Exhibit 1
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CIRCUIT COURT OF TENNESSEETWENTIETH JUDICIAL DISTRICTNASHVILLE, DAVIDSON COUNTY
'.,~
DOUGLAS and MARY BALLINGER,SWAN BURRUS III,JAMES L. GREGORY,CLAIR HENDERSON,JOSEPH B. LEDBETTER,CHARLES MITCHELL, Individuallyand as Executor of the Estate ofMary Mitchell, KAY MITCHELL,Individually and as PersonalRepresentative and Next Friendof Wingate Spivey,CHARLES S. MITCHELL, JR.,KATHLEEN E. MITCHELL,SVITLANA MORGAN, Attorney-In-Factfor Claude D. Jones,VADIS L. PIERCE,RICHARD B. RAY,ARDEN and RUTHIE SEXTON,MARION M. STOWERS,JACK and PAMELA TOWNES,VICKI P. TURNER,VADIS L.P. TURNER,GREGG C. UNDERWOOD, VENTURESERVICES OF KENTUCKY, INC.TIMOTHY W. WILLIAMS,
Plaintiffs,
v.
MORGAN KEEGAN & CO., INC.,MORGAN ASSET MANAGEMENT,INC., JAMES C. KELSOE, JR.,DAVID H. TANNEHILL,CARTER E. ANTHONY,ALLEN B. MORGAN, JR.,JOSEPH C. WELLER,JAMES STILLMAN R. MCFADDEN,ARCHIE W. WILLIS, III,MARY S. STONE,W. RANDALL PITTMAN,
)))))))))))))))))))))))))))))))))))))))))
No.
JURY DEMAND
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J. KENNETH ALDERMAN,J. THOMPSON WELLER,CHARLES D. MAXWELL,WILLIAM JEFFRIES MANN,JAMES D. WITHERINGTON,R. PATRICK KRUCZEK,JACK R. BLAIR,ALBERT C. JOHNSON,MICHELE F. WOOD,BRIAN B. SULLIVAN,
Defendants.
))))))))))))
COMPLAINT
PRELIMINARY STATEMENT
1. Each of the plaintiffs in this action lost money in investments
made in one or more of the following income funds operated, managed,
directed, underwritten, and/or sold by defendants: th.e Regions Morgan
Keegan Select High Income Fund, the Regions Morgan Keegan Select
Intermediate Bond Fund, the RMK Strategic Income Fund, the RMK
Advantage Income Fund, the RMK High Income Fund, and the RMK Multi-
Sector High Income Fund (collectively, the "Funds"). Defendants engaged
in unlawful, deceptive, and unfair conduct in connection with these Funds.
I. PARTIES
2. Plaintiffs Douglas and Mary Ballinger are residents of Florida.
3. Plaintiff Swan Burrus III is a resident of Davidson County,
Tennessee.
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4. Plaintiff James 1. Gregory is a resident of Alabama.
5. Plaintiff Clair Henderson is a resident of Davidson County,
Tennessee.
6. Plaintiff Joseph B. Ledbetter isa resident of Davidson County,
Tennessee.
7. Plaintiffs Charles Mitchell, Individually and as Executor of the
Estate of Mary Mitchell, Kay Mitchell, Individually and as Personal
Representative and Next Friend of Wingate Spivey, Charles S. Mitchell, Jr.
and Kathleen E. Mitchell are residents of Rutherford County, Tennessee.
8. Plaintiff SvitIana Morgan is a resident of Florida. Ms. Morgan
is the stepdaughter of Claude D. Jones and holds a power of attorney
conferred by Mr. Jones, who is elderly and in very poor health.
9. Plaintiff Vams L. Pierce is a resident of Sumner County,
Tennessee.
10. Plaintiff Richard B. Ray is a resident of Tennessee.
11. Plaintiffs Arden and Ruthie Sexton are residents of Alabama.
12. Plaintiff Marion Stowers is a resident of Arkansas.
13. Plaintiffs Jack and Pamela ToWnes are residents of Tennessee.
14. Plaintiff Vicki P. Turner is a resident of Davidson County,
Tennessee.
15. PlaintiffVadis L.P. Turner is a resident of New York.
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16. Plaintiffs Gregg C. Underwood and Venture Services of
Kentucky, Inc. reside and have its principal place of business in Hamilton
County, Tennessee.
17. Plaintiff Timothy W. Williams is a resident of Tennessee.
18. Defendant Morgan Asset Management, Inc. ("MAM"), is a
registered investment adviser that managed and advised the Funds at alI
times relevant herein. MAM is headquartered in Birmingham, Alabama,
with a principal office in Memphis, Tennessee. MAM charged the Funds
management fees based on the average daily net assets of the Funds.
19. Defendant Morgan Keegan & Company, Inc. ("Morgan Keegan")
is a full service broker/dealer that purports to provide personalized
investment services to its clients from over 400 offices in 19 states, and is
headquartered in Memphis, Tennessee. Morgan Keegan has, and at all
times material to this case, had offices in and did business in Davidson
County, Tennessee. Morgan Keegan acted as underwriter and/or
distribution agent with respect to the Funds' shares sold during the time
period relevant to plaintiffs' claims.· Morgan Keegan sold and received
commissions on the sale of shares of the Funds. Morgan Keegan also
provided an employee to serve as the Funds' Chief Compliance Officer
and, pursuant to a Fund Accounting Service Agreement, provided portfolio
accounting services to the Funds for an annual fee based on the average daily
net assets of the Funds. Morgan Keegan also served as the Transfer and
Dividend Disbursing Agent for the Funds. Pursuant to the Transfer
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Agency and Service Agreement, each Fund pays Morgan Keegan an aimual
base fee per share class.
20. Defendant Allen B. Morgan, Jr. ("Morgan"), was during the time
period relevant-to plaintiffs' claims a director of one or more of the Funds.
During the time period relevant to plaintiffs' claims, he also served as a
Director of MAM, and Chairman and Executive Managing Director of
Morgan Keegan. Defendant Morgan signed one or more of the Funds'
registration statements, prospectuses, and/or amendments thereto effective
during the time period relevant to plaintiffs' claims and/or with respect to
which plaintiffs can trace their purchases in the Funds.
21. Defendant Carter E. Anthony ("Anthony") was, during times
relevant to plaintiffs' claims, a director and officer of one or more of the
Funds. Additionally, Anthony was President and Chief Investment Officer
of MAM. Mr. Anthony signed one or more of the registration statements,
prospectuses, and/or amendments theretoeffective during the time period
relevant to this case and/ or with respect to which plaintiffs can trace their
purchases in the Funds.
22. Defendant Joseph C. Weller ("Weller") co-founded Morgan
Keegan. Weller was Vice Chairman of Morgan Keegan and Treasurer of the
Funds until November 2006. Weller also served as Chief Financial Officer
("CFO") of Morgan Keegan and was during the time period relevant to
plaintiffs' claims an officer of one or more of the Funds. Defendant Joseph
Weller signed one or more of the Funds' registration statements,
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prospectuses, and/or amendments thereto effective during the time period
relevant to plaintiffs' claims and/or with respect to which plaintiffs can
trace their purchases in the Funds.
