Morgan Keegan & Company and Morgan Asset Management have agreed to pay $200 million to settle fraud charges related to bond funds that invested in subprime mortgage-backed securities. The charges were filed by the Securities and Exchange Commission, state regulators from Alabama, Kentucky, Mississippi, Tennessee and South Carolina, and the Financial Industry Regulatory Authority (FINRA). Former RMK bond fund portfolio manager James C. Kelsoe Jr., and comptroller Joseph Thompson Weller also agreed to pay penalties for their misconduct. Kelsoe is now barred from the securities industry.
Kelsoe and Weller caused false valuation of subprime mortgage-backed securities in five funds managed by Morgan Asset Management from January 2007 to July 2007, according to the regulators. Morgan Keegan also failed to employ reasonable pricing procedures, failed to calculate accurate “net asset values” for the funds, published the inaccurate daily NAVs, and sold shares to investors based on the inflated prices, according to regulators. The SEC brought its enforcement action in coordination with FINRA and a task force of state regulators from Alabama, Kentucky, Mississippi, Tennessee and South Carolina.
“The falsification of fund values misrepresented critical information exactly when investors needed it most ? when the subprime mortgage meltdown was impacting the funds,” Robert Khuzami, Director of the SEC’s Division of Enforcement, was quoted as saying, adding: “Such misconduct does grievous harm to investors.”
William Hicks, Associate Director for the SEC’s Atlanta Regional Office, said: “This enforcement action makes clear that the SEC will deal firmly with those who abuse their responsibility to assign accurate values to securities or other assets held by funds.”
The SEC’s order found that Kelsoe instructed Morgan Keegan’s fund accounting department to make arbitrary “price adjustments” to the fair values of certain portfolio securities. In so doing, Kelsoe disregarded lower values for those same securities provided by outside broker-dealers, and induced at least one broker-dealer to provide inaccurate confirmations. As a result, Morgan Keegan did not price those bonds at their current fair value.
Kelsoe thus fraudulently prevented a reduction in the NAVs of the funds that should have occurred as a result of the deterioration in the subprime securities market in 2007, according to the regulators. Morgan Keegan failed to employ the fair valuation policies and procedures adopted by the funds’ boards of directors to fair value the funds’ portfolio securities.
Under the settlement, Morgan Keegan is required to pay $25 million in disgorgement and interest and a $75 million penalty to the SEC to be placed into a Fair Fund for the benefit of investors harmed by the violations. Morgan Keegan will pay $100 million into a state fund that also will be distributed to investors. The firms are additionally required to abstain from involvement in valuing fair valued securities on behalf of investment companies for three years. Kelsoe agreed to pay $500,000 in penalties and be barred from the securities industry by the SEC, and Weller agreed to pay a penalty of $50,000.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in Morgan Keegan cases. For further information, please contact us.