Morgan Keegan Settles SEC Fraud Charges For $210 Million And Is Simultaneously Put Up For Sale By Regions
The Securities and Exchange Commission (SEC) has announced that Morgan Keegan & Company and Morgan Asset Management, both subsidiaries of Regions Financial Corporation, have jointly agreed to pay $210 million to settle ongoing fraud charges related to subprime mortgage backed securities (MBS). Simultaneously, Regions Financial announced that it was putting troubled Morgan Keegan up for sale, as it hopes to cleanse itself from the unit which has been an Achilles heel for the firm. In addition to the firms’ settlement, James C. Kelsoe, Jr. and Joseph Thompson Weller agreed to pay fines for their involvement. Kelsoe is the former portfolio manager for the five proprietary mutual funds managed by Morgan Asset Management from January 2007 until July 2007 and Weller was comptroller of Morgan Keegan. Both were accused of providing inaccurate net asset values (NAVS) for the funds and failing to employ reasonable pricing procedures from which to calculate them. This resulted in the shares being sold to investors based upon those inflated prices. Robert Khuzami, Director of the SEC’s Atlanta Regional Office, said that “the falsification of fund values misrepresented critical information exactly when investors needed it most – when the subprime mortgage meltdown was impacting the funds” and that “such misconduct does grievous harm to investors.”
According to the SEC’s order, Kelsoe instructed Morgan Keegan’s accounting department to make arbitrary “price adjustments” to the fair values of certain portfolio securities. Additionally, the order concluded that Kelso screened and influenced the price confirmations from at least one broker dealer. For example, the broker dealer was induced to provide interim price confirmations enabling the funds to avoid marking down the value of securities to reflect current fair value, preventing a reduction in the NAVs of the funds that should have been impacted by the deterioration of the subprime securities market in 2007.
Under the settlement, Morgan Keegan will pay $25 million in disgorgement and interest and a $75 million penalty to the SEC to be placed in a fair Fund for investors harmed by their actions. Another $100 million will be paid into a state fund by Morgan Keegan which will be distributed to investors. Mr. Kelsoe agreed to pay a $500,000 fine and be barred from the securities industry forever by the SEC. Mr. Weller was fined $50,000 for his part in the alleged fraud. Unfortunately, the $200 million is clearly not going to be enough to make injured investors whole but they will be provided some recovery.
How the settlement will be disbursed to the injured investors is yet to be finalized however, there will be a distribution plan established and administered in accordance with SEC rules. There will be an administrator appointed by the SEC who will evaluate the claims of investors and propose a distribution plan to compensate those victimized.
It is theorized that the Morgan Keegan sale could generate as much as $1.5 billion, which Regions could use to pay down the $3.5 billion in TARP money the bank received in 2008. Back in 2000, Regions was embarking on a new era when it agreed to pay $789 million for Morgan Keegan. In doing so Regions, whose roots go back to 1856 in Huntsville, AL, became the first ever Alabama based financial institution to go out and purchase a major league stockbroker firm and bond underwriter. Initially the marriage was a good one with Morgan Keegan earning some $600 million for Regions since 2004. Unfortunately, the luster wore off when Morgan Keegan fund manager Jim Kelsoe made huge bets on subprime mortgages and created mutual funds filled with bonds tied to them. Early on the funds performed admirably but when the housing market collapsed the funds’ values plummeted losing on an average of 67% from May 2007 to May 2008. For the last three years, the Morgan Keegan issue has been a considerable distraction for Regions with news of arbitration results, lawsuits or state investigations coming almost every week, according to Samford University’s Brock School of Business, John Kottmeyer.