23. Defendant James Stillman R. McFadden ("McFadden") was
during the time period relevant to plaintiffs' claims a director of one or more
of the Funds. Defendant McFadden signed one or more of the Funds'
registration statements, prospectuses, and/or amendments thereto effective
during the time period relevant to plaintiffs' claims and/or with respect to
which plaintiffs can trace their purchases in the Funds.
24. Defendant Archie W. Willis, III ("Willis") was during the time
period relevant to plaintiffs' claims a director of one or more of the Funds.
Defendant Willis signed one or more of the Funds' registration statements,
prospectuses, and/or amendments thereto effective during the time period
relevant to plaintiffs' claims and/or with respect to which plaintiffs can
trace their purchases in the Funds.
25. Defendant Mary S. Stone ("Stone") was during the time period
relevant to plaintiffs' claims a director of one or more of the Funds.
Defendant Stone signed one or more of the Funds' registration statements,
prospectuses, and/or amendments thereto effective during the time period
relevant to plaintiffs' claims and/or with respect to which plaintiffs can
trace their .purchases in the Funds.
26. Defendant W. Randall Pittman ("Pittman") was during the time
period relevant to plaintiffs' claims a director of one or more of the Funds.
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Defendant Pittman signed one or more of the Funds' registration
statements, prospectuses, and/or amendments thereto effective during the
time period relevant to plaintiffs' claims and/or with respect to which
plaintiffs can trace their purchases in the Funds.
27. Defendant J. Kenneth Alderman ("Alderman") was during the
time period relevant to plaintiffs' claims a director of one or more of the
Funds. Mr. Alderman has been CEO of MAM since 2002. Defendant
Alderman signed one or more of the Funds' registration statements,
prospectuses, and/or amendments thereto effective during the time period
relevant to plaintiffs' claims and/or with respect to which plaintiffs can
trace their purchases in the Funds.
28. Defendant J. Thompson Weller ("JT Weller") is, and at all
relevant times was, Managing Director and Controller of Morgan Keegan.
Defendant JT Weller signed one or more of the Funds' registration
statements, prospectuses, and/or amendments thereto effective during the
time period relevant to plaintiffs' claims and/or with respect to which
plaintiffs can trace their purchases in the Funds.
29. Defendant Brian B. Sullivan ("Sullivan") has served as
President and Chief Investment Officer of MAM since 2006.
30. Defendant Charles D. Maxwell ("Maxwell") has served as
Executive Managing Director, CFO, Treasurer and Secretary of Morgan
Keegan since 2006. Defendant Maxwell signed one or more of the Funds'
registration statements, prospectuses, and/or amendments thereto effective
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during the time period relevant to plaintiffs' claims and/or with respect to
which plaintiffs can trace their purchases in the Funds.
31. Defendant James C. Kelsoe, Jr. ("Kelsoe") is, and at all relevant
times Senior Portfolio Manger of the Funds and of MAM.
32. Defendant David H. Tannehill ("Tannehill") is and was during
the time period relevant to plaintiffs' claims the Portfolio Manager of the
Funds and of MAM.
33. Defendant Michele F. Wood ("Wood") is, and at all relevant
times was, Chief Compliance Officer and Senior Vice President of MAM.
34. Defendant Jack R. Blair ("Blair") was during the time period
relevant to plaintiffs' claims .a director of one or more of the Funds.
Defendant Blair signed one or more of the Funds' registration statements,
prospectuses, and/or amendments thereto effective during the time period
relevant to plaintiffs' claims and/or with respect to which plaintiffs can
trace their purchases in the Funds.
35. Defendant Albert C. Johnson ("Johnson") was during the time
period relevant to plaintiffs' claims a director of one or more of the Funds.
Defendant Johnson signed one or more' of the Funds' registration
statements, prospectuses, and/or amendments thereto effective during the
time period relevant to plaintiffs' claims and/or with respect to which
plaintiffs can trace their purchases in the Funds.
36. Defendant William Jeffries Mann ("Mann") was during the time
period relevant to plaintiffs' claims a director of one or more of the Funds.
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Defendant Mann signed one or more of the Funds' registration statements,
prospectuses, and/or amendments thereto effective during the time period
relevant to plaintiffs' claims and/or with respect to which plaintiffs can
trace their purchases in the Funds.
37. Defendant James D. Witherington, Jr. ("Witherington") was
during the time period relevant to plaintiffs' claims a director of one or more
of the Funds. Defendant Witherington signed one or more of the Funds'
registration statements, prospectuses, and/or amendments thereto effective
during the time period relevant to plaintiffs' claims and/or with respect to
which plaintiffs can trace their purchases in the Funds.
38. Defendant R. Patrick Kruczek ("Kruczek") was during the time
period relevant to plaintiffs' claims a director of one or more of the Funds.
Defendant Kruczek signed one or more of the Funds' registration
statements, prospectuses, and/or amendments thereto effective during the
time period relevant to plaintiffs' claims and/or with respect to which
plaintiffs can trace their purchases in the Funds.
39. The defendants referred to in ~~ 20-38 above are referred to
herein as the "Individual Defendants."
40. Defendants either participated, directly or indirectly, in the
wrongful conduct alleged herein; combined to engage in the wrongful
transactions and dealings alleged herein; knew, or in the exercise of
reasonable care, should have known, of the misrepresentations and
omissions of material facts, or recklessly caused such misrepresentations or
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omissions of material facts to be made; or benefited from the wrongful
conduct alleged.
II. FACTS GIVING RISE TO PLAINTIFFS' CLAIMS
The Funds' Catastrophic Crash
41. During all times relevant to this case, the Funds were operated,
managed, directed, underwritten, and/or sold by the defendants.
42. During 2007-2008, the Funds experienced a meltdown of
unprecedented proportions, suffering losses of 90% or more of their values.
43. These tremendous losses were not caused primarily by an
economic downturn, the subprime crisis, or other general market forces.
This assertion is easily confirmed by the performance of the investment
indices by which the Funds measured themselves and by the performance
of other funds in the high income bond category. For example, for the year
2007, the Lehman Brothers U.S. High Yield Index, the benchmark by which
the Funds measured themselves, gained 1.87% while the Funds lost close
to 60% of their value.
44. Similarly, the performance of other high income and
intermediate bond funds in 2007 and 2008 was dramatically different from
the catastrophic performance ofthe Funds at issue in this case. The Funds
were by far the worst performing funds in their categories. And in 2009,
most high yield bond funds have experienced a significant rebound, while
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those RMK Funds have not (the RMK Select High and Select Intermediate
Funds were actually closed in May 2009).
45. In July of 2008, the management of the Funds was taken away
from MAM and turned over to an investment advisor called Hyperion
Brookfield. This new firm attempted to chart a new course for the Funds
and to move its holdings out of structured securities. The Select High and
Select Income Funds were unsalvageable and were closed in May 2009.
The four closed end funds continue to trade at less than 10% of their
offering prices and have no prospects for a significant recovery..
