On July 21, 2009, the Securities and Exchange Commission (“SEC”) filed a Complaint against Morgan Keegan & Company, Inc. in the United States District Court for the Northern District of Georgia for misleading investors about the liquidity risks of auction rate securities that it sold. Morgan Keegan sold approximately $925 million of auction rate securities between November 1, 2007 and March 20, 2008 after it knew the market for such securities was deteriorating and it had decided to stop supporting the market, according to the SEC. The Complaint alleges that Morgan Keegan’s sales practices violated the anti-fraud provisions of the United States securities laws, and seeks an order directing Morgan Keegan to stop violating those laws, repurchase all auction rate securities it sold before March 20, 2008, disgorge all ill-gotten gains or unjust enrichment it has enjoyed as a result of its unlawful activities, and pay civil monetary penalties pursuant to federal statutes.
The SEC Complaint further alleges that Morgan Keegan brokers marketed and misrepresented auction rate securities as “cash alternatives,” telling customers, among other things, that auction rate securities carried “zero risk” or were “guaranteed” and were “fully liquid” and “just like a money market.” Morgan Keegan also failed to adequately train its brokers about the liquidity risks of auction rate securities; knew of, but failed to disclose, significant and increasing risks associated with auction rate securities; accelerated its sales of auction rate securities in late 2007 and 2008, despite its knowledge of the increased risks; and affirmatively downplayed liquidity risks to its brokers and customers, according to the SEC.
“Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms’ ARS auctions began to fail,” said the SEC, as reported by the Associated Press.
Morgan Keegan is a member of the Financial Industry Regulatory Authority (“FINRA”) and is bound by FINRA rules of conduct that provide in part: “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” It is a challenge to imagine how such conduct is consistent with “high standards of commercial honor.”
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