A FINRA arbitration panel has found Morgan Keegan & Co. Inc. liable
for both compensatory and punitive damages in an arbitration claim that
involved a Madoff "feeder fund," Greenwich Sentry, L.P.
Hedge Fund, which filed for bankruptcy on November 19, 2010 ("In Madoff tie,
Morgan Keegan ordered to pay $200K to investors," Memphis Business
Journal, March 10, 2011).
The Claimants, Jeffrey and Marisel Lieberman, brought the arbitration
claim against Morgan Keegan for what they alleged was fraudulent and negligent
activity in the company's recommendation of the fund. The Liebermans,
whose $200,000 account was invested 100 percent in Greenwich Sentry, asserted
that "speculation" was not their primary investment objective.
Thus, under the company's own rules, Morgan Keegan should not have
recommended the hedge fund to them.
According to an August 28, 2006, Morgan Keegan Compliance Department memorandum,
the company's financial advisers were only supposed to recommend hedge
funds to clients for whom the funds would be "suitable" for
their stated investment goals ("Morgan Keegan Hit With Punitive Damages
in Madoff Feeder Case," Forbes. com, March 10, 2011).
For suitability to be established, a client who was receiving a recommendation
that would establish an account predominantly composed of a hedge fund
investment must have checked "speculation" as the primary investment
objective on the new account form. If this was not the case and a financial
advisor made the recommendation anyway, the business manager was supposed
to catch it and reject the transaction.
Since the evidence supported the claim that Morgan Keegan failed to perform
substantial due diligence in the recommendation of Greenwich Sentry to
the Liebermans, the FINRA panel ruled that Morgan Keegan was grossly negligent
and fraudulently represented the risks of the hedge fund investment to
the Claimants. Morgan Keegan was ordered to pay the Claimants $200,000
plus 6 percent annual interest for losses; $14,000 for expert witness
fees; $300 for filing fees; and $50,000 in punitive damages.