united states district court southern district of … false testimony - opinion.pdf · john anthony...

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

MORGAN KEEGAN & COMPANY,INC.,

Petitioner,

vs.

JOHN J. GARRETT, NAN M.GARRETT, HENRY R. HAMMAN,DAVID W. DAUPHIN, CHRISTYDAUPHIN, WILLIAM C. GOODWIN,HSMCO, INC., VANCE C. MILLER,HENRY S. MILLER, JR. 1989-1IRREVOCABLE TRUST, J. STEPHENHARRIS, THE RYRIE FOUNDATION,ELIZABETH RYRIE ANTHONY,CAROLYN R. HOWARD, CHARLESC. RYRIE, STEVEN CHARLESANTHONY TRUST, MATTHEWJOHN ANTHONY TRUST, CLAIREHANNAH HOWARD TRUST, ANDEDGAR SMITH,

Respondents.

))))))))))))))))))))))))

Civil Action No. 4:10-cv-04308

Judge Lynn N. Hughes

MORGAN KEEGAN AND COMPANY, INC.’SSUPPLEMENTAL BRIEF IN SUPPORT OF ITS

MOTION TO VACATE ARBITRATION AWARD

Case 4:10-cv-04308 Document 12 Filed in TXSD on 11/05/10 of 29

TABLE OF CONTENTS

I. Procedural and Factual Background ................................................................................... 1

A. Claimants’ Relentless Pursuit of an Identical Civil Suit and the Severanceof the Arbitrations. .................................................................................................. 2

B. Morgan Keegan Asks that the Garrett Arbitration Panel Follow theGoverning Rules, but the Arbitrators Refuse to Do So. ......................................... 3

C. The Arbitration Chairperson Begins the Evidentiary Hearing byMisstating that Public Arbitrator Stacey Barnes Had Properly Sworn HisOath, and Barnes Remains Silent, Despite his Awareness of theFalsehood. ............................................................................................................... 5

D. The Expert’s Admittedly False Testimony. ............................................................ 7

E. The Panel Gave Every Garrett Arbitration Claimant the Same PercentageAward, Regardless of the Many Differences Among the Claimants..................... 9

II. Argument and Citation of Authorities .............................................................................. 11

A. The Court Should Vacate the Award Because It Was Procured byFraudulent Evidence. ............................................................................................ 11

B. The Award Should be Vacated Because the Arbitrators Exceeded TheirAuthority by Impermissibly Acting Outside of the Parties’ Agreement andthe Governing FINRA Rules. ............................................................................... 14

1. The Award Must be Vacated Because One Arbitrator Refused toMake His Required Oath and Thus He, and the Panel, Had NoAuthority to Render the Award. .................................................................... 16

2. The Award Must be Vacated Because the Arbitrators Exceeded TheirPowers by Hearing Derivative Claims in Violation of FINRA Rules. .......... 18

3. The Award Must be Vacated Because the Arbitrators Exceeded TheirPowers by Hearing Claims Brought by Non-Customers of MorganKeegan. .......................................................................................................... 21

III. Conclusion ........................................................................................................................ 24


TABLE OF EXHIBITS

Exhibit A Arbitration Award, Garrett v. Morgan Keegan, FINRA DR No. 09-00683Exhibit B Second Amended Statement of Claim, Garrett v. Morgan Keegan, FINRA

DR No. 09-00683Exhibit C Complaint, Garrett v. Regions Financial Corp., No. 2009-17382, Dist. Ct.

of Harris County, Tex.Exhibit D FINRA Rule 12205Exhibit E Morgan Keegan’s Motion in Limine, Garrett v. Morgan Keegan, FINRA

DR No. 09-00683Exhibit F In re Grantland Rice II, No. 1090425, 2010 WL 3835727 (Ala. Sept. 30,

2010)Exhibit G Second Amended Complaint, Grantland Rice II v. Regions Financial

Corp.Exhibit H Excerpts from final, certified Garrett Hearing TranscriptExhibit I FINRA Rule 12406(d)Exhibit J Oath of Arbitrator of Mr. Oren L. ConnawayExhibit K AAA/ABA Code of Ethics for Commercial ArbitratorsExhibit L Correspondence with FINRA, Nov. 1, 2010Exhibit M Excerpts from final, certified Arispe Hearing TranscriptExhibit N Agreed Stipulations of Fact, Garrett v. Morgan Keegan, FINRA DR No.

09-00683Exhibit O McCann Presentation regarding Damages, Garrett v. Morgan Keegan,

FINRA DR No. 09-00683Exhibit P Ryrie Client Agreement, § 5, Jun. 9, 2001Exhibit Q FINRA Rule 12101Exhibit R FINRA Arbitration Submission Agreements, Garrett v. Morgan Keegan,

FINRA DR No. 09-00683Exhibit S FINRA Rule 12200Exhibit T Claimants’ Prehearing Brief, Garrett v. Morgan Keegan, FINRA DR No.

09-00683Exhibit U FINRA Rule 2261(c)Exhibit V Morgan Keegan’s Motions to Director to Declare Claims of Non-

Customers Not Subject to FINRA Arbitration, Garrett v. Morgan Keegan,FINRA DR No. 09-00683


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Petitioner, Morgan Keegan and Company, Inc. (“Morgan Keegan” or “Petitioner”)

hereby files this Supplemental Brief in Support of its Motion to Vacate Arbitration Award,

which will substitute for the Brief in Support of Motion to Vacate Arbitration Award filed on

October 11, 2010 in Case No. 4:10-mc-00424. The Supplemental Brief is appropriate and

necessary in part because Morgan Keegan discovered additional facts after filing its original

Motion and Brief demanding vacatur of the award (the “Award”) (attached hereto as Ex. A), and

because Morgan Keegan was awaiting the final certified copy of the hearing transcript of the

arbitration proceeding, which it is filing with this Supplemental Brief. Morgan Keegan indicated

in its original filing that it was “filing this Motion and the accompanying materials in

anticipation of submitting additional materials and briefing in support of our argument, as the

transcript of the final arbitration hearing is still being finalized.” Morgan Keegan v. Garrett,

Case No. 4:10-mc-00424, Motion to Vacate Arbitration Award, p. 2, n.1 (S.D. Tex. Oct. 11,

2010).

I. PROCEDURAL AND FACTUAL BACKGROUND

A perfect storm of fraud and overreaching occurred in the underlying Financial Industry

Regulatory Authority (“FINRA”) arbitration, necessitating vacatur of the Award. Before the

final arbitration, the three-member panel (the “Panel” or the “Arbitrators”) decided to hear

claims over which they had no jurisdiction according to the clear authority of FINRA—

shareholder derivative claims and claims of non-customers. At the start of the hearing, one of

the Arbitrators failed to swear to his mandatory oath of arbitrator, violating a FINRA prerequisite

to his serving as an arbitrator and thereby tainting the proceeding. And during the hearing, the

claimants’ (“Claimants”) star witness—their expert witness—made false statements on a

principal issue in the case, as apparently he has done dozens of times before in cases against

organ Keegan. That the expert was not telling the truth was not discoverable until after the


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Award was issued and he finally admitted he had not told the truth. The Award, when issued,

gave every Claimant exactly 85% of their claimed damages, irrespective of the many differences

between all the Claimants, for a total of more than $9,000,000 in damages, including over

$1,000,000 in attorneys’ fees and costs. This defective Award was procured by fraud, the

Arbitrators exceeded their authority in issuing it, and it must be vacated. See 9 U.S.C. § 10.

