A series of victories by Morgan Keegan & Co. is calling into question who can be considered a "customer" in securities arbitration cases.

Most recently, a case involving a partner in the Lion Fund, a hedge fund, led to an award totaling $206,000 for Corbin Robertson III for personal losses stemming from a group of money-losing bond funds tied to allegations of fraud. The award was a small fraction of the $4.9 million he and the fund sought from a securities arbitration panel.

In its decision, the panel concluded that only Robertson could be considered a Morgan Keegan customer.

It was a major victory for Morgan Keegan, which is being sold by Regions Financial Corp. to Raymond James Financial Inc., which is based in St. Petersburg, Fla.

The brokerage has been battling a flood of cases tied to bond funds it underwrote and sold. The funds, heavily invested in risky subprime loans, were the subject of a $200 million civil regulatory fine.

Morgan Keegan's success turns on a controversial argument: Investors who buy Morgan Keegan funds through other brokerages are not Morgan Keegan's customers and, therefore, shouldn't be allowed to file arbitration claims against it.

The argument has been successful in other Morgan Keegan cases, including one that reversed a $9.2 million award to a large group of investors, only two of whom were not direct Morgan Keegan customers.

These wins highlight the ambiguity of a Financial Industry Regulatory Authority [FINRA] arbitration rule that defines the term "customer." A brokerage is required to arbitrate in FINRA's forum when a customer requests the arbitration. An interpretation in a 2001 federal court opinion suggests there must be a "brokerage or investment relationship" between the parties for an investor to be considered a customer.

FINRA's only guidance is a rule that says "customer shall not include a broker or a dealer."

"Presumably, courts and FINRA should interpret the customer rule exactly as its written -- as everyone who is not a broker or a dealer," said Adam Gana, senior litigation counsel for Napoli Bern Ripka Shkolnik LLP, a New York-based law firm. If that happens, it would clarify that FINRA arbitration could extend to investors who bought securities underwritten by FINRA members through other brokerages.

Gana has already appealed two rulings that deemed his clients non-customers and will attempt to persuade federal judges to consider this literal definition of "customer."

A FINRA spokeswoman declined to comment on the rule and its interpretations.


A 2010 ruling by a FINRA arbitration panel foreshadowed the March 16 ruling on Robertson's award.

In the earlier ruling, the panel deemed that Morgan Keegan was "not associated" with the accounts, securities or conduct related to the Lion Fund's purchase of securities. Those funds were not held in Morgan Keegan brokerage accounts. That left just Robertson's claims for personal losses because his money-losing Morgan Keegan funds were held in Morgan Keegan brokerage accounts.

A lawyer for the Lion Fund and Robertson did not respond to  requests for comment.

The "not-a-customer" strategy has already worked in other cases, including the one by a federal district court in October that overturned the $9.2 million ruling against the Morgan Keegan. The investors in that case have appealed.

Morgan Keegan has also filed lawsuits against numerous smaller investors, asking the court to stop their arbitration cases because they are also not customers for the same reason. Morgan Keegan would not say how many cases it is pursuing using this argument.

Gana, who is handling appeals for two investors who a federal court ruled were not "customers," is ready for a fight.

"We're prepared to go to the Supreme Court if we have to," he said.

It could be an uphill battle, said Mercer Bullard, chief executive of Fund Democracy, an Oxford, Mississippi-based advocacy group for mutual fund shareholders and their advisers.

While Morgan Keegan underwrote the funds, it is difficult for investors to raise sales practice violations by Morgan Keegan when they buy the funds through another firm, he said.

Gana disagreed. He and other lawyers for investors say investors should still be able to use the arbitration process to allege violations of securities laws by FINRA members. In Morgan Keegan's case, the company still misled investors about the value and risks of the funds, even if those who purchased them through other brokerages, he said.

"You don't need to have an account with a member to bring a suit against them," he said.

(Reporting by Suzanne Barlyn of Reuters.)