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Securities Lawyers Brace for Subprime Crisis Fallout

The Indianapolis Star

Fishers securities attorney Mark Maddox calls them “come-to-Jesus” moments – the time when an investment adviser realizes he has to tell a client his portfolio’s gone to hell.

There are a lot of portfolios – held by non-profits, governments and companies – with bonds backed by subprime mortgages.

With the burst housing bubble and subprime meltdown roiling the markets, Maddox and his partner Tom Hargett think there will be a lot of come-to-Jesus moments.

They’ve already had success in a case involving the Indiana Children’s Wish Fund and its investment adviser, Morgan Keegan.

Hargett filed an arbitration claim to recover nearly $50,000 the wish fund said it lost when it switched investments on the advice of Morgan Keegan.

The case closed late last month when Morgan Keegan agreed to pay the fund an undisclosed sum.

“Eight months ago, Mark and I saw the rumblings of this avalanche coming from the subprime loan mess,” Hargett said.

Maddox, Hargett and New York-based partner Steven Caruso have made a name for themselves in arbitration cases against brokers.

Maddox was Indiana securities commissioner under Gov. Evan Bayh, while Hargett worked as a stockbroker before becoming a lawyer. Caruso was general counsel for a national brokerage.

They’ve had some big wins in arbitration cases, but the subprime problem is so big and so new, they decided not to go it alone.

Over four days in August, Maddox and Hargett hammered out an unusual alliance between their firm and three others that specialize in securities law. The new affiliation “makes a lot of sense,” said Craig McCann, an expert witness in securities cases across the country.

“I don’t know of any other group that has organized the way these guys have,” he said.

It would be hard for the firms to take on the cases individually, McCann said, but together they can.

Regular investors soon will see the problems that big investment banks like Bear Stearns have had since last fall. “There are a lot of people who don’t see the problem yet,” Hargett said. “But trust me, its coming.”

Those come-to-Jesus moments, that is.