A. Claimants’ Relentless Pursuit of an Identical Civil Suit and the Severance of theArbitrations.

The underlying case was originally brought by 42 different investors who claimed to

have lost money in one or more of four different bond mutual funds known as the “RMK Funds”

that collapsed in value during the onslaught of the credit crisis. That case is styled John J.

Garrett et al. v. Morgan Keegan, FINRA DR No. 09-00683 (the “Consolidated FINRA

Arbitration”). At the same time as these Claimants instituted their arbitration against Morgan

Keegan through their Statement of Claim (the most recent version of which is the Second

Amended Statement of Claim, Mar. 5, 2010 (the “Amended SOC”) (attached hereto as Ex. B)),

they filed a nearly identical lawsuit in the 280th District Court for Harris County, Texas against

the RMK Funds’ advisor, portfolio manager, the parent company of the Funds’ advisor, and the

parent of that company. That case is styled Garrett et al. v. Regions Financial Corp., No. 2009-

17382, Dist. Ct. of Harris County, Tex. (the Complaint is attached hereto as Ex. C) (the “Garrett

Lawsuit”). Indeed, other than the names of the defendants and the forum for the respective

cases, the state court Garrett Lawsuit and the Consolidated FINRA Arbitration were

substantively the same. In essence, the same investors in both cases sought the same relief for

losses in the same RMK mutual fund investments, and they did so under the same fraud-based

legal claims and based on the same sets of facts. Both cases alleged that the RMK Funds were

mismanaged in a myriad of ways and that the mismanagement was misrepresented to prospective


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and current RMK investors. The only real difference between the Consolidated FINRA

Arbitration and the Garrett Lawsuit was the names of the case-specific defendants, although all

defendants were related directly or indirectly to Morgan Keegan.

Shortly after being filed, the Garrett Lawsuit was removed to the United States District

Court for the Southern District of Texas, as case number 4-09-cv-01157, and then transferred to

the Multi-District Litigation pending in the United States District Court for the Western District

of Tennessee, styled In re Regions Morgan Keegan Open-End Mutual Fund Litigation, 2:07-cv-

2784 (W.D. Tenn.). The Multi-District Litigation case is proceeding.

The original Consolidated FINRA Arbitration was split into three separate arbitration

cases to be heard by three different panels of arbitrators. The first of these to proceed to final

arbitration hearing is the arbitration at issue, which is known as the “Garrett Arbitration” and

involves the 18 different Claimants. The second group, known as the “Arispe Arbitration,”

involves 22 claimants. The arbitration hearing in that case is moving forward, and no award has

yet been issued. The third arbitration is known as the “Stein Arbitration,” and has not yet

proceeded to final evidentiary arbitration hearing.

B. Morgan Keegan Asks that the Garrett Arbitration Panel Follow the Governing Rules,but the Arbitrators Refuse to Do So.

Prior to the final hearing in the Garrett Arbitration, Morgan Keegan unsuccessfully asked

the Panel to refuse to consider those claims that were derivative in nature because the FINRA

Code of Arbitration Procedure for Customer Disputes (the “FINRA Rules”) governing the

dispute expressly prohibits such claims from being arbitrated; those claims were more properly

left to be decided in the Garrett Lawsuit. Put another way, and as argued, such derivative claims

were outside of the authority of the Panel to consider. See FINRA Rule 12205 (“Shareholder

derivative actions may not be arbitrated under the Code.”) (attached hereto as Ex. D); Morgan


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Keegan’s Motion in Limine to Exclude Evidence Relating to Claims of Alleged Mutual Fund

Mismanagement (July 26, 2010) (“Motion in Limine”) (attached hereto as Ex. E). Shareholders

(like Claimants here) have no direct private cause of action for claims of diminution in the value

of their individual shares due to mismanagement of the corporation, because with such claims,

there is no injury to the individual distinct from the injury to the corporation itself. See infra

II.B.1. Such claims are derivative as a matter of law and are not actionable by individuals,

particularly not in FINRA arbitration. See id.

As Morgan Keegan correctly pointed out in its Motion in Limine before the Arbitrators,

Claimants’ alleged injuries in both the Garrett Arbitration and the Garrett Lawsuit are not only

indistinguishable from each other, but are the same as any harm suffered by the RMK Funds

themselves. In fact, the Alabama Supreme Court has recently ruled that such claims based on the

RMK Funds are derivative claims because they pertain to fund mismanagement issues and

related claims of factual misrepresentations and omissions. See In re Grantland Rice II, No.

1090425, 2010 WL 3835727, at *9 (Ala. Sept. 30, 2010) (attached hereto as Ex. F); see also

Second Amended Complaint, Grantland Rice II v. Regions Financial Corp., Mar. 18, 2010

(“Grantland Rice Amended Compl.”), ¶¶ 15-16 (attached hereto as Ex. G).

In addressing Morgan Keegan’s Motion in Limine, the Panel was presented with the clear

mandate that derivative claims cannot be arbitrated under FINRA Rule 12205. Garrett Hearing

Transcript (“Garrett Tr.”), Sept. 1, 2010, 1506:1-6 (excerpts of final, certified Garrett Hearing

Transcript attached hereto as Ex. H). Nonetheless, the Panel proceeded to disregard this obvious

boundary on their authority and allow these claims to be addressed at the final hearing. See

generally Garrett Tr.


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C. The Arbitration Chairperson Begins the Evidentiary Hearing by Misstating that PublicArbitrator Stacey Barnes Had Properly Sworn His Oath, and Barnes Remains Silent,Despite his Awareness of the Falsehood.

Like the rules requiring judges and jurors to take a sworn oath before they begin their

service, the governing FINRA arbitration procedures require the same for arbitrators. FINRA

Rule 12406(d) requires that “[b]efore making any decision as an arbitrator or attending a hearing

session, the arbitrators must execute FINRA’s arbitrator oath or affirmation.” FINRA Rule

12406(d) (emphasis added) (attached hereto as Ex. I). The Oath of Arbitrator requires, in part,

that the arbitrator must commit that: “I have no direct or indirect interest in this matter; I know

of no existing or past financial, business, professional, family or social relationship which would

impair me from performing my duties; and that I will decide the controversy in a fair manner and

render a just award.” See, e.g., Oath of Arbitrator submitted by Chairman Mr. Oren L. Connaway

(attached hereto as Ex. J). The Oath also binds the arbitrator to follow the AAA/ABA Code of

Ethics for Commercial Arbitrators (“Code of Ethics”) (attached hereto as Ex. K), which provides

that “Arbitrators should conduct themselves in a way that is fair to all parties.” Canon I, ¶ D.

