High Yield Bond Fund Suits on the Rise
Last year, many muni-bond funds took a hit as a “perfect storm” struck the markets, flattening the yield curve between long term munis and short term munis. Many bond funds took a hit. Now, investors are hitting back.
Investors are beginning to file suit over the poor recommendations by their brokers to invest in certain High Yield Muni Bond Funds. Muni bond funds invest in debt issued by cities and other municipalities. They usually offer lower, steady returns, but are tax-free, which is attractive to rich people.
However, muni bond prices began to fall last summer and early fall, pushing yields higher, as investors moved money into the safest securities, such as short-term Treasury bonds. That, in turn, has hit some of the large muni bond funds. Some customers have begun to sue because they were not told that the high-yield funds in which they invested had significant risk to principal.
The result is that investors who thought they were investing in relatively safe, low volatility bond funds actually invested in bond funds that were subject wild price fluctuations. For example, the Oppenheimer Rochester Municipal Bond Fund was cited as a fund that was subject to significant price volatility in a Morningstar analyst report last January, 2007. “Some investors bought the fund after being told it was appropriate as an income producing vehicle, without disclosing that there was a material risk to the principal value, as this fund took some risks in more concentrated areas more than normal.,” said Jeff Erez, Esq. a partner at Sonn & Erez in Fort Lauderdale. “We have recently filed suit against a brokerage firm, because of this lack of disclosure, and a significant amount of our client’s portfolio was put in the fund, when only a small portion of the portfolio should have been invested, consistent with public recommendations from well-respected analysts, including Morningstar,” said Erez.
Other lawsuits focus on the Morgan Keegan family of Bond Funds, which suffered losses as high as 80%, due to overexposure to the subprime credit market. Many of the arbitration cases filed alleged that Morgan Keegan, owned by Regions Bank, failed to disclose that is fund manager, Jim Kelsoe, had snapped up large amounts of collateralized mortgage obligations and other asset backed securities, many of which became illiquid in the fall of 2008. Other funds that suffered significant losses in 2007 included Eaton Vance National Muni fund The Goldman Sachs High Yield Muni fund and the Nuveen High Yield Municipal fund.
“The theme of these suits are consistent–investors are sold on the idea that they can earn an income in a relatively low risk investment, but are not told of the substantial risks to their principal investment,” said Jeff Sonn, Esq., a partner at Sonn & Erez.
