounts for which certain Defendants acted as fiduciaries and made investments on the beneficiaries' behalf or 2) who acquired a beneficial ownership of shares in the Funds because of certain Defendants' decisions made as trustee or custodian of these Plaintiffs' accounts. ( Id. ¶¶ 33, 107.) During the class period, the named Plaintiffs invested more than $4.5 million in the Funds and “refrained from redeeming” more than $7 million in investments in the Funds. ( Id. ¶ 34.)

Defendant Morgan Keegan Select Fund, Inc. (“MK Select”) is a Maryland Corporation organized as a open-end management investment company under the Investment Company Act of 1940, 15 U.S.C. §§ 80a–1 et seq. (CAC ¶ 36.) MK Select consisted of three portfolios; namely, the three Funds. ( Id.) The Intermediate and High Income Funds opened for investment on March 22, 1999, and the Short Term Fund opened on November 4, 2001. ( Id. ¶ 37.) The High Income Fund closed to new investors in December 2002; however, existing shareholders of the High Income Fund could increase their investments by purchasing additional shares. ( Id.) Because of the “catastrophic decline” in the Funds' assets during 2007–2008, MK Select and the Funds were liquidated on June 15, 2009. ( Id. ¶ 39.) MK Select filed an application with the Securities and Exchange Commission to deregister as an investment company on July 28, 2009. ( Id.)

Defendant Morgan Asset Management (“MAM”) is a registered investment advisor with its principal place of business in Memphis, Tennessee. MAM is a wholly-owned subsidiary of Defendant MK Holding, Inc. (“MK Holding”). ( Id. ¶ 40.) MAM managed the Funds' portfolio of securities, including making purchases or sales of securities consistent with the Funds' investment objectives. ( Id.) The Advisory Agreement between MAM and the Funds required MAM to provide the Funds with office space and the executive personnel necessary to operate the Funds; however, Defendant Morgan Keegan & Co., Inc. (“Morgan Keegan”) actually provided those services. ( Id.) The Agreement also required MAM to provide the Funds' officers and Board of Directors with various reports and statistical information. ( Id.) MAM and/or Morgan Keegan compensated those officers and directors who also were employees of MAM or Morgan Keegan. ( Id. ¶ 41.) MAM received an annual management fee for its services based on the average daily net assets of the Funds. The more money invested in the Funds, the higher the fee MAM received. ( Id.)

Defendant Morgan Keegan is a full service broker/dealer with its principal place of business in Memphis, Tennessee. ( Id. ¶ 45.) Morgan Keegan provided an employee to serve as the Funds' chief compliance officer and provided portfolio accounting services to the Funds. It also received an annual fee based on the Funds' average daily net assets for those services. ( Id.) Morgan Keegan is a wholly-owned subsidiary of Defendant Regions Financial Corporation (“Regions”), a Delaware corporation with its principal place of business in Birmingham, Alabama. ( Id. ¶ 48.) Regions is also the ultimate parent company of MK Holding and MAM. ( Id.) Regions marketed shares of the Funds through two subsidiaries, Morgan Keegan and Defendant Regions Bank. ( Id. ¶¶ 49, 53.) Regions Bank maintains Defendant Regions Morgan Keegan Trust FSB (“Regions Morgan Keegan Trust”), a federally chartered savings bank formerly known as Morgan Keegan Trust Company, as its trust department. ( Id. ¶ 54.) Regions Morgan Keegan Trust served as a fiduciary on behalf of its customers. Under an April 1, 2003 agreement, MAM provided investment advisory services to Regions Bank and Regions Morgan Keegan Trust (collectively “RMK Trust”). ( Id.)

Defendants Allen B. Morgan, Jr.; J. Kenneth Alderman; Jack R. Blair; Albert C. Johnson; James Stillman R. McFadden; W. Randall Pittman; Mary S. Stone; and Archie W. Willis, III, were directors of the Funds. ( Id. ¶¶ 59–67.) Morgan also served as a director and vice-chairman of Regions, a director of MAM, and chairman and CEO of Morgan Keegan. ( Id. ¶ 59.) Alderman served as CEO of MAM and has served as an executive vice president of Regions, president of RMK Trust, and vice chairman and CEO of MAM. ( Id. ¶ 60.) Johnson, McFadden, Pittman, and Stone served as members of MK Select's audit committee. ( Id. ¶ 69.)

Defendants Carter E. Anthony, Brian B. Sullivan, Joseph C. Weller, J. Thompson Weller,¹ G. Douglas Edwards, Charles D. Maxwell, David M. George, and Michele F. Wood served as officers of the Funds. ( Id. ¶¶ 75–82.) Anthony served as the Funds' president from 2003 until August 2006. ( Id. ¶ 75.) He also was president and chief investment officer of MAM from 2002–2006. ( Id.) Sullivan succeeded Anthony as the Funds' president. ( Id. ¶ 76.) Joseph C. and J. Thompson Weller served as treasurer. ( Id. ¶¶ 77–78.) Both also held executive roles at Morgan Keegan. ( Id.) Edwards, a twenty-five year veteran of Morgan Keegan, served as the investment bank's CEO from 2003 until his resignation in April 2008. Before becoming CEO, Edwards had served as Morgan Keegan's president from 2001–2003. ( Id. ¶ 79.) Maxwell was the Funds' secretary and, from 2006, served as the executive managing director, chief financial officer, treasurer, and secretary of Morgan Keegan. ( Id. ¶ 80.) David M. George was the Funds' chief compliance officer until 2006 and was Morgan Keegan's senior vice president. ( Id. ¶ 81.) Wood succeeded George as chief compliance officer. ( Id. ¶ 82.) She also served as MAM's chief compliance officer, and her salary was paid solely by Morgan Keegan. ( Id.)

Defendant James C. Kelsoe, Jr., a chartered financial analyst, served as MAM's and the Funds' senior portfolio manager. Kelsoe also was employed by Morgan Keegan and was registered with the Financial Industry Regulatory Authority as a representative of Morgan Keegan. ( Id. ¶ 83.) Defendant David H. Tannehill, also a chartered financial analyst, assisted Kelsoe as a portfolio manager for the Funds and MAM. ( Id. ¶ 84.) Kelsoe and Tannehill were eligible to receive annual cash bonuses that could equal fifty percent of their base salaries. ( Id. ¶ 86.) The performance of the Funds relative to their benchmark index determined part of Kelsoe's and Tannehill's bonuses. ( Id.) The remainder of their bonuses was discretionary and depended on factors like their ability to bring in new clients, their service to existing clients, and their support of Morgan Keegan's policies and procedures. ( Id.)

Defendant Thomas R. Gamble was a vice president of the Funds from 2003 and an executive of Regions from 1981. ( Id. ¶ 84.) Pl...