Indianapolis-based CountryMark Cooperative is suing its investment adviser, Morgan Keegan & Co., for directing the farmer-owned co-op toward a $10 million investment in mortgage-backed securities, including subprime.
CountryMark purchased the note on Aug. 10, 2007. Seven days later, ratings agencies downgraded the A+-rated investment to junk status and it remains in default.
CountryMark is suing Memphis-based Morgan Keegan, a division of Alabama-based Regions Financial Corp., to recover the purchase price, interest and attorney's fees. In the suit, filed in U.S. District Court in Indianapolis, the company says Morgan Keegan failed to disclose the investment was substantially backed by subprime and midprime mortgages-a risky bet that ran counter to the group's investment objective. Financial institutions nationwide have written off more than $100 billion such investments, and many more writedowns are expected.
"We have been let down by Morgan Keegan in so many ways," Charlie Smith, CountryMark's CEO, said in a statement.
A spokeswoman for Morgan Keegan says the company was merely a middleman in the transaction, selling a "Golden Key" security underwritten by Merrill Lynch.
"The commercial paper at issue in this suit had the highest available commercial paper rating 'A-1+' by Standard & Poor's," said Kathy Ridley, in an e-mailed statement. "Morgan Keegan acted only as a distributor in this transaction, buying the securities from Merrill Lynch, who was the underwriter, and then reselling them to CountryMark. Shortly after the sale this issue defaulted, a rare and unexpected occurrence with such a highly rated issue."
CountryMark isn't the only local company to feel stung by investment advice from Morgan Keegan. The Indiana Children's Wish Fund, which grants wishes for terminally ill children, lost about $48,000 after a Morgan Keegan adviser suggested the group invest $223,000 in an intermediate-bond fund in June 2007.
The fund, which included mortgage-related securities, fell 22 percent before the Wish Fund yanked its investment. The Wish Fund eventually recovered its loss after filing an arbitration claim.