Morgan Keegan & Co. has agreed to a $200 million settlement with the Financial Industry Regulatory Authority (FINRA) and five state securities regulators that resolves a civil case brought against the firm last year accusing top executives of defrauding investors by artificially inflating the value of mortgage-backed securities in several of its mortgage bond funds.
Under the terms of the agreement, Morgan Keegan, which neither admits or denies wrongdoing as a condition of the settlement, will be required to repay at least some of the estimated $1.5 billion in losses suffered by investors in seven affiliated bond funds that it marketed between January 2006 and September 2007.
FINRA, in announcing the settlement agreement, said that its investigators had found that during the period in question, the company had “marketed and sold” the funds, which were managed by the company’s affiliate, Morgan Asset Management, using sales materials that “contained exaggerated claims, failed to provide a sound basis for evaluating the facts regarding the fund, were not fair and balanced, and did not adequately disclose the impact of market conditions in 2007 that caused substantial losses.”
FINRA says that one of the funds, the Morgan Keegan Select Intermediate Bond Fund, which the company promoted to investors and financial advisors as a “relatively safe, investment-grade fixed income mutual fund investment,” was actually “invested predominantly in structured products, including mezzanine and subordinated tranches of structured securities including sub-prime products.”
These products, FINRA notes, were actually extremely risky. Furthermore, the regulatory organization reports that in early 2007, when Morgan Keegan was aware the fund was running into trouble because of the collapse in the sub-prime mortgage market, the company “failed to adequately disclose those risks in the sales materials or internal guidance.”
In March 2007, at the point when adverse market conditions began to seriously impact affect the funds, FINRA says over 54% of the Intermediate Fund portfolio was invested in asset-backed and mortgage-backed securities and 13.5% was invested in subprime products.
Brad Bennett, Chief of Enforcement at FINRA, said of the settlement, “Firms must ensure that their marketing materials fully and accurately describe the products they sell, including the attendant risks and any relevant information about market conditions that may impact those products. By not fully disclosing the risks, Morgan Keegan portrayed the Intermediate Fund as a safer investment than it was."
Bennett gave credit to the Securities and Exchange Commission and state securities regulators in Alabama, Kentucky, Mississippi, South Carolina and Tennessee for helping FINRA with its investigation and in reaching a settlement with Morgan Keegan.
"The falsification of fund values misrepresented critical information exactly when investors needed it most -- when the subprime mortgage meltdown was impacting the funds," SEC Enforcement Division Director Robert Khuzami said in a statement. "Such misconduct does grievous harm to investors."
Separately, the New York Times is reporting that Morgan Keegan's parent, Regions Financial, has put the firm up for sale and plans to use any eventual proceeds garnered from the sale to help repay a loan it received from the government's Trouble Asset Relief Program.
A Morgan Keegan spokesperson had no comment on the settlement, directing media members to a letter posted on the company’s website from CEO John C. Carson, Jr. The letter, addressed to the company’s clients, said, “It was simply time to put this behind us.”
This substantial settlement stands in marked contrast to two much smaller arbitration cases brought by investors against Morgan Keegan, one for $2.2 million which the company won, and a second, for $9.2 million, which the company lost, but is appealing.
While the particular funds involved in those cases were different, they reportedly also involved mortgaged-backed investment products.
Investors who wish to seek restitution from the settlement funds must apply to the SEC or state regulators, according to FINRA.