On July 9, 2009, Morgan Keegan & Company, Inc. (“Morgan Keegan”) (a wholly-owned subsidiary of Regions Financial Corporation), Morgan Asset Management, Inc. and three employees, each received a “Wells” notice from the Staff of the Atlanta Regional Office of the United States Securities and Exchange Commission (the “SEC”) stating that the SEC Staff intends to recommend that the SEC bring enforcement actions for possible violations of the federal securities laws. The potential actions relate to the SEC’s investigation of certain mutual funds formerly managed by Morgan Keegan and Morgan Asset Management. Morgan Keegan received another Wells Notice earlier this year related to its unlawful sales practices in connection with sales of auction rate securities.
Regions did not disclose which mutual funds are subject to potential SEC actions. Among the mutual funds formerly managed by Morgan Keegan and Morgan Asset Management are a number of RMK bond funds (now managed by Hyperion Brookfield Asset Management) that are the subject of countless arbitrations filed by aggrieved investors all across the country, including the following funds that were run by James Kelsoe:
- Regions Morgan Keegan Select High Income Fund
- Regions Morgan Keegan Select Intermediate Bond RMK High Income Fund
- RMK High Income Fund
- RMK Strategic Income Fund
- RMK Multi-Sector High Income Fund
- RMK Advantage Income Fund.
These funds, which boasted outsized gains during the housing bubble, collapsed as a result of concentrated holdings in collateralized debt obligations and other complex structured financial products tied to mortgages. The returns for these bond funds were among the worst of any bond-focused mutual funds in the U.S. for 2008 and 2009.
A Regions spokesperson refused to say whether Mr. Kelsoe was one of the three Morgan Keegan employees who received Wells Notices. Mr. Kelsoe still works at Morgan Keegan but could not be reached, according to Matthias Rieker of the Wall Street Journal in his July 17 article entitled “SEC Warns Regions of Possible Charges.”
Arbitrations and actions against Morgan Keegan allege that Morgan Keegan misrepresented, in words or in substance, the following material facts, among others:
- that the funds were suitable for investors seeking capital preservation,
- that the funds were broadly diversified bond funds,
- that the funds were authorized to use only up to 20% leverage but none was in use,
- that the funds did not invest in speculative derivative securities, and
- that the funds were soundly and honestly managed.
The arbitrations and actions against Morgan Keegan further allege that Morgan Keegan failed to disclose the following, among other material facts, that it was legally obligated to disclose to investors:
- that the funds were not broadly diversified, but were heavily concentrated in exotic and illiquid non-conventional structured finance securities,
- that the funds’ significant investments in subordinate or lower-level “tranches” (or slices) of non-conventional structured finance securities created extraordinary risks that caused the funds to be effectively leveraged many times more than the 20% limit disclosed by Morgan Keegan,
- that the funds had always held and intended to hold high concentrations of low-priority tranches of non-conventional structured finance securities that were heavily concentrated in mortgage backed investments,
- that the funds held significant investments in speculative derivative securities,
- that the open-end the funds’ reported Net Asset Values (NAVs) were highly unreliable because there were heavy concentrations in highly illiquid structured finance securities that had no market values and were being valued based on models or estimates of value,
- that the non-conventional structured finance securities held by the funds were heavily concentrated in mortgage instruments subject to the significant risks that existed at the time in the real estate housing markets,
- that there was substantial risk that the U.S. housing market was overpriced and overbuilt, and that the funds would experience large losses if average housing prices declined,
- that many of the holdings of the funds were securities backed by exotic mortgage instruments that involved far greater risk of loss than traditional mortgages, and
- that its own economist was on record in May of 2005 stating that there was a significant risk of a housing bubble, a housing price contraction, and related financial problems associated with exotic mortgage financing arrangements.
According to Mr. Rieker, analysts have speculated that Regions might sell Morgan Keegan, one of its most valuable core assets. Regions has itself been struggling as a result of heavy losses on real estate loans, particularly in hard-hit Florida and Georgia, reported Mr. Rieker.
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 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in securities cases. For further information, please contact us.