46. The astonishing meltdown of the Funds was caused primarily
by their extreme overconcentration in the riskiest tranches of structured,
asset-backed securities - an investment strategy and risk not properly
disclosed to potential investors, by the Funds' failure to value their assets
at reasonable fair value, and by the failure of the Funds to disclose properly
all material risks and the true facts.
47. Although subprime and credit concerns in 2007 had some
effect on the Funds, the magnitude of the Funds' losses was completely
outside the range of the losses, if any, experienced by other high income
and intermediate income funds to which the Funds compared themselves.
48. The disproportionate, adverse effect of economic events on
the Funds could not reasonably have been foreseen or anticipated by
persons investing in the Funds, in view of the Funds' misleading and
incomplete disclosures. The disproportionate effect of economic events on
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the Funds, however, could and should reasonably have been foreseen and
anticipated by defendants, given the Funds' high concentration in a narrow
sector of securities that were likely to plummet in unison in the event of a
credit crunch or real estate downturn.
49. The majority of the Funds' collapse occurred during and
after a period of time in which defendants' made the following disclosures
concerning problems with the Funds:
• At a shareholders meeting on July 13, 2007, defendant Kelsoedisclosed that the Funds' subprime and collateralized debt holdings wereunder pressure and experiencing substantial volatility.
• On August 10, 2007, defendant Kelsoe disclosed in an open letter theFunds' increasing volatility, negative price movement in the Funds' assets,and "unprecedented" problems.
• In mid-August, 2007, the Funds made several SEC filings disclosingasset illiquidity and difficulties in obtaining realistic values for some of theFunds' securities. These SEC filings also stated that the Funds were unableto file certified shareholder reports on a timely basis and had retained avaluation consultant to assist in determining the fair value of the Funds'securities.
• On October 4, 2007, Regions Morgan Keegan Select Funds, Inc., fJledits annual report with the SEC. The following day, the Wall Street Journalreported that the Regions_ Morgan Keegan Select High Income andIntermediate Funds had had to value 60% and 50% of their assets,respectively, at fair value since market values were not readily available. Inconnection with that article, defendant Kelsoe told the Journal that "Whatwas an ocean of liquidity has quickly become a desert."
• On November 7,2007, defendant Kelsoe published a letter in which hestated that "we have always invested a large portion of our portfolios in"structured finance" fixed income securities .... and the weakness in theportfolios relates to this area of investment."
• On March 6, 2008, Regions Morgan Keegan Select High Income andIntermediate Funds disclosed for the first time in an SEC filing that theFunds losses were caused primarily because of the leveraged risk in theFunds' structured securities.
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50. Thus, the extraordinary decline in the Funds' asset values and
share prices during 2007-2008 was caused by actions and omissions of the
defendants and their failure to make timely and accurate disclosures to the
investing public.
Misrepresentations And Omissions In The Funds' SEC Filings
51. The Securities and Exchange Commission ("SEC")
promulgates, through its Forms N-IA and N-2, directives that open-end
and closed-end management companies, respectively, must follow in the
prospectuses they file with the SEC. 1 Form N-I states that prospectuses
filed by open-end management companies must:
• "clearly disclose the fundamental characteristics and investmentrisks of the Fund, using concise, straightforward, and easy tounderstand language" (emphasis supplied)
• "identiJY the Funds' principal investment strategies (including thetype or types of securities in which the Fund invests or will investprincipally)" (emphasis supplied)
• "summarize the principle risks of investing in the Fund." (emphasissupplied)
• not "disproportionately emphasize investments or activities of theFund that are not a significant part of the Funds' investmentoperations"
1 Regions Morgan Keegan Select High Income Fund, Inc., which owned and operated the
Regions Morgan Keegan Select High Income Fu.nd and the Regions Morgan Keegan Select
Intermediate Bond Fund, is an open-end management company. The RMK Strategic
Income Fund, the RMK Advantage Income Fund, the RMK High Income Fund, and the
RMK Multi-Sector High Income Fund were owned and operated by closed-end
managern,ent companies.
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•. "be designed to assist an investor in comparing and contrasting theFund with other funds"
52. Similarly, Form N-2 states that prospectuses filed by closed- end
management companies must:
• use "clear, concise, and understandable" language and include "onlyinformation needed to understand the fundamental characteristics"of the fund (emphasis supplied)
• "concisely describe the investment objectives and policies of theRegistrant that will constitute its principal portfolio emphasis,including . . . the types of securities in which the registrant willinvest principally" and must "briefly describe the significantinvestment practices" the fund intends to employ. (emphasissupplied)
• "concisely describe the risks associated with an investment in theRegistrant" and "discuss the principal risk factors" (emphasissupplied)
53. At all times relevant to this case, the principal, fundamental
strategy of the Funds was an unusual concentration in structured, asset-
backed securities, particularly the lowest, riskiest tranches of such
structured securities. The Select High Income and Select Intermediate
Bond Funds utilized this strategy from the outset. And when the four,
closed~end RMK Funds were offered in 2003, 2004, and '2006, Morgan
Keegan, MAM and their affiliates and officers and directors understood that
these funds would simply continue the existing strategy.
54. Concomitantly, the principal risk posed by an investment in
the Funds was the usual risk associated with the lower tranches of
structured securities. The income flow produced by the pool of assets
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backing a $tructured investment typically flows to the tranches in order of
priority from top to bottom. For example, an eighth tier tranche receives
income only if all other tranches are fully paid. Thus, the lower tranches,
which earn more interest if things go well, have highly leveraged risks that,
in bad times, may result in complete losses.
55. In violation of SEC rules, the prospectuses and registration
statements filed by the Funds failed to disclose either their principal
investment strategy or the unusual, leveraged risk associated with that
strategy - facts that were highly material. The Funds' SEC filings
misleadingly numbed investors with an extensive laundry list of possible
investments and risks, but gave them no fair notice of what the Funds
actually were doing and intended to do.
56. No other intermediate term or high-yield bond fund invested
as heavily in structured financial instruments as did the Funds in this
case. On July 19, 2007, Bloomberg News quoted defendant James Kelsoe,
senior portfolio manager of the Funds, as having an "intoxication" with
such securities. Bloomberg further reported that an analyst at Morningstar,
Inc., the mutual fund research firm, noted that "[a] lot of mutual funds
didn't own much of this stuff" and that Kelsoe was "the one real big
exception."
57. But the Funds' SEC filings never gave investors the requisite
information to assist them "in comparing and contrasting the Fund with
other funds," as the SEC requires. To the contrary, the Funds misled
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inv.estors about the true nature of the Funds by comparing themselv.es, in
SEC filings, to a bond fund benchmark that did not include any component
of structured securities.
58. In other litigation, defendants hav.e noted that the Statement of
Additional Information filed by one of the Funds included a discussion of
the fact that the Funds "may" inv.est in "subordinated classes of senior
subordinated securities" that "are subordinated in some manner" as to
payments. This disclosure clearly failed to satisJY the Funds' legal
obligations. This v.ague, uncertaln language did not fairly explain the
nature and risks of the tranched inv.estments, nor was there any
explanation that this type of inv.estment was in fact the principal strategy
and concentration of the Funds. Moreov.er, the SEC requires that principal
strategies and risks must be disclosed in the prospectus. Disclosure of
principal strategies and risks only in a Statement of Additional Information,
which is not routinely prov.ided to inv.estors, is not permissible, nor is it fair
to inv.estors.
