The U.S. Securities Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) and four states have charged Morgan Keegan & Company with fraud and reckless business practices, saying the company caused bond fund investors to lose more than $1 billion during the subprime mortgage collapse.
The SEC and FINRA say that James Kelsoe, managing director at Morgan Keegan and a leading mutual fund manager, directed staff to perform 262 “price adjustments” in 2007 that hid the declining values of bond funds that were heavily invested in subprime mortgages. In addition, the two financial authorities say the company, and its subsidiary, Morgan Asset Management, withheld vital information from investors about the value and security of their investments.
The SEC is also charging Joseph Weller, who heads Morgan Keegan’s accounting department, with failing to assure that the securities’ prices were set at the proper level.
The charges come as the company faces hundreds of Morgan Keegan bond fund arbitration claims from investors. Morgan Keegan officials say they have already bought back $100 million in securities to remediate investor losses.
Mississippi, Alabama, Kentucky and South Carolina have also announced that they intend to take administrative actions against Morgan Keegan, which could result in them being forced to compensate investors for more than $1 billion in losses and could also result in the company losing its license to do business in those states.
The bond funds were heavily invested in the subprime mortgage market, and lost as much as 82% in value after the market imploded. The funds were subsequently taken from Morgan Keegan by its parent company, Regions Financial Corp., and transferred to Hyperion Brookfield Assed Management, Inc., which has since liquidated and closed down two of the funds.
Morgan Keegan officials have said that the charges represent factual inaccuracies and misrepresentations of law and say the company plans to defend itself against the charges and claims.
Hundreds of Morgan Keegan lawsuits filed by individual investors are currently pending against the brokerage firm. The cases involve several different Morgan Keegan funds, including the RMK Strategic Income Fund, RMK Select High Income Fund and RMK Advantage Fund.