The Oath of Arbitrator, thus, is the document that compels an arbitrator to render a fair and

unbiased decision in the proceeding. See id.; see also Oath of Arbitrator Oren L. Connaway.

The Oath of Arbitrator is supplied by the arbitrators directly to the FINRA administrative staff; it

is typically not given to the parties and was not given to the parties in this case during the course

of the Garrett Arbitration.

As the evidentiary portion of the Garrett Arbitration began in Houston, Texas, the

Chairman of the Panel, Mr. Connaway, advised the parties on the record that “we, the arbitrators,

have submitted our properly-executed oaths of arbitrators to the FINRA Dispute Resolution staff;

so, there’s no need for us to take an oath.” Garrett Tr., Aug. 16, 2010, 4:25-5:3 (emphasis

added). This statement by the Chairman, as important as it was to the integrity of the process,


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was false. Notwithstanding the statement by the Chairman that the Oaths had been completed,

FINRA has now admitted that one of the three Arbitrators, Mr. Stacey Barnes, never made the

Oath. Indeed, Mr. Barnes served on the Panel, participated in the hearing sessions, deliberated

with the other Panel members, and issued the Award in the case, all without swearing to the

mandatory Oath. See Correspondence with FINRA dated Nov. 1, 2010 (attached hereto as Ex.

L). What is perhaps even more shocking is that when the Chairman asserted, in front of Mr.

Barnes, that the Arbitrators have taken their Oaths, Mr. Barnes did not alert the parties to the fact

that the Chairman was wrong. Mr. Barnes just sat mutely on the Panel, letting the parties be

misled into believing he had sworn the Oath and that the FINRA Rules requiring the Oath had

been followed. See generally Garrett Tr., Aug. 16, 2010, 4:25-5:3.

Mr. Barnes, moreover, was not a wallflower on the Panel, but was active during the

proceedings. In fact, on no fewer than 28 occasions, he made comments, asked questions, and

participated in making rulings on the record. For example, Mr. Barnes suggested that Claimants’

counsel elicit specific testimony about “exactly what your expert relied upon.” Garrett Tr., Aug.

17, 2010, 241:23-24. He was similarly involved with Morgan Keegan’s experts, at one point

asking one expert about his qualifications, id. at Aug. 20, 1285:14-17, and also asking

substantive questions about the best index for the RMK Funds and the accuracy of the ratings

given by rating agencies. Id. at 1295:7-12, 1298:12-13. He also examined exhibits closely,

querying about the IP addresses accessing an account online, id., Aug. 19, 957:22-24, and asking

to see the arbitration clause between the parties. Id. at Aug. 20, 1239:7-11. Mr. Barnes’ active

participation in the Garrett Arbitration was all done in violation of the FINRA Rule requiring

him to make his Oath of Arbitrator before participating in a hearing. FINRA Rule 12406(d).


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D. The Expert’s Admittedly False Testimony.

Claimants’ expert, Dr. Craig McCann, was used as a principal witness to support their

main theory in the case—that the internally priced securities held by the RMK Funds were

actually mispriced. He claimed to have spent in excess of 1,000 hours of time analyzing the

RMK Funds. Garrett Tr., Aug. 17, 2010, 371:3-11. Prior to the Garrett Arbitration, McCann had

testified against Morgan Keegan in at least 35 other cases involving the RMK Funds. Id. at

210:3-5. He testified for the better part of a full day of the four and one-half days of evidence

presented in the Garrett Arbitration. See generally id. at Aug. 17, 2010. Consistent with his

prior testimony against Morgan Keegan, McCann testified that certain percentages of losses in

the four RMK Funds were attributable to what he described as internal mispricing of the Funds.

See, e.g., id. at Aug. 17, 2010, 294:15-295:20. Given that it was a focal point of Claimants’ case,

the Panel listened to the testimony and even asked McCann questions, apparently relying upon

the truthfulness of the testimony and the answers to the questions. See id. at 295:21-299:6. For

example, the Panel Chairman, after several preceding questions, asked “[Y]ou’re saying that 70

percent of . . . the NAV [net asset value] reflected numbers that were internally generated from

Morgan Keegan?” Id. at 298:19-25.

Notwithstanding the importance of this testimony in the Garrett Arbitration as

underscored by the Claimants, McCann recently reluctantly admitted for the very first time

in response to questioning that his testimony before the Garrett Panel about the internally

priced securities was flat-out false. Perhaps most significantly, McCann made this

admission shortly after the Garrett Award was issued. At the Arispe Arbitration hearing in

Houston, mere weeks after the evidentiary phase in the Garrett Arbitration concluded, McCann

admitted that his testimony under oath in the Garrett Arbitration was false because he overstated

the alleged losses due to internally priced securities:


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Q: . . . Dr. McCann, you would agree with me that in the Garrett case, for RHY, youoverstated the number, 92.8 percent in the Garrett case and in this case, Arispe,it’s now 56.6 percent, referring to the first quarter for RHY. Isn’t that true?

A: For the first quarter, that’s correct.Q: . . .[A]nd you overstated it in the Garrett case in that first quarter for RMA . . . in

the Garrett case, you told that Panel it was 93.9 percent and now you’re tellingthis Panel it’s 67.8 percent. Isn’t that true?

A: That’s correct.Q: And in the Garrett case you overstated the top one, RMH, for that first quarter by

close to 5 percent as well. Isn’t that correct, Dr. McCann?A: Yes . . . .. . .Q: Dr. McCann, it’s true that in the Garrett Panel you swore that the information

contained on Page 26 [of McCann’s expert report] was true and accurate. Isn’tthat correct?

A: Well, I don’t know about that. I took an oath to tell the truth . . . . And then Imade this presentation, that’s correct. . . .

Arispe Hearing Transcript (“Arispe Tr.”), Oct. 13, 2010, 509:5-20, 501:17-21 (excerpts of final,

certified version attached as Ex. M). In fact, McCann also admitted to falsely testifying as to the

losses arising from internal pricing for every RMK Fund at issue in the Garrett Arbitration:

Q: . . . You said 82 percent to this [Arispe] Panel and, as you say, a couple of monthsago, you were telling the Garrett Panel that the RMH losses from internally-pricedsecurities from March 2007 to December was only 75 percent, right?

A: That’s correct.Q: . . . [Y]ou’re telling this [Arispe] Panel that for RSF, that the losses from

internally-priced securities was 81.9 percent, right, Dr. McCann?A: That’s correct.Q: . . . [J]ust a couple months ago in the Garrett case, in this very room, you told a

Panel under oath that the losses for RSF for that same time frame was only 67.4percent, right, Dr. McCann?

A: That’s correct.Q: And . . . you’re telling this Panel that the losses from internally-priced securities

for RMA is 82.6 percent, right, Dr. McCann?A: Yes.Q: [B]ut, wait, a couple months ago in the Garrett case in this very room under oath

you told that Panel that the RMA losses from internally-priced securities was 73.5percent, right, Dr. McCann?