59. It was not until an SEC filing in early March of 2008 that the
Funds first made any meaningful disclosure of their principal risk - a risk
that by that time had destroyed the Funds. In a semi-annual report filed
by the Select Funds, management's discussion of the brutal losses
sustalned by the Funds included a brief statement that "the structured
fmance category has taken the hardest hit so far due to the implicit (i.e.,
built into the structures) and explicit (i.e., financed, or bought on margin)
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leverage employed for this asset category...."2
60. But the Funds prospectuses and registration statements had
never disclosed or explained the leveraged risk created by the Funds'
concentration in structured, asset-backed securities. To the contrary, the
Select Funds' prospectuses stated that they could not employ margin
leverage, and the four RMK Fund prospectuses stated that leverage would
be limited to margin debt equal to no more than one-third of the Funds'
total asset value. These statements significantly misled investors about the
principal risk in the Funds - the implicit leverage in the lower tranches of
structured securities, which was dramatically higher than one-third of the
total investment in these securities.
61. Thus, as set forth in the preceding paragraphs, each of the
prospectuses and registration statements pursuant to which the Funds
were sold to the public during the time period relevant to this case
contained material misrepresentations and/or failed to disclose material
facts concerning the Funds' principal investment strategy and risk. In
addition, the Funds' prospectuses and registration statements also failed to
disclose a number of other material facts, including the follOWing:
(a) The structured investments in which the Funds were concentrating
their investments were not actively traded and were less liquid that many
other types of securities;
(b) The substantial illiquidity of the Funds meant that in the event of
2 This statement was presumably confused in its reference to margin debt, which the SelectFunds were not allowed to use.
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a forced sale assets would quite likely bring far less than the prices at
which they were valued by the Funds;
(c) The substantial illiquidity of the Funds also meant that if it
became necessary for the Funds to sell assets, either because of
shareholder liquidations or margin calls, the manager would likely have to
sell first the few lower-risk, liquid assets held by the Funds, thus penalizing
those who remained in the Funds;
(d) The Funds were all pursuing the same investment strategy and
investing in the same or similar securities. This greatly exacerbated the
difficulty of selling assets at reasonable prices in the event of a forced
liquidation; and
(e) Investors in the Funds were not told that in the event that one of
the Funds were forced (because of redemptions or margin calls) to sell
assets at prices below value at which they were carried by that Fund, then
the other Funds would have to mark down the value of the same of similar
assets they held.
62. In addition, the Funds were presented to the investing
public as different funds that employed different investment strategies. In
truth, however, they were managed almost identically, with highly similar
asset allocations and individual securities holdings. This reality was not
disclosed in the registration statements and prospectuses filed by the
Funds.
63. Because of their highly correlated portfolios, investors who
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purchased more than one of the Funds assumed they were thereby
diversifying and reducing overall risk, were in fact not doing so. This fact
was not disclosed in the registration statements and prospectuses filed by
the Funds.
64. Also, the registration statements and prospectuses filed by
the Funds represented that they would invest in a wide range of securities,
which would contribute to a more stable net asset value, would not invest
more than 25% of its total assets in the securities of companies in the same
industry, and would pursue a value investing strategy. These statements
were misleading in view of the fact that the Funds were concentrated and
intended to concentrate far beyond 25% in securities that in the event of a
liquidity crunch would collapse as a single sector because they were
purchased primarily by financial industry firms that relied on credit.
65. In addition, the prospectuses and registration statements
filed with respect to the Morgan Keegan Select High Income and
Intermediate Funds stated that these Funds would not invest more than
15% of their assets in illiquid securities. In 2006 and 2007, these Funds
substantially violated this investment restriction. This fact was not
disclosed in the Funds' prospectuses.
66. Furthermore, during significant portions of 2007 and 2008,
the Funds were paying dividends to investors that included an undisclosed
return of principal. The Funds never advised shareholders that they were
receiving their own money back. The fraudulently inflated dividends misled
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investors into believing that the Funds were doing reasonably well and
therefore induced investors, including plaintiffs, to hold onto their
investments.
67. In addition, the annual and semi-annual reports filed by the
Funds during 2006-2007 contained inflated valuations of the Fuhds'
securities and mischaracterized certain holdings in structured securities as
other types of assets.
Plaintiffs' Investments In The Funds
68. In 2007, Douglas and Mary Ballinger invested more than
$1,000,000 in the RMK Strategic Income Fund and the RMK Advantage
Income Fund.
69. Between 2000 and 2007, Morgan Keegan recommended that
Swan Burrus (and his now deceased father whose investments Mr. Burrus
inherited) invested close to $2 million in the Select High Fund and the
Select Intermediate Bond Fund.
70. In 2005, James Gregory invested more than $40,000 in the
Advantage Income Fund and the Strategic Income Fund.
71. During 2004-2007, Joe Ledbetter invested more than $4.3
million in the RMK High Income Fund, the RMK Strategic Income Fund, the
RMK Advantage Income Fund, and the RMK Multi-Sector High Income
Fund.
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72. During 2005-2007, Charles Mitchell, Kathleen Mitchell, and
Charles Mitchell, Jr. invested more than $500,000 in the Advantage Income
Fund.
73. During 2005-2007, Arden and Ruthie Sexton invested more
than $390,000 in the RMK Strategic Income Fund, the RMK Advantage
Income Fund, and the Regions Morgan Keegan Select High Income Fund.
74. Jack and Pamela Townes and their daughter Clair Henderson
invested more than $500,000 in the RMK High Income Fund, the RMK
Strategic Income Fund, the RMK Advantage Income Fund, and the RMK
Multi-Sector High Income Fund.
75. During 2007, Marion Stowers invested more than $560,000 in
the RMK Strategic Income Fund, the RMK Advantage Income Fund, and the
RMK Multi-Sector High Income Fund.
76. During 2004-2007, Timothy Williams invested more than $3.5
million in the Regions Morgan Keegan Select Intermediate Fund, the RMK
High Income Fund, the RMK Strategic Income Fund, the RMK Advantage
Income Fund, and the RMK Multi-Sector High Income Fund.
77. During 2004-2007, Richard Ray invested approximately $1.2
million in the RMK High Income Fund, the RMK Strategic Income Fund, the
RMK Advantage Income Fund, and the RMK Multi-Sector High Income
Fund.
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78. In 2006-2007, Claude Jones invested more than $600,000 in
the RMK High Income Fund, the RMK Strategic Income Fund, the RMK
Advantage Income Fund, and the RMK Multi-Sector High Income Fund.
79. During 2003-2008, Vicki Turner, Vadis Turner, and Vadis
Pierce purchased and/ or held millions of dollars worth of the Select High
Income Fund, the Strategic Income Fund, and the Multi-Sector High
Income Fund.
