Investors Beware

Back in 2010, Morgan Keegan & Co. Inc., a securities underwriting firm, began selling $39 million in bonds on behalf of Moberly, a small town of about 13, 000 in north central Missouri. Funds from the sale were to pay for the construction of an artificial sweetener processing plant that the company Mamtek U.S. would operate. 

But a year later, in 2011, investors got a bitter surprise when Mamtek defaulted on the debt. The project collapsed. Construction on the new plant stopped. The jobs, and the much-needed economic boost in Moberly, never materialized. 

John Cromeans, an Alabama resident who had invested in the bonds, decided to sue, which led to a class action against Morgan Keegan in 2012. The plaintiffs alleged that Morgan Keegan failed in its due diligence to investigate Mamtek before the bond issue. One of the attorneys representing the plaintiff investors was Alabama attorney Andrew Campbell. 

Known for his expertise in securities and derivative litigation, class actions and fiduciary duty claims, Campbell — a managing partner at the law firm Campbell Guin in Birmingham — started his career nearly 40 years ago after earning his law degree from the University of Alabama in 1978. 

“I saw in law an opportunity to help people solve problems, ” says Campbell. “Since then, I’ve been a business litigator and been able to do just that. It’s been very fulfilling in that sense, and it turned out exactly as I thought it would be when I started out on this journey.”

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After law school, Campbell clerked for Judge Walter Gewin of the U.S. Court of Appeals, Fifth Circuit, where he helped craft and write opinions. The job, he says, gave him insight into how judges reach their decisions. 

“The best part of the experience was understanding of the reasoning of a court, how a court applies the law and essentially uses the law to apply to a certain set of facts in a case and decide opinions, ” he says. “It was an invaluable experience for a young lawyer.”

Campbell says that early in his career, an older attorney gave him a word of advice. 

“He said, ‘Never get too high over wins or too low over losses, ’” says Campbell. “That’s because over the years, it’s important to maintain a steady equilibrium, and that when you’re representing clients, you’re given a set of facts, and you try to resolve their problems. Sometimes it’s not going to go their way. Sometimes it will, but in all cases, they’re entitled to the best representation you can provide them. But some emotional distance is important in order to sustain a long career.”

Campbell worked his way up to co-managing partner at Leitman, Siegal, Payne & Campbell PC, before co-founding his current boutique law practice, Campbell Guin, in 2014 in Birmingham. Campbell also sat on the Alabama Securities Commission from 2008 to 2013 and has been a member of Best Lawyers in America. 

Underwriting Responsibilities

It is common for municipalities to issue bonds to help pay for specific projects. Investors, in turn, can receive interest payments based on revenues from the projects. Underwriting companies like Morgan Keegan — which today is a unit of Raymond James Financial Inc. — act as go-betweens or dealers by purchasing newly issued bonds from the issuer and selling them to investors. 

But before a bond sale takes place, says Campbell, the underwriter is legally bound to conduct a thorough investigation to determine whether the security is sound and whether the prospectus is true and accurate. 

It is also important for underwriters to investigate the character of the people running an enterprise to make sure their reputations are sterling, he says. When underwriters seek to maximize their own profits by cutting corners in their investigations, fraud may go undetected.

“So if it’s a fraudulent enterprise, as this turned out to be, ” says Campbell, “there’s no basis for the bonds to ever be paid back. And what you see today in a lot of these cases with these kinds of bonds is that there’s no due diligence done by the underwriter to determine if such a project will even really be feasible.”

The federal Securities and Exchange Commission, in fact, has ruled that an underwriter’s participation in a deal carries “an implied recommendation about the securities it is underwriting, ” and that the underwriter has the responsibility to determine the truth behind a prospectus. 

In the case of Mamtek, its chief executive, Bruce Cole, pleaded guilty in 2014 to one count felony stealing and two counts securities fraud for diverting about $700, 000 of the bond monies for his personal use, including more than $280, 000 to keep his Beverly Hills home out of foreclosure. He also received the authority to claim tax credits based on his promises that the sucralose factory would bring jobs to Moberly and represented to the town that he operated a functioning sucralose factory in China, which turned out to be untrue, according to statements issued by the Missouri Attorney General’s Office. A judge sentenced Cole to seven years in prison. The class action case was settled in 2015 in favor of the plaintiff class, which recouped around 86 percent of their out-of-pocket losses — about $5.2 million, Campbell says.

Campbell recalls another case in which a Birmingham church leader sold bonds to his congregants to raise monies for improvements to the building. The members who bought the bonds, however, never got their money back, Campbell says. 

“It was an amazing act of larceny carried out by a charismatic minister of the church, ” says Campbell. “That one and the Cromeans mess take the cake, because, in Cromeans, you had representations that a process had been successfully developed and that there was a plant operating in China. None of that was true and nobody checked it out.” 

Regulatory agencies like the federal Securities and Exchange Commission and the Alabama Securities Commission are designed to protect investors by setting and enforcing federal or state securities laws, as well as proposing new rules. Investors, as in the case of Cromeans v. Morgan Keegan, can try to recover their losses through arbitration or the courts, Campbell says. 

Investors Beware 

To protect themselves from fraud, people should do their own due diligence before giving their money to an investment adviser, financial adviser or individual bond issue, Campbell says. 

“In an individual bond issue, have some idea of what it is you’re being asked to invest in, because many bond issues are highly speculative, and they’re unsuitable for ordinary investors, ” he says. “They should read carefully the prospectus, but not trust the prospectus, and if there’s not verification of what’s in the prospectus, I would be very careful about investing in it.” 

Second, when choosing a financial adviser, do your homework, he says. 

“Before picking a financial adviser or investing with someone, check them out, ” he says. “Ask other people who have had experience with them and who are satisfied or otherwise.”

He says investors should also avoid giving an investment adviser discretionary authority to make stock or bond trades without their knowledge. Such agreements can make an investor vulnerable to a broker or dealer who makes excessive trades just to generate commissions or buys stocks or bonds that are unsuitable for their investment objectives. 

“If you’re giving someone discretionary authority, you’re basically giving them a blank check, ” says Campbell. “If you do that, you should at least have the ability to look over their shoulder and review what they’re doing.” 

Campbell says investors instead can require an investment adviser to notify them whenever they want to make a trade and to explain their reasoning. 

“People can no longer afford to just blindly follow what somebody says who holds themselves out as a financial guru, ” says Campbell. “There are too many fraudsters … holding themselves out as financial planners and broker dealers who end up taking their clients’ money.” 

Gail Allyn Short and Art Meripol are freelance contributors to Business Alabama. Both are based in Birmingham.


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