A: Yes.Q: . . . You’re telling this Panel to believe you that for RHY, which is the Multi-

Sector Fund, that the losses from internally-priced securities from March 31, ’07to December ’07 was 82.4 percent, right, Dr. McCann?

A: Yes.


9

Q: [W]ait, just a couple of months ago with respect to the Multi-Sector Fund, youtold the Garrett Panel that the Multi-Sector’s losses from internally-pricedsecurities was 77.2 percent, right, Dr. McCann?

A: That’s correct.. . . .Q: And, in fact, Dr. McCann, in going through the numbers on this chart . . . you can

see, can you not, sir, that every single quarter is different in the Arispe case versuswhat you testified to before the Garrett Panel just a couple of months ago in thisvery room. Isn’t that true?

A: That’s correct.

Arispe Tr., Oct. 13, 2010, 504:17-505:6; 507:5-11.

Significantly, McCann was asked by the Chairman of the Arispe Arbitration panel what

prompted him to finally come clean about his admitted failures in the Garrett Arbitration.

McCann admitted that it was the questioning by Morgan Keegan’s counsel that forced the issue -

he would never have changed these numbers otherwise. Id. 518:15-23, 519:18-19. Moreover,

McCann admitted to the false statements after ruling out the possibility of his staff making a

mere mistake: “I don’t recall when the last time an actual error was pointed out in anything that

my office has done. If it’s been a year, it’s been five years.” Arispe Tr., Oct. 13, 2010, 399:25-

400:3. Given this, and the thousands of hours McCann spent analyzing the RMK Funds, the

possibility of a simple mistake is highly unlikely. McCann, of course, never revealed his

falsehoods to the Garrett Arbitration Panel, nor were they discoverable until he finally told the

truth in the Arispe Arbitration. Instead, he just gave the testimony and watched as the Panel

listened to every word.

E. The Panel Gave Every Garrett Arbitration Claimant the Same Percentage Award,Regardless of the Many Differences Among the Claimants.

As the Garrett Arbitration progressed, it became clear that the Claimants had very little in

common with each other, other than the fact they claimed to have lost money in their

investments in the RMK Funds and to have relied on a Morgan Keegan broker for information.

The Claimants did not buy the same RMK Funds, did not make their investments at the same


10

time, did not sell them at the same time and, indeed, in some cases did not even make them

through Morgan Keegan. All of these differences among the investors were made plain to the

Arbitrators by written stipulations of fact covering thirteen of the Claimants, which were

presented to the Panel, and by the testimony of two Claimants, John Garrett and Vance Miller.

See Agreed Stipulations of Fact (“Stipulations”) (attached hereto as Ex. N); see generally Garrett

Tr., Aug. 19, 2010, 916:15-991:21; 1214:19-1222:16.

For example, two of the Claimants, Mr. Harris and Mr. Goodwin (the “Non-

Customers”), never purchased the RMK Funds at Morgan Keegan, instead buying them through

discount brokerage firms. Two others, Mr. Dauphin and Mr. Hamman, purchased the Funds

both at Morgan Keegan and other brokerage firms. Only six of the ten groups of Claimants

purchased the RMK High Income Fund. Three Claimants never purchased any of the RMK

Funds on their initial public offerings (“IPO”). Only three Claimant groups purchased the RMK

High Income Fund on its IPO. Only four groups of Claimants purchased the RMK Advantage

Income Fund on its IPO, the other six making purchases at different times on the open market.

Similarly, only four Claimant groups purchased the RMK Strategic Fund on its IPO and only

three purchased the Multi-Sector on its IPO. Some Claimants elected to make multiple

purchases in the RMK Funds up to and through 2007, while others made an initial purchase and

elected to simply hold that investment. Three Claimants, Mr. Ryrie, Ms. Anthony, and Ms.

Howard, elected to sell portions of their holdings in the RMK Funds at a profit in 2006. Mr.

Smith, Mr. Harris, and Mr. Dauphin elected to sell portions of their holdings in late 2007. The

other Claimants elected to hold their shares, most transferring their shares to their broker’s new

firm. Finally, the Dauphins, Mr. Hamman, the Millers, Ms. Anthony, Mr. Goodwin, and Mr.


11

Harris all elected to purchase more shares of the RMK Funds in mid- to late 2007, after the price

of the Funds had declined substantially.

After the end of the evidentiary hearing, the Panel issued the written Award.

Notwithstanding all of the differences among the various Claimants and their varied investment

circumstances, the Panel awarded each Claimant 85 cents on every investment dollar that

McCann contended each Claimant lost. See McCann Presentation regarding Damages (attached

hereto as Ex. O); Award, pp. 6-7. The Arbitrators, incorporating McCann’s damage analysis,

applied an across-the-board damages analysis, regardless of the stipulated differences among the

Claimants regarding the specific investments made, the amount of the investments, when the

investments were bought and sold, and even whether the RMK Funds were bought through

Morgan Keegan.

II. ARGUMENT AND CITATION OF AUTHORITIES

The Award should be vacated under 9 U.S.C. § 10(a)(1) because it was procured by the

fraudulent testimony of Claimants’ only expert witness, McCann, and upon whose testimony the

Panel relied. The Award was also the result of the Arbitrators exceeding their authority,

mandating vacatur under 9 U.S.C. § 10(a)(4). Specifically, the Arbitrators exceeded their powers

by violating unambiguous provisions of the FINRA Rules: (1) the Rule requiring arbitrators to

make an Oath, (2) the Rule preventing shareholder derivative claims from being arbitrated before

FINRA, and (3) the Rule preventing non-customers from arbitrating before FINRA. A finding

either that the expert’s false testimony procured the Award or that the Arbitrators exceeded their

authority by violating any of the three FINRA Rules is an independent basis for vacatur of the

Award. See 9 U.S.C. § 10(a).

A. THE COURT SHOULD VACATE THE AWARD BECAUSE IT WASPROCURED BY FRAUDULENT EVIDENCE.


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When an arbitration award is procured by fraud in the evidence, vacatur is appropriate.

Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1383-86 (11th Cir. 1988); see also 9 U.S.C.

§ 10(a)(1); MidAmerican Energy Co. v. Int’l Bhd. of Elec. Workers Local 499, 345 F.3d 616, 623

(8th Cir. 2003) (vacating an arbitration award based on expert witness false testimony over his

resume credentials). In Bonar, the claimant’s expert witness exaggerated his expert

qualifications. Bonar, 835 F.2d at 1383-84. The court concluded the testimony amounted to

perjury, and that, since perjury clearly constitutes fraud, vacatur under 9 U.S.C. § 10(a)(1) of the

portion of the award procured by the expert’s testimony was necessary. Id. at 1383.

