Expert witness fights ruling in Morgan Keegan case

Constantine Katsoris '57 in Reuters, November 18, 2011

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Nov 18 (Reuters) - A former Securities and Exchange Commission economist who was cited by a judge for giving fraudulent testimony in a case against Morgan Keegan & Co. is fighting back in a battle for his reputation.

The outcome could potentially affect hundreds of claims against Morgan Keegan and other securities firms in which investors are relying on the witness, Craig McCann, who heads Virginia-based Securities Litigation and Consulting Group Inc.

McCann, who has riled the brokerage industry in his many appearances, wants a Houston federal judge to delete references to him in a recent court opinion that threw out a $9.2 million ruling that a group of investors had won against Morgan Keegan in a Financial Industry Regulatory Authority arbitration case. The investors hired McCann to testify on their behalf in the case.

His motion to the court was among a recent flurry of legal filings in an already bitter dispute between Memphis-based Morgan Keegan & Co., a unit of Regions Financial Corp., and a group of investors over losses tied to troubled bond funds.

The Houston U.S. District Court judge, Lynn Hughes, in late September, invalidated the $9.2 million FINRA ruling against Morgan Keegan, in part because of McCann's allegedly "fraudulent testimony" regarding the investors' claims against the firm. Lawyers for the investors have appealed the decision to the U.S. Court of Appeals for the 5th Circuit.

The finding by Judge Hughes hinges on calculations that McCann made about the valuation of funds in the case. He revised the figures in a later Morgan Keegan case.

EXPERT WITNESSES VS OPPOSING LAWYERS

McCann, a well-respected expert witness, has testified in numerous cases against securities firms on behalf of investors and regulators, including the SEC. But the court's opinion, which links McCann to alleged fraudulent conduct, could now potentially undermine his credibility.

Lawyers in other Morgan Keegan cases are already using the decision to discredit McCann, he wrote in an affidavit. Some lawyers working on cases against other firms have told McCann they will no longer hire him and asked him to return their retainers, McCann wrote.

About 1,000 investors filed arbitration cases involving losses they incurred during 2007 and 2008. Many cases are still pending. Morgan Keegan paid a $200 million fine to the SEC and state regulators this summer to settle fraud allegations.

Expert witnesses are frequently under attack by the opposing parties' lawyers. But the ruling about McCann is "unusual," said Constantine Katsoris, a professor at Fordham University School of Law in New York.

"Fairness would dictate that you should be able to defend yourself," said Katsoris, who has been an arbitrator for 40 years. McCann said he didn't know of Morgan Keegan's efforts to use the figures to overturn the ruling until he read the opinion, according to an affidavit.

Judge Hughes, in an initial hearing on the matter last week, showed no inclination to change his mind about McCann, according to a review of the transcript. McCann was paid and coached by lawyers who didn't try to retract the earlier figures, Judge Hughes said. "We are not reopening the record because he doesn't like how he was represented," the judge told lawyers. Still, he ordered the parties to file more information about the case.

DEFENSE FOR EXPERT WITNESS

McCann's lawyers, in legal papers filed on Monday, said Morgan Keegan "misstated and withheld key information" from the court when it alleged last year that McCann's testimony was fraudulent. The brokerage firm, they said, "concealed" its knowledge of McCann's revised calculations because he informed them of the problem during another arbitration case, in which he also testified about the changes, McCann's lawyers wrote. McCann declined to comment.

A Morgan Keegan spokeswoman declined to comment. But the firm's lawyers argued in court documents filed late Thursday that he has no right to relief, because he isn't a party in the case. His allegations are "meritless," wrote lawyers for the firm, which has been taking the unusual step of challenging some of the largest arbitration rulings against it in court.

McCann is not "the first disgruntled expert to seek intervention and his predecessors have quite properly met with no success," they wrote, in an earlier filing.

But even without that intervention, one recent effort to discredit McCann fell flat. A FINRA arbitration panel, on Thursday, ruled in favor of an investor who relied on McCann's testimony in a dispute against a unit of Citigroup Inc. over losses tied municipal arbitrage funds. The panel awarded the investor $706,760 -- the full amount of his losses -- plus interest and certain fees, according to Philip Aidikoff, a lawyer for Aidikoff, Uhl & Bakhtiari in Beverly Hills, California. Citigroup could not be reached for comment.

"Craig (McCann) was subjected to the most aggressive cross examination I can recall," said Aidikoff, who represented the investors.

(Reporting by Suzanne Barlyn)