80. During 2004-2005, Gregg Underwood and Venture Services of
Kentucky, Inc. invested several million dollars in the Select High Fund, the
Advantage Income Fund, and the Multi-Sector High Income Fund.
81. All plaintiffs suffered significant losses on the investments
described above.
III. LEGAL CLAIMS
COUNT ONE - VIOLATION OF SECTION 11 OF SECURITIES ACT
82. Plaintiffs incorporate n 1-81 by reference.
83. This Count is brought by plaintiffs pursuant to § 11 of the
Securities Act, 15 U.S.C. § 77k, against all defendants.3
84. The registration statements by which the Funds were offered to
plaintiffs, or to those investors from whom plaintiffs acquired their shares,
were inaccurate and misleading, contained untrue statements of material
3 Only the following plaintiffs assert claims against Morgan Keegan in this Count: Marion
Stowers, Douglas and Mary Ballinger, Jack and Pamela Townes, Clair Henderson, and
Joseph Ledbetter.
22
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fact, omitted to state facts necessary to make the statements therein not
misleading, and omitted to state material facts required to be stated
therein.
85. The defendants were persons who signed the Funds'
registration statements, were directors or persons or entities performing
similar functions for the issuers, or underwriters of the Funds.
86. None of the defendants named herein made a reasonable
investigation or possessed reasonable grounds to believe that the
statements contained in the Funds' registration statements were true and
without omissions of material facts and not misleading. Defendants could
have, with the exercise of reasonable care, become aware of the misleading
nature of the registration statements.
87. Through the conduct alleged above, each defendant violated, is
liable under, or controlled a party who is liable under §ll of the Securities
Act.
88. Plaintiffs acquired shares of the Funds during the period in
which defendants' misleading registration statements were in effect. The
shares purchased by plaintiffs were bought pursuant to defendants'
registration statements or are traceable to such registration statements.
89. Plaintiffs have been damaged and are entitled to all relief from
defendants permitted by § 11 of the Securities Act.
23
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90. At the times plaintiffs purchased their shares in the Funds,
they did not know and could not reasonably have known of the misleading
statements, omissions, and misconduct set forth above.
COUNT TWO - VIOLATION OF SECTION 12 OF SECURITIES ACT
91. Plaintiffs incorporate ~~ 1-90 by reference.
92. This Count is brought by plaintiffs pursuant to § 12a(2) of the
Securities Act, 15 U.S.C. § 771, against all defendants.4
93. Defendants were sellers, offerors, and/or solicitors with respect
to the investments in the Funds made by plaintiffs.
94. The Individual Defendants participated in the preparation of
the prospectuses filed with respect to the Funds.
95. The prospectuses by which the Funds were offered to plaintiffs
and others were inaccurate and misleading, contained untrue statements of
material fact, omitted to state facts necessary to make the statements
therein not misleading, and omitted to state material facts required to be
stated therein.
96. Defendants could have, with the exercise of reasonable care,
become aware of the misleading nature of the Funds' prospectuses.
4 Only the following plaintiffs assert claims against Morgan Keegan in this Count: Marion
Stowers, Douglas and Mary Ballinger, Jack and Pamela Townes, Clair Henderson, and
Joseph Ledbetter.
24
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97. Through the conduct alleged above, defendants violated, are
liable under, or controlled a party who is liable under §12a(2) of the
Securities Act.
98. For the same reasons, the fund companies that issued and sold
shares in the Funds,s violated §12a(2) of the Securities Act. These
companies are not defendants herein, however, and plaintiffs seek no relief
against them.
99. Plaintiffs acquired shares of the Funds from the issuers during
the time when defendants' misleading prospectuses were in effect.
100. Plaintiffs have been damaged and are entitled to all relief from
defendants permitted by § 12a(2) of the Securities Act.
COUNT THREE - VIOLATION OF SECTION 15 OF SECURITIES ACT
101. Plaintiffs incorporate n 1-100 by reference.
102. This Count is brought by plaintiffs pursuant to § 15 of the
Securities Act, 15 U.S.C. § 770, against all defendants.6
103. Defendants were control persons of the Funds and/or Fund
companies by virtue of their positions as directors or senior officers of the
Funds and/or by virtue of their relationships with the Funds. These
5 RMK Advantage Income Fund, Inc., RMK High Income Fund, Inc., RMK Strategic Income
Fund, Inc., RMK Multi-Sector High Income Fund, Inc., and Morgan Keegan Select Fund,
Inc.
6 Only the following plaintiffs assert claims against Morgan Keegan in this Count: Marion
Stowers, Douglas and Mary Ballinger, Jack and Pamela Townes, Clair Henderson, and
Joseph Ledbetter.
25
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defendants exercised control over the general affairs of the Funds and/ or
Fund company and had the power to control the conduct giving rise to
plaintiffs' claims.
104. Defendants are therefore liable for the Securities Act violations
alleged in Counts One and Two above.
COUNT FOUR - AIDING AND ABETTING THE FRAUD OF THE FUNDS
105. Paragraphs 1-104 are incorporated herein by reference.
106. This Count is brought against defendants MAM, Morgan
Keegan,7 Kelsoe, Tannehill, Morgan, Alderman, and Anthony (hereinafter
"Defendants In Counts Four and Five").
107. RMK Advantage Income Fund, Inc., RMK High Income Fund,
Inc., RMK Strategic Income Fund, Inc., RMK Multi-Sector High Income
Fund, Inc., and Morgan Keegan Select Fund, Inc. (the "Fund Companies")
intentionally or recklessly made material misrepresentations and/or failed
to disclose material facts concerning the Funds to the investing public,
including plaintiffs.
108. These misrepresentations and material omissions worked a
fraud on the market and on plaintiffs and artificially increased the market
value of the Funds' shares.
7 Only the following plaintiff~ assert claims against Morgan Keegan in this Count: Marion
Stowers, Douglas and Mary Bailinger, Jack and Pamela Townes, Clair Henderson, and
Joseph Ledbetter.
26
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109. Defendants In Counts Four and Five were aware of the fact that
the SEC filings made by the Funds contained material misrepresentations
and/or omissions.
110. Defendants In Counts Four and Five were aware that the Fund
Companies were not fully and fairly disclosing the risks in the Funds.
1I 1. Nevertheless, for their own financial gain, Defendants In
Counts Four and Five materially assisted in the promotion, sale, and
management of the Funds. These defendants therefore aided and abetted
the fraud of the Fund Companies.
112. Plaintiffs are therefore entitled to recover rescissionary
damages and/or all losses they incurred with respect to their investments
in the Funds, plus prejudgment interest, from Defendants In Counts Four
and Five.
113. Defendants In Counts Four and Five acted recklessly and in
conscious indifference to the rights and interests of plaintiffs. Plaintiffs are
therefore entitled to recover punitive damages from Defendants In Counts
Four, Five, and Six.
COUNT FIVE - VIOLATION OF CONSUMER PROTECTION ACT
114. Paragraphs 1-113 are incorporated herein by reference.
27
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115. This Count is brought against Defendants In Counts Four and
Five.8
116. Defendants In Counts Four and Five engaged in trade,
commerce, and/or consumer transactions, as defmed in T.C.A. § 47-18-
103(1), in connection with the management, marketing, and sale of the
Funds.
