Morgan Keegan & Co. is going to trial before a judge whose decision to throw out regulators claims the retail brokerage misled thousands of investors about the risks of auction-rate securities was reversed on appeal.
Lawyers for the U.S. Securities and Exchange Commission and the Memphis, Tennessee-based financial firm are set to deliver opening statements today in federal court in Atlanta in a nonjury trial scheduled to take two weeks.
The case, alleging that Morgan Keegan told clients that the more than $2 billion in securities it sold had zero risk as the market was collapsing in late 2007 and 2008, was dismissed by U.S. District Judge William Duffey Jr. in June 2011. In May, the U.S. Court of Appeals in Atlanta overruled Duffey, finding he incorrectly concluded brokers verbal comments to four customers were immaterial in light of disclosures posted on the firms website.
Morgan Keegan representatives did not provide customers with these disclosures or refer customers to the website prior to the purchase, lawyers for the SEC said in a November 2011 brief to the appeals court. Trusted financial professionals personally represented to their customers that ARS were highly liquid instruments.
The SEC, in a court filing, listed at least 11 witnesses it may call to testify, including Calvin Sullivan, Morgan Keegans chief strategy officer for fixed income, and Managing Director Thomas Galvin. Along with current and former customers and brokers, the list also includes as well Kevin Giddis, fixed income head at St. Petersburg, Florida-based Raymond James Financial Inc.
Morgan Keegan, which was acquired by Raymond James in April, listed 71 potential witnesses in a court filing. They include Giddis and Galvin as well as customers and brokers.
Morgan Keegan sold as much as $2.2 billion in auction-rate securities that customers were unable to liquidate after the markets collapse in 2008, according to the SEC. The commission sued Morgan Keegan for securities fraud in 2009, even after the firm had begun buying back the investments.
Typically, auction-rate securities were municipal and student-loan-backed bonds with interest rates that were determined through periodic auctions, the SEC said. The company frequently told customers the investments were the same as cash or cash equivalents, the agency said in court papers.
The market for auction-rate securities began to disintegrate in August 2007 after the companies insuring the investments began suffering heavy losses in subprime mortgage- related bonds, the SEC said.
In November 2007, Morgan Keegan learned of a small number of failed auctions for the securities, in which some of the investments were left unsold, according to the SEC suit.
By February 2008, auctions began to fail on a widespread basis, the SEC said.
In March 2008, Morgan Keegan began requiring customers who wished to buy auction-rate securities to sign statements acknowledging it may bSe a considerable period of time before liquidity returns to this investment, the SEC said.
Morgan Keegan said in court filings that auction-rate securities were historically extremely safe and liquid. The company denied the SEC allegations that it failed to tell customers about the risks of investing in them.
In one filing, the company described late 2007 and early 2008 as a small window of time in a larger financial market meltdown unequaled since the Great Depression, in which events were unfolding quickly and unpredictably.
Not `a Penny'
After the market collapsed and before the SEC filed its lawsuit, Morgan Keegan voluntarily bought back $2 billion in auction-rate securities from customers, it said in court documents.
Participants in the repurchase program have not lost a penny on their auction-rate investments, the company said.
In dismissing the case last year, Duffey said in his ruling that failure to predict the market does not constitute securities fraud.
The SEC seeks unspecified monetary penalties against Morgan Keegan. Raymond James paid about $1.2 billion to buy the company from Regions Financial Corp.
The suit is Securities and Exchange Commission v. Morgan Keegan & Company Inc., 1:09-cv-01965, U.S. District Court, Northern District of Georgia (Atlanta).