Vacatur is necessary when the fraud is: (1) not discoverable upon exercise of due

diligence prior to the arbitration; (2) materially related to an issue in the arbitration; and (3)

established by clear and convincing evidence. See, e.g., Envtl. Barrier Co., LLC v. Slurry Sys.,

Inc., 540 F.3d 598, 608 (7th Cir. 2008). These elements were satisfied in Bonar because: (1)

limited pre-hearing discovery prevented the expert’s qualifications from being discovered in

advance; (2) the expert was the only witness on the relevant question, so his testimony must have

procured the award as to that issue; and (3) the fraud was established by affidavits demonstrating

the perjury, constituting clear and convincing evidence. Bonar, 835 F.2d at 1383-85.

In this case, McCann’s false testimony meets all the elements for vacatur. First, his false

testimony could not have been discovered by the Arbitrators or Morgan Keegan in advance

because he kept it quiet notwithstanding the fact he had testified falsely the same way against

Morgan Keegan approximately 35 times. Garrett Tr., Aug. 17, 2010, 210:3-5. McCann admitted

that it was only the questioning by Morgan Keegan’s counsel that even prompted him finally to

come clean and to change his false loss numbers, demonstrating that Morgan Keegan was in fact

doing all it could to discover any errors in the testimony. See Arispe Tr., Oct. 13, 2010, 518:15-


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23, 519:18-19. Morgan Keegan did not, and could not, know of the fraud before the Garrett

Award was issued.

The second prong, that the fraudulent evidence procured the Award, is also met.

McCann’s testimony was a critical component of Claimants’ case, as evidenced by the Chair’s

focus on it. See Garrett Tr., Aug. 17, 2010, 295:21-299:6. Internal pricing allegations were a

key component of Claimants’ case, and would certainly factor into the Award. For example,

besides McCann’s testimony, approximately 179 pages of the transcript of the Garrett

Arbitration are devoted to testimony about internal mispricing allegations, and a full half of

Claimants’ counsel’s opening was directed to this issue. See generally Garrett Tr., Aug. 16 -

Sept. 1, 2010. In closing, Claimants’ counsel focused his argument on the RMK internal pricing

and the fraudulent evidence of McCann, see generally Garrett Tr., Sept. 1, 2010, but more

importantly, counsel specifically referenced McCann’s false testimony, saying “Dr. McCann’s

report is . . . 75 percent of the losses in the RMH Fund were from internally-priced securities,

internally priced by Morgan Keegan, 67 percent of the losses were from internally-priced

securities in the RSF Fund, 73.5 percent of RMA’s losses were from internally-priced securities

and 77 percent of the RHY Fund was from internally-priced securities.” See Garrett Tr., Sept. 1,

2010, 1442:2-9. Further evidence that the fraudulent testimony formed the basis for the

Arbitrators’ Award is that the Panel relied solely on McCann’s damage calculations in awarding

all Claimants 85 cents on every investment dollar McCann contended Claimants lost. See

McCann Presentation regarding Damages; Award, pp. 6-7. Thus, the Award “unquestionably

reflect[ed] the influence of [McCann’s] testimony.” See Bonar, 835 F.2d at 1385.

The third prong is satisfied because McCann gave demonstrably false testimony. During

the Arispe Arbitration, McCann himself admitted that his prior testimony in Garrett was false, so


14

the standard of clear and convincing evidence of the fraudulent evidence is met. He admitted

that his testimony on at least three occasions overstated the losses attributable to internal pricing,

even by his own calculations—which may have led to inflation of damages. See Arispe Tr., Oct.

13, 2010, 509:5-20. Lest Claimants argue that this was a simple mistake on the part of McCann,

this Court should bear in mind that McCann testified that he spent over 1,000 hours researching

the RMK funds in this case—more time than it typically takes to earn a four-year college degree.

See Garrett Tr., Aug. 17, 2010, 371:3-11. He testified against Morgan Keegan with this same

sort of testimony approximately 35 times. Id. 210:3-5. McCann’s own testimony that he would

not have changed the numbers, except that he was challenged on them by counsel for Morgan

Keegan, further corroborates the inference of fraud. See Arispe Tr., Oct. 13, 2010, 518:15-23,

519:18-19. Finally, McCann himself foreclosed the possibility that it could have been a mere

mistake when he noted that “I don’t recall when the last time an actual error was pointed out in

anything that my office has done. If it’s been a year, it’s been five years. So, I feel pretty

confident, although we’re all human, that these exhibits are created accurately.” Arispe Tr., Oct.

13, 2010, 399:25-400:5.

McCann’s false testimony meets the vacatur standard of fraud in Bonar and otherwise

under U.S.C. Section 10. See Bonar, 835 F.2d at 1383-84. As in Bonar, the expert here also

gave false testimony that the Panel relied upon. Consequently, this Court should vacate the

Award. See 9 U.S.C. § 10(a)(1).

B. THE AWARD SHOULD BE VACATED BECAUSE THE ARBITRATORSEXCEEDED THEIR AUTHORITY BY IMPERMISSIBLY ACTING OUTSIDEOF THE PARTIES’ AGREEMENT AND THE GOVERNING FINRA RULES.

An arbitration award must be vacated where, as here, “the arbitrators exceeded their

powers.” 9 U.S.C. § 10(a)(4). “‘Arbitration is a matter of contract:’ The powers of an arbitrator

are ‘dependent on the provisions under which the arbitrators were appointed.’” Apache Bohai


15

Corp. LDC v. Texaco China BV, 480 F.3d 397, 401 (5th Cir. 2007) (citing Brook v. Peak Int’l,

294 F.3d 668, 672 (5th Cir. 2002)). As the Fifth Circuit has held, “arbitral action contrary to

express contractual provisions will not be respected.” Delta Queen Steamboat Co. v. AFL-CIO,

889 F.2d 599, 602, 604 (5th Cir. 1989) (affirming vacatur of award where arbitrators exceeded

powers by acting contrary to contractual provisions); see also Bridas S.A.P.I.C. v. Gov’t of

Turkmenistan, 345 F.3d 347, 365 (5th Cir. 2003) (“[A]rbitral action contrary to express

contractual provisions is not entitled to deference upon review.”). For example, in Smith v.

Transp. Workers Union of Am., the Court affirmed vacatur because the “plain wording of the

arbitration agreement” prohibited arbitrators from modifying the award, but the arbitrators did so

regardless. 374 F.3d 372, 375 (5th Cir. 2004).

This arbitration was governed by the FINRA Rules because the express terms of the

parties’ customer agreements so dictated. See, e.g., Claimant Ryrie Client Agreement § 5, Jun.

9, 2001 (providing that arbitration shall be in accordance with FINRA Rules) (attached hereto as

Ex. P). The arbitration agreements in this case expressly incorporated the FINRA Rules,

delineating what claims could and could not be arbitrated, what parties could or could not be

included in the arbitration, and what the arbitrators must and must not do. See Stolt-Nielsen S.A.

v. Animalfeeds Int’l Corp., -- U.S. --, 130 S. Ct. 1758, 1774 (2010) (noting that parties may

structure their arbitration agreements as they see fit); FINRA Rule 12101(b) (“When a dispute is

submitted to arbitration under the [FINRA Rules] pursuant to an arbitration agreement, the

[FINRA Rules] are incorporated by reference into the agreement.”) (attached hereto as Ex. Q).

