By Maria Burnham/The Associated Press
JACKSON — Four states and federal regulators have taken action against Morgan Keegan & Co., accusing the brokerage firm of costing investors, including retirees, more than $2 billion through fraudulent and reckless business practices.
The states of Mississippi, Alabama, Kentucky and South Carolina along with the Securities and Exchange Commission and the Financial Industry Regulatory Authority announced administrative actions Wednesday against the Memphis, Tenn.-based company, which is owned by Birmingham, Ala-based Regions Financial Corp.
Regulators allege Morgan Keegan overstated the value of funds backed by subprime mortgages and used false and misleading sales materials. No criminal charges have been filed.
“This misconduct masked from investors the true impact of the subprime mortgage meltdown on these funds,” said William Hicks, associate director in the SEC’s Atlanta office.
Morgan Asset Management, the subsidiary that managed the funds, and several individuals who work at the two companies also face charges.
State regulators are hoping to force Morgan Keegan to repay investors and to bar the companies from doing business in the states. FINRA, an independent regulator of U.S. securities firms, is also seeking to recover funds for investors, as well as levying unspecified fines. The SEC is waiting on the outcomes of their hearings to decide what actions should be taken. Those actions could include fines, censure, having their licenses revoked and being barred from the securities industry altogether.
In a statement, Morgan Keegan said it has cooperated fully with the investigations of the SEC, FINRA and the states.
“We have always held our obligations to our clients and to regulatory law with the utmost seriousness,” the statement said. “We are disappointed at the decision by these agencies and the states to bring charges which we believe are meritless and based upon erroneous hindsight analysis. We will vigorously refute these charges.”
State regulators accused the companies and four individuals — James C. Kelsoe, Brian B. Sullivan, Gary Stringer and Michele Wood — of misrepresenting the value of the funds and the risk involved and misclassifying the securities held within those funds to entice people to invest.
Kelsoe was senior portfolio manager of the funds. Sullivan is president and chief investment officer for Morgan Asset Management. Stringer is director of investments for the Wealth Management Services division of Morgan Keegan. Wood served as chief compliance officer of the funds.
The states also alleged preferential treatment was given to some customers to the detriment of others and that even after the funds had collapsed, investors were told to continue to hold and buy the funds.
According to the states’ filing, Morgan Keegan targeted customers who owned low-risk CDs and those who were retired or nearing retirement, then concentrated too much of their investments into the risky funds without revealing the amount of risk they would be taking on.
“Morgan Keegan made these funds seem a lot more diversified and a lot less risky than they were,” said Joseph Borg, director of the Alabama Securities Commission.
The SEC filed similar complaints against Morgan Keegan, Morgan Asset Management, but focused primarily on the actions of two employees — Kelsoe and Joseph Thompson Weller, who was head of Morgan Keegan’s fund accounting department.
In its filing, the SEC accuses Kelsoe of purposely manipulating data to make it appear that the funds’ per share market values were greater than they were, even after the subprime mortgages that backed them had collapsed.
“In short, the mortgages were subprime and so was Morgan Keegan’s actions,” Hicks said.
FINRA’s filing was a disciplinary complaint against Morgan Keegan, charging the company misled its brokers and customers in the sale of funds.
“Morgan Keegan violated our advertising rules, our supervision rules and our rule requiring every firm and every broker to abide by just and equitable principals of trade,” said James Shorris, FINRA’s acting chief of enforcement.
As part of the year-and-a-half-long investigation, state investigators visited seven states, interviewed 80 present or former employees and combed through 100,000 e-mails, said Mississippi Secretary of State Delbert Hosemann.
The filings were announced Wednesday during a joint press conference between the Mississippi Secretary of State’s Office, The Alabama Securities Commission, the SEC and FINRA.