The assumption that bonds are a uniformly “safe” investment is not always true. Some bonds are unrated and must be evaluated by your financial advisor and broker. Many unrated bonds are underwritten by brokerage houses and sold to their customers. Typically the prospectus is complex, lengthy, and presented in dense legalese. Only your stock broker can explain the bond in simple English. Unfortunately, however, it is often little more than a sales pitch.
A current situation highlights what can happen when everything goes wrong.
Moberly is a small city in mid-Missouri whose principal employer historically has been a state prison. To diversify its economy and provide as many as 600 jobs, a company called Mamtek, owned by group of foreign businessmen and financially advised by Morgan Keegan, a brokerage house, proposed an artificial sweetener plant.
In 2010, Moberly, through its industrial development authority, issued $39 million in industrial revenue bonds. Morgan Keegan, now owned by Raymond James, underwrote the bonds and sold them to its retail customers. Morgan Keegan led customers to believe that the city of Moberly had guaranteed the bonds and that Mamtek, anticipated owner and operator of the plant was financially solid.
The plant was never built. Mamtek is in involuntary bankruptcy filed by the contractors. The money disappeared.
In an apparently desperate gambit, Morgan Keegan sued Moberly claiming that the city was liable for the bonds. Its effort to transform a victim into the primary wrongdoer was spectacularly unsuccessful. Recently, a federal court ruled that Moberly is not liable for the bonds under the well-settled legal precedent of sovereign immunity. The primary purpose of a governmental entity in Missouri in issuing bonds is to make the bonds state tax free. It is black law here in Missouri that unless the governmental entity expressly waives immunity it does not have any liability for the bonds.
Attempts by Morgan Keegan to shift legal responsibility to Moberly, to date, have been unsuccessful. The latest is a class action lawsuit by an Alabama investor. Historically, nationwide class actions involving securities claims is inappropriate since victims receive only a tiny fraction of their losses when (not if) the matter is settled and at the same time the class action lawyer is handsomely paid an attorney’s fee. Under securities laws the proper remedy for customers is FINRA arbitration. Bond holders are still waiting for some restitution. The final chapter in this sad saga is far from ove