Moreover, the parties signed FINRA Arbitration Submission Agreements, which, too, provided

that the “arbitration will be conducted in accordance with the FINRA Code of Arbitration

Procedure.” See FINRA Arbitration Submission Agreements (attached hereto as Ex. R).


16

The FINRA Rules delineating the Arbitrators’ powers are not mere procedural rules that

can be disregarded without necessitating vacatur. Cf., e.g., Dawson v. Goldman Sachs & Co.,

No. H-07-391, Opinion on Arbitration, at 2 (S.D. Tex. Oct. 3, 2007) (Hughes, J.) (denying

motion to vacate arbitration award when panel violation was on mere minor pleading issue).

Rather, the FINRA Rules’ substantive provisions establish which kinds of claims are within the

Arbitrators’ powers to adjudicate and which are not. See, e.g., FINRA Rule 12205; FINRA Rule

12200 (attached hereto as Ex. S).

The Arbitrators in this case violated multiple FINRA Rules, each of which provided that

there was no basis for jurisdiction in this case. Violation of any one of these is, by itself, grounds

for vacatur. See 9 U.S.C. § 10(a)(4). When arbitrators “ignore . . . utterly” the arbitration rules

under which a proceeding is conducted, as the Panel did in this case, the arbitrators have

exceeded their powers and the award must be vacated. See SAL Fin. Servs., Inc. v. Nugent, No.

3:06-CV-2051-D, 2007 WL 719230, at *5 (N.D. Tex. Mar. 9, 2007) (internal citation omitted);

cf. Dealer Computer Servs., Inc. v. Hammonasset Ford Lincoln-Mercury, Inc., No. H-08-1865,

Opinion on Confirmation, at 5-6 (S.D. Tex. Dec. 22, 2008) (Hughes, J.) (confirming arbitration

award when it could not be shown that arbitrators’ alleged misapplication of the law satisfied the

standard for vacatur). As this Court has ruled, “[a] lawless award must be vacated.” Citigroup

Global Mkts., Inc. v. Bacon, No. H-05-3849, 2007 WL 2255114, at *4 (S.D. Tex. Aug. 2, 2007)

(Hughes, J.), rev’d, finding only that manifest disregard of the law is not a recognized ground for

vacatur, 562 F.3d 349 (5th Cir. 2009).

1. The Award Must be Vacated Because One Arbitrator Refused to Make HisRequired Oath and Thus He, and the Panel, Had No Authority to Renderthe Award.

“Before making any decision as an arbitrator or attending a hearing session, the

arbitrators must execute FINRA’s arbitrator oath or affirmation.” FINRA Rule 12406(d).


17

Failure to make the Oath prior to the proceedings is a violation of the FINRA Rules, and means

the arbitrator who fails to do so cannot preside over any part of the arbitration. See id. Failure to

swear the required Oath calls into question the very credibility and fundamental fairness of the

arbitration process, and courts have recognized that failure to execute an oath could be grounds

for overturning an award. See Gronager v. Gilmore Secs. & Co., No. 93 Civ. 1484, 1996 WL

200303, at *2 (S.D.N.Y. Apr. 25, 1996) (noting that, although there was insufficient evidence to

determine if Oath of Arbitrator had been executed, arbitrator’s failure to execute oath might

vitiate arbitration proceedings altogether), abrogated on other grounds by Photopaint Techs.,

LLC v. Smartlens Corp., 335 F.3d 152 (2d Cir. 2003).

The Oath of Arbitrator is what obligates arbitrators to act in a fair manner, and to follow

the strictures of the Code of Ethics. See Oath of Arbitrator Oren L. Connaway. Moreover, the

Oath of Arbitrator imposes limits on an arbitrator’s authority, by incorporating the Code of

Ethics, which provides that arbitrators are required to stay within the authority provided by the

parties’ agreement, and that they must follow procedures and rules specified by the parties’

agreement. See id.; Code of Ethics, Canon I, ¶ E. Mr. Barnes’ failure to make the Oath of

Arbitrator implies that he is not bound to hear the case in a fair manner or to obey limitations on

his authority.

Though he did not take his Oath, Mr. Barnes was nonetheless active in the arbitration,

asking numerous questions and participating in rulings. His involvement, despite violation of

FINRA Rules, tainted not just the Award but all stages of the arbitration. In addition, Mr.

Barnes’ failure to correct the Chairman when he stated that all the Arbitrators had taken their

Oaths implicates the Chair in the violation of FINRA Rule 12406(d) as well. In short, Mr.

Barnes’ refusal to make his Oath of Arbitrator was a clear violation of the FINRA Rules that


18

rendered him incapable of acting as an arbitrator in this case and tainted the entire proceeding.

See FINRA Rule 12406(d).

2. The Award Must be Vacated Because the Arbitrators Exceeded TheirPowers by Hearing Derivative Claims in Violation of FINRA Rules.

The second FINRA Rule that the Arbitrators violated, thereby exceeding their authority,

was FINRA Rule 12205, which mandates that “[s]hareholder derivative actions may not be

arbitrated under the Code.” FINRA Rule 12205. Claimants’ case constitutes a shareholder

derivative action that the Arbitrators lacked the power to hear, and consequently, the Award must

be vacated.

Just weeks ago, the Alabama Supreme Court ruled in another case involving the identical

RMK Funds that claims that were substantively identical to those brought by Claimants were

shareholder derivative claims. See In re Grantland Rice II, No. 1090425, 2010 WL 3835727, at

*9 (Ala. Sept. 30, 2010). Both these Claimants and the plaintiffs in In re Grantland Rice sought

damages for fraud based on misrepresentations about the RMK Funds’ management, which

allegedly caused the Funds to decline significantly in value. See Claimants’ Amended SOC, ¶¶

2-3; Grantland Rice Amended Compl., ¶¶ 15-16. These parallel allegations include:

• Inflation of the prices of the underlying holdings, when reported by fund management(Amended SOC, ¶¶ 2, 20, 28, Claimants’ Prehearing Brief (“Prehrg. Brief”), p. 2,attached hereto as Ex. T; Grantland Rice Amended Compl., ¶¶ 35, 36, 46);

Misrepresentation of the investment quality of the underlying holdings—an issue of fundmanagement (Prehrg. Brief, pp. 3-4; Grantland Rice Amended Compl., ¶¶ 20, 21, 24);

• Misrepresentation by the Funds’ manager of the default rates of the Funds’ underlyingassets (Prehrg. Brief, p. 4; Grantland Rice Amended Compl., ¶¶ 36, 38);

• Misrepresentation of the Funds’ dividends, again a fund management issue (AmendedSOC, ¶¶ 2, 19, 27; Prehrg. Brief, p. 4-5; Grantland Rice Amended Compl., ¶¶ 36, 38);

• Failure to disclose the Funds’ “highly risky investment strategy,” including trancheprioritization for the underlying securities in the Funds, again an issue of fund


19

management (Amended SOC, ¶¶ 18-21; Prehrg. Brief, pp. 5-6; Grantland Rice AmendedCompl., ¶¶ 16, 21, 25-28); and

• Failure to disclose the Funds’ over-concentration of holdings (Amended SOC, ¶¶ 18, 21,22, 25; Grantland Rice Amended Compl., ¶¶ 16, 21, 33).

