Regulators Sue Morgan Keegan Over Toxic Bond Funds

 

The Securities and Exchange Commission has charged Morgan Keegan and its touted managing director, James Kelsoe, with securities fraud for deliberately inflating the value of subprime securities in order to hide losses in Morgan Keegan’s proprietary toxic bond mutual funds. See Joe Bel Bruno’s recent Wall Street Journal article, “Morgan Keegan and Its Onetime Star Kelsoe Charged by SEC.”

The Financial Industry Regulatory Authority (FINRA) filed a separate complaint accusing the firm of misleading investors about the funds’ risks. Various state securities regulators have also filed enforcement actions against Morgan Keegan.

The SEC administrative proceeding filed last Wednesday alleged that Morgan Keegan and Kelsoe took advantage of the absence of any true market value in the funds’ portfolios and perpetrated a scheme to intentionally misprice those securities. The article points out 262 “price adjustments” made by Kelsoe in 2007, which hid the dropping value of toxic securities that plummeted as much as 82% and cost investors more than $1 billion in losses. The SEC also alleged that Kelsoe told one outside broker not to provide price information on one collateralized-debt obligation unless the figure was above a certain level, which resulted in a false valuation of the CDO, according to the article. The SEC also charged that Kelsoe convinced at least one of firm to omit valuations from reports issued to Morgan Keegan or to recognize declines incrementally instead of all at once, according to the article.

Allegations of intentionally mispricing securities are unusual, partly because mutual funds tend to hold easily traded securities. But Morgan Keegan’s bond funds were loaded with securities for which there was no ready market.
The SEC also alleged that Morgan Keegan failed to employ “reasonable procedures to internally price the portfolio securities” in five funds managed by Mr. Kelsoe and, as a result, “recklessly published” inaccurate net asset values, selling shares to investors based on the inflated prices.

The SEC further alleged that Joseph Weller, the head of Morgan Keegan’s accounting department set up to review prices of securities held by Kelsoe’s funds, improperly failed to assure that securities in the funds were properly priced.
Kelsoe and Weller still work at Morgan Keegan, according to the article.
Morgan Keegan is opposing hundreds of arbitration claims filed by customers who are victims of this blatant fraud.

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 35 occasions. Page Perry’s attorneys are actively involved in representing investors in Morgan Keegan cases. For further information, please contact us.