Broker Morgan Keegan Charged with Fraud
"Morgan Keegan recklessly published these inaccurate daily net asset values and sold shares to investors based on the inflated prices," U.S. Securities and Exchange Commission said in a statement.
The firm was also charged with misleading practices in selling bond funds in a separate case that the SEC filed along with the Financial Industry Regulatory Authority and 13 state securities regulators.
An attorney for Morgan Keegan did not return a call seeking comment.
The SEC charges were directed at Morgan Keegan & Company and Morgan Keegan Asset Management, which is the investment banking, securities brokerage trust and asset management division of Regions Financial Corp. The two employees charged with fraud were Morgan Keegan funds portfolio manager James Kelsoe Jr. and accountant Joseph Thompson Weller.
Price Adjustments Allegedly Ignored Lower Values
According to the commission's allegations, Kelsoe arbitrarily instructed the firm's fund accounting department to make 262 "price adjustments" in 2007 that increased the fair value of some portfolio securities. The price adjustments ignored lower values for the same securities quoted by various dealers, the SEC said.
Many of the funds' securities were backed by subprime mortgages and lacked readily available market quotations. Kelsoe's actions "fraudulently prevented a reduction in the NAVs of the funds that otherwise should have occurred as a result of the deterioration of the subprime securities market," the SEC said.
Weller, a certified public accountant who was head of the firm's fund accounting department and a member of its valuation committee, did nothing to correct the valuation procedures, the SEC further alleged.
Judge to Determine Any Sanctions or Penalties
A hearing is to be scheduled before an administrative law judge to determine whether the firm and the two employees committed the violations, and the hearing will also determine what sanctions and financial penalties, if any, are appropriate, the SEC said.
In a separate action by the SEC, FINRA and 13 states, Morgan Keegan, Kelsoe and three other employees were charged with marketing seven affiliated bond funds to investors using false and misleading sales materials, costing investors well over $1 billion. In addition to an unspecified fine, FINRA is seeking to force the firm to repay ill-gotten profits and pay full restitution to investors.
In 2006 and 2007, Morgan Keegan sold more than $2 billion of the bond funds to some 13 investors, FINRA and state regulators said. The funds were invested in risky structured products, particularly subordinated tranches of asset- and mortgage backed securities, including subprime products. The investments caused the funds to experience serious financial difficulties beginning in early 2007, and they collapsed later that year.
Charges Are Result of a Two-Year Probe
FINRA alleges that "the misleading sales materials, combined with the firm's misleading and deficient internal guidance and failure to train its brokers about the risks, led Morgan Keegan's brokers to make material misrepresentations to investors," the self-regulatory organization said. This allegedly was a problem with the Regions Morgan Keegan Select Intermediate Bond Fund, which was marketed as a relatively safe, conservative fixed income mutual fund, FINRA said.
The action resulted from a two-year multi-state probe of Morgan Keegan led by Mississippi and Alabama securities regulators, the North American Securities Administrators Association said in a release.