At the arbitration hearing itself, Claimants here continued to focus their case on the same issues

of fund mismanagement, including valuation and pricing, portfolio allocation, overpayment of

dividends, and failure to follow prospectus guidelines. Garrett Tr., Aug. 16, 2010, 25:1-38:25;

id. at Sept. 1, 2010, 1426:1-1429:25, 1449:1-1451:25.

The Alabama Supreme Court’s decision considered applicable law to determine what

constituted a derivative claim. The court relied on Strougo v. Bassini, 282 F.3d 162 (2d Cir.

2002), which held that “[w]hen the corporation is injured and the injury to its shareholders

derives from that injury . . . only the corporation may bring suit; there is no shareholder

standing.” In re Grantland Rice II, 2010 WL 3835727, at *5 (quoting Strougo, F.3d at 171); see

also Cowin v. Bresler, 741 F.2d 410, 414 (D.C. Cir. 1984) (holding that “[c]laims of corporate

mismanagement must be brought on a derivative basis”). The court also looked to Smith v.

Waste Mgmt., Inc., 407 F.3d 381 (5th Cir. 2005), which held that investor’s claims were

derivative because “the duty breached was owed to the stockholder and . . . he or she can prevail

without showing a corresponding injury to the corporation.” In re Grantland Rice, 2010 WL

3835727, at * 9 (quoting Smith, 407 F.3d at 386); see also In re Dreyfus Aggressive Growth Mut.

Fund Litig., No. 98 Civ. 4318(HB), 2000 WL 10211, at *1, *4 (S.D.N.Y. Jan. 6, 2000); In re

Blackrock Mut. Funds Fee Litig., No. 04 Civ. 164 (TFM), 2006 WL 4683167, at *6 (W.D. Pa.

Mar. 29, 2006); In re Goldman Sachs Mut. Funds, No. 04 Civ. 2567 (NRB), 2006 WL 126772,

at *6 (S.D.N.Y. Jan. 17, 2006); In re Franklin Mut. Funds Fee Litig., 388 F. Supp. 2d 451, 464

(D.N.J. 2005).


20

Finally, the Alabama Supreme Court took note that the fact that the claims were styled as

fraud claims did not alter their derivative nature. It stated that “although the [plaintiffs] appear

therefore to be arguing that their claims must be direct claims because they are fraud claims, . . .

fraud claims may still be derivative claims if the alleged injury is to the corporation.” In re

Grantland Rice, 2010 WL 3835727, at *6 (citing Tafflin v. Levitt, 608 A.2d 817, 819-20 (Md. Ct.

Spec. App. 1992)). The court further noted that “[c]ourts have generally rejected attempts by

plaintiffs to convert traditionally derivative claims into direct claims based on the failure of the

alleged guilty parties to disclose their bad acts.” Id. at 21 (citing Kas v. Fin. Gen. Bankshares,

Inc., 796 F.2d 508, 513 (D.C. Cir. 1986)).

Here, Claimants generally allege that the cause of the decline in the value of Claimants’

holdings was the mismanagement of the Funds’ assets, which caused a decline in the Funds’

prices overall. Amended SOC, ¶ 2. The specific bases for their claims include alleged

mispricing of securities, Amended SOC at ¶¶ 15, 19, 28, investment in inappropriate holdings,

Amended SOC at ¶¶ 1, 17, misreporting of dividends, Amended SOC at ¶¶ 2, 19, and failure to

follow appropriate defensive strategy. Amended SOC at ¶ 22. None of these claims are personal

to Claimants or different from injuries sustained by the Funds themselves, and thus they are

derivative. See In re Grantland Rice, 2010 WL 3835727, at *9. In fact, Claimants’ alleged harm

is indistinguishable from that suffered by all the RMK Funds. Claimants attempt to frame the

issue as one of failure to disclose or fraud regarding the alleged fund mismanagement, but, as the

Alabama Supreme Court noted, such efforts fail and the claims are still considered derivative.

The derivative nature of the claims can be seen even in the Award, which treats all Claimants

equally and awards them 85% of their damages, across the board, irrespective of the

circumstances of their investments. The legal standard regarding what constitutes a derivative


21

claim is exceedingly clear, and was thoroughly briefed by Morgan Keegan in its Motion in

Limine. See Motion in Limine. Claimants’ claims are derivative and cannot be arbitrated under

FINRA Rule 12205. The Panel exceeded its powers by allowing these claims to be heard and by

issuing an Award, and the Award must be vacated.

3. The Award Must be Vacated Because the Arbitrators Exceeded TheirPowers by Hearing Claims Brought by Non-Customers of Morgan Keegan.

The Award also should be vacated because the Arbitrators exceeded their powers by

adjudicating claims of non-customers of Morgan Keegan, which are not subject to arbitration.

FINRA Rule 12200 mandates that a dispute with a FINRA member is to be arbitrated only if it is

“between a customer and a [FINRA] member or associated person of a member.” FINRA

Rule 12200 (emphasis added). A “customer” under FINRA Rules is “one involved in a business

relationship with a[]…member that is related directly to investment or brokerage services.” Fleet

Boston Robertson Stephens, Inc. v. Innovex. Inc., 264 F.3d 770, 772 (8th Cir. 2001). As the Eighth

Circuit pointed out, numerous FINRA Rules support the concept that a customer is someone who

receives investment or brokerage services from a FINRA member. Id.; see, e.g., FINRA Rule

2261(c) (defining customer as “any person who, in the regular course of such member’s business, has

cash or securities in the possession of such member”) (attached as Ex. U). The term customer should

be construed narrowly enough so as not to “do significant injustice to the reasonable expectations of

[FINRA] members.” Wheat, First Sec., Inc. v. Green, 993 F.2d 814, 820 (11th Cir. 1993).

Investors are not customers of the broker-dealer if they have not “opened, maintained,

controlled, or traded in an account at [the broker-dealer] or entered into an account or customer

agreement with [the broker-dealer].” Interactive Brokers, LLC v. Duran, No. 08-CV-6813, 2009 WL

393827, at *3 (N.D. Ill. Feb. 17, 2009); see also Herbert J. Sims & Co. v. Roven, 548 F. Supp. 2d 759,

764-65 (N.D. Cal. 2008) (determining that investors were not customers of broker-dealer where they


22

did not invest with broker-dealer or its representative, never had written agreement with broker-dealer,

had no direct investment relationship with broker-dealer, and broker-dealer never received any money

from investors, even though broker-dealer’s representative communicated with investors’ advisor);

Mony Sec. Corp. v. Vasquez, 238 F. Supp. 2d 1304, 1308 (M.D. Fla. 2002) (same). Moreover, “one

cannot be a customer of a broker-dealer if one has absolutely no relationship with the broker-dealer at

the time of the event causing the dispute.” AXA Distribs., LLC v. Bullard, No. 1:08-CV-188-WKW

[WO], 2008 WL 5411940, at * 7 (M.D. Ala. Dec. 24, 2008); see also Sands Bros. & Co, Ltd.. v.