117. Defendants In Counts Four and Five engaged in unfair and/or
deceptive acts and practices affecting the conduct of trade and commerce in
violation of § 47-18-104 in connection with plaintiffs' investments, thereby
causing damage to plaintiffs.
118. Plaintiffs are entitled, pursuant to § 47-18-109, to recover from
these defendants their actual damages, plus treble damages, pre-judgment
interest, and attorney's fees pursuant to § 47-18-109.
COUNT SIX - COMMON LAW FRAUD
119. Paragraphs 1-118 are incorporated herein by reference.
120. This Count is asserted by all plaintiffs against defendant MAM
and Kelsoe.
121. MAM assisted in the marketing of the Funds, managed the
Funds, and received a portion of the money plaintiffs' invested in the
Funds.
8 Only the following plaintiffs assert claims against Morgan Keegan in this Count: Marion
Stowers, Douglas and Mary Ballinger, .Jack and Pamela 'Townes, Clair Henderson, and
Joseph Ledbetter.
28
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122. In the course of their work as investment advisor and portfolio
manager to the Funds, MAM and Kelsoe were aware of and participated in
the Funds' misleading statements and their failure to disclose material
information to investors, including plaintiffs.
123. Acting intentionally and/or recklessly, MAM and Kelsoe
engaged in acts, practices, and a course of business that acted as a fraud of
deceit on plaintiffs.
124. Plaintiffs are therefore entitled to recover all losses they have
incurred with respect to their investments in the Funds, plus prejudgment
interest.
125. Because of the recklessness and conscious indifference of MAM
and Kelsoe to the rights and interests of the plaintiffs, plaintiffs are entitled
to recover punitive damages.
COUNT SEVEN - AIDING AND ABETTING THE FRAUD OF MAM
126. Paragraphs 1-125 are incorporated herein by reference.
127. This Count is brought against defendants Morgan Keegan,9
Kelsoe, Tannehill, Morgan, Alderman, and Anthony (hereinafter
"Defendants In Count Seven").
128. As set forth above, MAM engaged in fraud in connection with
the management of the Funds and the sale of its shares.
9 Only the following plaintiffs assert claims against Morgan Keegan in this Count: Marlon
Stowers, Douglas and Mary Ballinger, Jack and Pamela Townes, Clair Henderson, and
Joseph Ledbetter.
29
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129. Defendants In Count Seven were aware of and provided
material assistance to MAM's fraudulent conduct. These defendants
therefore aided and abetted the fraud of MAM.
130. Plaintiffs are therefore entitled to recover rescissionary
damages and!or all losses they incurred with respect to their investments
in the Funds, plus prejudgment interest, from Defendants In Count Seven.
131. Defendants In Count Seven acted recklessly and in conscious
indifference to the rights and interests of plaintiffs. Plaintiffs are therefore
entitled to recover punitive damages from Defendants In Count Seven.
COUNT EIGHT - VIOLATION OF TENNESSEE SECURITIES ACT
132. Paragraphs 1-131 are incorporated herein by reference.
133. This Count is brought against defendant MAM and Kelsoe by
all plaintiffs.
134. MAM and Kelsoe promoted and assisted in the marketing of the
Funds and the sale of its shares to investors, including plaintiffs. MAM and
Kelsoe engaged in these acts to create revenue for themselves.
135. MAM received a portion of the money invested by each plaintiff
in the Funds.
136. In connection with the sale of shares in the Funds to plaintiffs,
MAM and Kelsoe failed to disclose facts necessary to make the facts given
plaintiffs not misleading and engaged in acts, practices, and a course of
conduct that constituted a fraud or deceit on plaintiffs, all in violation of
T.e.A. § 48-2-121.
30
Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 31 of 66
137. In addition, MAM and Kelsoe were controlling persons of the
Funds pursuant to T.C.A. § 48-2-122(g). The Funds violated T.C.A. § 48-2
121 because they failed to disclose facts necessary to make the facts given
plaintiffs not misleading and engaged in acts, practices, and a course of
conduct that constituted a fraud or deceit on plaintiffs.
138. Plaintiffs are therefore entitled to recover from MAM and Kelsoe
all remedies afforded by T.C.A. § "48-2-122, including rescissionary
damages, interest, and attorneys fees.
THEREFORE, plaintiffs respectfully request that the Court:
1. Grant judgment in favor of plaintiffs and against defendants,
jointly and severally, for rescissionary damages or other appropriate
compensatory damages, including prejudgment interest.
2. Order the disgorgement by defendants of all fees earned with
respect to the investments improperly sold to plaintiffs.
3. Award to plaintiffs punitive damages or treble damages.
4. Award to plaintiffs reasonable attorney's fees.
5. Afford plaintiffs a trial by jury.
6. Provide such further legal or equitable relief as the Court
deems to be just.
31
Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 32 of 66
Respectfully submitted,
/ft1fFI!~787John B. Veach III, BPR #8994FALLS & VEACH1143 Sewanee Rd.Nashville, TN 37220615/242-1800
Attorneys for Plaintiffs
I M0rlill:ly certify that this is a true copyof origirr.allnstrument f~~ in my officethis ~ day of ..Qg c.. 20ft
RICHARD R. K R ClerkBy_~~~__
32
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IN THE CIRCUIT COURT OF TENNESSEEFOR THE TWENTIETH JUDICIAL DISTRICT AT NASHVILLE
DOUGLAS AND MARY BALLINGER, )et a!., )
Plaintiffs, ))
v. ))
MORGAN KEEGAN & CO., INC., )et a!., )
Defendants. ))
No. 09-C-4280
NOTICE OF REMOVAL
PLEASE TAKE NOTICE that, pursuant to 28 U.S.C. § 1446, Defendants Morgan
Keegan & Company, Inc., Morgan Asset Management, Inc., James C. Kelsoe, Jr., David H.
Tannehill, Carter E. Anthony, Allen B. Morgan, Jr., Joseph C. Weller, James Stillman R.
McFadden, Archie W. Willis, III, Mary S. Stone, W. Randall Pittman, J. Kenneth Alderman, J.
Thompson Weller, Charles D. Maxwell, William Jeffries Mann, James D. Witherington, R.
Patrick Kruczek, Jack R. Blair, Albert C. Johnson, Michele F. Wood and Brian B. Sullivan have
timely and properly removed the above-captioned matter from this Court to the United States
District Court for the Middle District of Tennessee.
A copy of the Notice of Removal (without exhibits) filed in the federal court is attached.
DATED this 4th day ofJanuary, 2010.
Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 55 of 66
Respectfully submitted,
BASS, BERRY & SIMS PLC
BY:~~Michael L. DagleyMatthew M. CurleyW. Brantley Phillips, Jr.150 Third Avenue South, Suite 2800Nashville, TN 37201(615)[email protected]@[email protected]
Attorneys for Morgan Keegan & Co., Inc.,Morgan Asset Management, Inc.
2Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 56 of 66
CERTIFICATE OF SERVICE
I hereby certify that on January 4,2010, a copy of the foregoing document was served viaU.S. Mail on the following:
Harold Naill Falls, Jr.FALLS & VEACH1143 Sewanee RoadNashville, TN 37220
L. Webb Campbell IIJohn L. Farringer IVSHERRARD & ROE, PLC424 Church Street, Suite 2000Nashville, TN 37219
K&L GATES LLPJeffrey B. MalettaNicole A. Baker1601 K Street NWWashington, DC 20006
SUTHERLAND, ASBILL & BRENNAN LLPS. Lawrence Polk999 Peachtree Street, NEAtlanta, GA 30309
3Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 57 of 66
UNITED STATES DISTRICT COURTMIDDLE DISTRICT OF TENNESSEE
AT NASHVILLE
DOUGLAS AND MARY BALLINGER, )SWAN BURRUS III, JAMES L. )GREGORY, CLAIR HENDERSON, JOSEPH )B. LEDBETTER, CHARLES MITCHELL, )Individually and as Executor ofthe Estate of )Mary Mitchell, KAY MITCHELL, Individually )and as Personal Representative and Next )Friend of Wingate Spivey, CHARLES S. )MITCHELL, JR., KATHLEEN E. MITCHELL, )SVITLANA MORGAN, Attorney-In-Fact for )Claude D. Jones, VADIS L. PIERCE, )RICHARD B. RAY, ARDEN AND RUTHIE )SEXTON, MARION M. STOWERS, JACK )AND PAMELA TOWNES, VICKIP. )TURNER, VADIS L.P. TURNER, GREGG )C. UNDERWOOD, VENTURE SERVICES )OF KENTUCKY, INC., TIMOTHY W. )WILLIAMS, )
)Plaintiffs, )
)v. ) No. _
)MORGAN KEEGAN & CO., INC., )MORGAN ASSET MANAGEMENT, INC., )JAMES C. KELSOE, JR., DAVID H. )TANNEHILL, CARTER E. ANTHONY, )ALLEN B. MORGAN, JR., JOSEPH C. WELLER, )JAMES STILLMAN R. MCFADDEN, )ARCHIE W. WILLIS, III, MARY S. STONE, )W. RANDALL PITTMAN, J. KENNETH )ALDERMAN, J. THOMPSON WELLER, )CHARLES D. MAXWELL, WILLIAM JEFFRIES)MANN, JAMES D. WITHERINGTON,· )R. PATRICK KRUCZEK, JACK R. BLAIR, )ALBERT C. JOHNSON, MICHELE F. WOOD, )and BRIAN B. SULLIVAN, )
)Defendants. )
Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 58 of 66
NOTICE OF REMOVAL
Defendants Morgan Keegan & Company, Inc., Morgan Asset Management, Inc., James
C. Kelsoe, Jr., David H. TaJmehill, Carter E. Anthony, Allen B. Morgan, Jr., Joseph C. Weller,
James Stillman R. McFadden, Archie W. Willis, III, Mary S. Stone, W. Randall Pittman, J.
Kenneth Alderman, J. Thompson Weller, Charles D. Maxwell, William Jeffries Mann, James D.
Witherington, R. Patrick Kruczek, Jack R. Blair, Albert C. Johnson, Michele F. Wood and Brian
B. Sullivan (collectively "Defendants") by and through their respective attorneys, hereby file this
Notice of Removal pursuant to 28 U.S.C. §§ 1441 and 1446 for the purpose of removing this
case from the Circuit Court for the State of Tennessee, Twentieth Judicial District, at Nashville,
to the United States District Court for the Middle District of Tennessee.
Pursuant to 28 U.S.C. § 1446(a), Defendants set forth below the following grounds for
removal:
I. On or about December 3, 2009, Plaintiffs filed a Summons and Complaint in the
action Douglas & Mary Ballinger, et al. v. Morgan Keegan & Co., Inc., et aI., No. 09-C-4280,
pending in the Circuit Court for the State of Tennessee, Twentieth Judicial District, at Nashville
(the "Action"). In accordance with 28 U.S.C. § I446(a), a true and correct copy of the state
court file, including all process and pleadings as served upon Defendants, is attached as Exhibit I
and is incorporated by reference.
2. Defendants have timely filed this Notice of Removal because Defendants filed
this Notice within thirty days of the date on which Defendants received notice of the initial
pleading, in accordance with 28 U.S.C. § 1446(b).
3. This Court has jurisdiction pursuant to 28 U.S.C. §§ 1331, 1367, and 1441, as this
action arises under the laws of the United States.
2Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 59 of 66
4. The Action alleges violations of federal and state law relating to the management
of the Morgan Keegan Select High Income Fund, the Morgan Keegan Select Intermediate Bond
Fund, the RMK High Income Fund, the RMK Strategic Income Fund, the RMK Advantage
Income Fund and the RMK Multi-Sector Income Fund (the "Funds"). (Compi. ~ 1.)
5. Plaintiffs' Complaint includes eight counts: violations of the Securities Act of
1933 (the "1933 Act"), aiding and abetting fraud, violation of the Tennessee Consumer
Protection Act, fraud and violation of the Tennessee Securities Act. (Id. ~~ 82-138.) While not
set out as a separate count, Plaintiffs also allege that Defendants violated the Investment
Company Act of 1940 ("ICA"), 15 U.S.C. 80a-19(a), by fraudulently inflating dividends paid by
the Funds and by distributing dividends not consisting of net income of the Funds. (Id. ~ 66.) In
connection with these claims, Plaintiffs seek compensatory damages, rescission, disgorgement,
punitive or treble damages, pre-judgment interest and attorneys' fees. (Id. at 31.)
6. This Court has original subject matter jurisdiction over this Action pursuant to 28
U.S.C. § 1331, supported by 28 U.S.C. § 1367. This Action arises under the laws of the United
States, including, among others, §§ 13 and 19 of the ICA, §§ 11, 12 and 15 of the 1933 Act and
rules and regulations promulgated pursuant to those statutes. l Additionally, pursuant to 28
U.S.C. § 1367, this Court has supplemental jurisdiction over any claims alleged under state law.
7. This Court has jurisdiction over the Action because resolution of Plaintiffs'
claims necessarily "requires resolution of a substantial question of federal law." City of Chicago
v. Int'l Coli. of Surgeons, 522 U.s. 156, 164 (1997); see also Gramble & Sons Metal Prods. Inc.
v. Dame Eng. & Mfg., 545 U.S. 308, 312 (2005) (determining federal question jurisdiction
Defendants acknowledge that Plaintiffs' claims under §§ II, 12(a)(2) and IS of the 1933 Act,standing alone, do not give rise to the exercise of federal jurisdiction. See 15 U.S.C. § 77v(a).Nonetheless, and as set forth herein, because Plaintiffs' claims - including their claims under the 1933Act - require resolution of substantial questions of federal law, this Court's exercise of federaljurisdiction over this Action is appropriate.
3Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 60 of 66
Plaintiffs also allege that Defendants fraudulently inflated dividends paid to
existed where resolution of claims arising under state law depended on interpretation of disputed
federal statute); Landers v. Morgan Asset Mgmt., Inc., 2009 U.S. Dist. LEXIS 30891 (W.D.
Tenn. Mar. 31, 2009).
8. Plaintiffs' claims arIse from Defendants' alleged violation of federal law
regarding the calculation of the Funds' net asset value (the price at which a mutual fund share is
sold to the public, or "NAV"), and the concentration and liquidity of securities held in each of
the Funds' respective portfolios. (See id. ~ 51-67.) Indeed, in significant part, each claim is
premised on an intentional violation offederallaw. (See id. 'U'U 82-138.)
9. Whether the Funds violated concentration and liquidity restrictions relating to
their assets or failed to value their assets properly, as Plaintiffs allege, are matters that are
governed exclusively by federal law. SEC regnlations govern pricing of shares of investment
companies and the valuation of the Funds' portfolios per § 2(a)(41) of the ICA. See 15 U.S.C. §
80a-2(a)(41). Rules promulgated by the SEC that govern pricing include SEC Rule 270.2a-4
(method of calculation of net asset value) and SEC Rule 270.22c-1 (pricing of redeemable
securities). See 17 C.F.R. §§ 270.2a-4, 270.22c-1. Concentration of securities is regnlated by §
13 of the ICA. See 15 U.S.C. § 80a-13. Similarly, the liquidity requirements with respect to
assets held by the Funds are a matter of federal law, including SEC Rule I 44A, 17 C.F.R. §
230.l44A.
10.
investors by paying dividends to investors that included an undisclosed return of principal.
(Compl. 'U 66.) The Funds' distribution of dividends likewise is governed exclusively by federal
law. Section 19(a) of the ICA makes it unlawful for "any registered investment company to pay
any dividend ... from any source other than ... such company's accumulated undistributed net
4Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 61 of 66
income." 15 U.S.C. § 80a-19(a). SEC Rules also regulate distribution of dividends. See SEC
Rule 19a-1.
II. In light of the foregoing, Plaintiffs cannot establish that Defendants made
misrepresentations and/or omissions concerning the valuation of the Funds' assets, violated the
Funds' liquidity and concentration restrictions or that the Funds fraudulently inflated dividends
and paid dividends that improperly included an undisclosed return of principle without also
demonstrating an underlying violation of federal law. Under such circumstances, the exercise of
federal jurisdiction is appropriate. See Gobble v. Hellman, 2002 U.S. Dist. LEXIS 26833, at *9
II (N.D. Ohio Mar. 26, 2002) (holding that because "several counts of [p]laintiff's breach of
fiduciary duty claims depend upon whether [d]efendants violated their duties under the Federal
Exchange Act and SEC rules and regulations ... the resolution of [the] claims requires
construction and adjudication of substantial questions of federal law"); D'Alessio v. New York
Stock Exch., Inc. 258 F.3d 93, 101-102 (2d Cir. 2001) (noting that the plaintiffs "suit [was]
rooted in violations of federal law, which favors a finding that federal question jurisdiction
exists" and holding that a substantial federal question exists where "resolution of [the plaintiff's]
claims requires a court to construe federal securities laws and evaluate the scope of the
[defendant's] duties"); Landers, 2009 U.S. Dist. LEXIS 30891, at *24-27.
12. Because the disputed issues of federal law implicated by Plaintiffs' Complaint are
substantial, this case presents no risk of interference with the balance of federal and state judicial
responsibilities.
13. Accordingly, this Court has jurisdiction over Plaintiffs' claims against Defendants
pursuant to 28 U.S.C. § 1331 because the Action arises under the laws of the United States in
that federal law is central to the allegations in Plaintiffs' Complaint.
5Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 62 of 66
14. A copy of this Notice of Removal is being filed with the Clerk of the Circuit
Court of Davidson County, Tennessee, as provided by law, and written notice is being sent to
Plaintiffs' counsel.
IS. Defendants have not attempted to remove this Action previously.
16. The prerequisites for removal under 28 U.S.C. § 1441 have been met.
17. The allegations of this Notice are true and correct and within the jurisdiction of
the United States District Court for the Middle District of Tennessee, and this Action is
removable to the United States District Court for the Middle District of Tennessee.
18. This Notice of Removal is signed pursuant to Rule II of the Federal Rules of
Civil Procedure.
19. All Defendants join this Notice of Removal of this Action.
20. An appropriate Form JS-44 civil cover sheet is attached as Exhibit 2.
21. For all of the foregoing reasons, removal of this Action to this Court is proper
pursuant to 28 U.S.C. § 1441(b) and (c).
Based on the foregoing, Defendants hereby remove this Action from the Circuit Court of
the State of Tennessee, Twentieth Judicial District, at Nashville, to the United States District
Court for the Middle District of Tennessee.
DATED this 4th day ofJanuary 2010.
6Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 63 of 66
7
Respectfully submitted,
BASS, BERRY & SIMS PLC
By: ~C~Michael L. DagleyMatthew M. CurleyW. Brantley Phillips, Jr.150 Third Avenue South, Suite 2800Nashville, TN 37201(615)[email protected]@[email protected]
Attorneys for Morgan Keegan & Co., Inc.,Morgan Asset Management, Inc., Allen B.Morgan, Jr., J. Kenneth Alderman, Brian B.Sullivan, Joseph C. Weller, J. ThompsonWeller, Charles D. Maxwell, Michele F.Wood, James C. Kelsoe, Jr., David H.Tannehill, Carter E. Anthony and R. PatrickKruczek
SUTHERLAND, ASBILL & BRENNANLLPS. Lawrence Polk999 Peachtree Street, NEAtlanta, GA 30309(404)853-8000
Attorneys for Allen B. Morgan, Jr., J.Kenneth Alderman, Brian B. Sullivan,Joseph C. Weller, J. Thompson Weller,Charles D. Maxwell, Michele F. Wood,James C. Kelsoe, Jr., David H. Tannehill,Carter E. Anthony and R. Patrick Kruczek
Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 64 of 66
8
SHERRARD & ROE, PLC t...., A
/ I 111/ 'f~IW~By: lvd,f; {.uA..{ MI'kC
L. Webb Campbe IIJohn L. Farringer IV424 Church Street, Suite 2000Nashville, TN 37219(615) [email protected]@sherrardroe.com
K&L GATES LLPJeffrey B. MalettaNicole A. Baker1601 K Street NWWashington, DC [email protected]@klgates.com
Attorneys for Jack R. Blair, Albert C.Johnson, James Stillman R. McFadden, W.Randall Pittmqn, Mary S. Stone, Archie W.Willis, III, William Jeffries Mann, andJames D. Witherington
Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 65 of 66
CERTIFICATE OF SERVICE
I hereby certify that on January 4,2010, a copy of the foregoing document was served viaU.S. Mail on the following:
Harold Naill Falls, JI.FALLS & VEACH1143 Sewanee RoadNashville,1N [email protected]
9Case 3:10-cv-00006 Document 1-1 Filed 01/04/2010 Page 66 of 66