Ettinger, No. 03 Civ. 7854(DLC), 2004 WL 541846, at *3 (S.D.N.Y. Mar. 19, 2004) (stating that

investor was not “customer” of broker-dealer, and thus could not compel arbitration, for period during

which she did not have account with that broker-dealer); BMA Fin. Servs., Inc. v. Guin, 164 F. Supp.

2d 813, 816, 819 (W.D. La. 2001) (investors were not customers of broker-dealer where they had no

relationship with broker-dealer, even though they bought securities from broker who had relationship

with broker-dealer). An individual is not magically converted into a customer merely by receiving

financial advice. Fleet Boston, 264 F.3d at 773; Contemporary Fin. Solutions, Inc. v. Miller, No. 07-

cv-00793-MSK, 2007 WL 4197588, at *4 (D. Colo. Nov. 20, 2007) (stating that, to be customer,

person must have received investment or brokerage services, not merely investment advice from

associated person); Citigroup Global Mkts. Inc. v. VCG Special Opportunities Master Fund Ltd.,

598 F.3d 30, 39 (2d Cir. 2010) (noting that if entity’s transactions at issue “were never handled

by an agent of [broker-dealer], acting for that purpose, then [entity] was not the ‘customer’ of

[broker-dealer] under any reasonable construction of that term”).

Like other persons determined not to be customers, the Non-Customers had absolutely no

relationship with Morgan Keegan. See Bullard, 2008 WL 5411940, at *7. In fact, the parties

stipulated that the Non-Customers were “never . . . customer[s] of Morgan Keegan,” and that they


23

were “not . . . individual customer[s] of Mr. Stein,” Morgan Keegan’s associated person.

Stipulations, p. 6, ¶¶ 3, 11; p. 8, ¶¶ 1, 7, 10. As in the controlling cases, the Non-Customers had no

accounts with Morgan Keegan; made no purchases through the firm or through Mr. Stein; had no

agreements with the firm; never received account statements or confirmations from the firm; never

communicated with the firm; and paid no commissions or other moneys to Morgan Keegan. See id.,

pp. 6, 8-9. The Non-Customers also stipulated that they held their investment accounts with other

firms, and made all of their RMK Fund investments through these other brokerages. Id. p. 6, ¶¶

3, 4, 13; pp. 8-9, ¶¶ 1, 3, 12. Merely receiving information that Morgan Keegan’s associated person,

Mr. Stein, “passed along . . . regarding the RMK Funds” does not turn the Non-Customers into

Morgan Keegan’s customers, particularly since it is undisputed that they were not Mr. Stein’s

customers. See id., p. 6 ¶ 11; p. 8 ¶ 10; see also Herbert J. Sims, 548 F. Supp. 2d at 766.

Treating the Non-Customers as Morgan Keegan’s “‘customers’ would stretch the word

‘customer’ beyond its meaning.” See Interactive Brokers, 2009 WL 393827, at *3. Allowing the

Arbitrators to hear the Non-Customers’ claims in this case would mean that “every purchaser of

shares in a mutual fund . . . would arguably be ‘customers’ of every investment institution with which

those funds did business”— a result that courts have rejected. See Bensadoun v. Jobe-Riat, 316 F.3d

171, 177 (2d Cir. 2003).

Because the Non-Customers were never customers of Morgan Keegan, their dispute

cannot be arbitrated before FINRA. See FINRA Rule 12200; Morgan Keegan’s Motion[s] to

Director to Declare Claims of [Non-Customers] Not Subject to FINRA Arbitration (July 10,

2009) (attached as Ex. V). In the face of undisputed facts establishing that the Non-Customers

were ineligible for FINRA arbitration, the Panel proceeded to hear the Non-Customers’ claims

and awarded them identical damages to all the other Claimants. See Award, pp. 6-7. Allowing


24

the Non-Customers’ claims to proceed was a clear transgression of the Arbitrators’ authority and

jurisdiction, which should result in vacatur of the award. See Smith, 374 F.3d at 375; 9 U.S.C. §

10(a)(4).

III. CONCLUSION

The Award was procured by the fraudulent testimony of Claimants’ only expert, who

made a number of false statements despite over 1,000 hours of research, and failed to notify the

Panel of his false statements which were exposed just weeks after the Garrett Arbitration. The

Panel in the Garrett Arbitration exceeded its powers when (1) it proceeded despite one of the

Arbitrators’ failing to swear his Oath of Arbitrator; (2) it permitted Claimants’ derivative claims

to go forward; and (3) it allowed non-customers to proceed against (and recover from) Morgan

Keegan.

Accordingly, for the reasons stated herein, and those set forth in Morgan Keegan’s

Motion to Vacate Arbitration Award filed October 11, 2010, Morgan Keegan respectfully

requests that the Award in this case be vacated in its entirety, and that the case should be

remanded to FINRA with direction that a new and completely different arbitration panel be

chosen by the parties, and that a new evidentiary hearing take place, all in accordance with

FINRA Rules.

DATED: November 5, 2010 GREENBERG TRAURIG, LLP

By: /s/ Mary-Olga LovettMary-Olga Lovett (SBN 00789289)1000 Louisana, Suite 1800Houston, Texas 77002Telephone: (713) 374-3500Facsimile: (713) 374-3501

ATTORNEY-IN-CHARGE FOR PETITIONER

MORGAN KEEGAN & COMPANY, INC.


25

OF COUNSEL:Steve Carlin (SBN 03807700)Penelope Blackwell (SBN 24029456)2200 Ross Avenue, Suite 5200Dallas, Texas 75201Telephone: (214) 665-3600Facsimile: (214) 665-3601

Pamela Ferguson Sperber (SBN 24059743)1000 Louisana, Suite 1800Houston, Texas 77002Telephone: (713) 374-3500Facsimile: (713) 374-3501

Terry R. Weiss (Pro Hac Vice Pending)The Forum3290 Northside Parkway, Suite 400, Atlanta, GA 30327Telephone: (678) 553-2603Facsimile: (678) 553-2212

ATTORNEYS FOR PETITIONER

MORGAN KEEGAN & COMPANY, INC.


26

CERTIFICATE OF SERVICE

The undersigned hereby certifies that all counsel of record who have deemed to have

consented to electronic service are being served with a copy of this document via the Court’s

CM/ECF system per Local Rule CV-5(a)(3) on November 5, 2010. Any other counsel of record

will be served by facsimile transmission and first class mail.

/s/ Pamela F. SperberPamela F. Sperber


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