Morgan Keegan got hit Wednesday with enforcement actions from both FINRA and the Securities and Exchange Commission over several bond funds that have cost the firm millions of dollars in investor arbitration complaints.
The FINRA complaint alleges that during January 1, 2006 through Dec. 31, 2007, Memphis-based Morgan Keegan used “false and misleading sales materials” when it marketed and sold the seven bond funds to retail investors. The complaint also states that “all of the funds invested heavily in structured products which caused them serious difficulties beginning in early 2007 and led to their collapse later that year, costing investors well over a billion dollars.” The complaint continued, saying: “The sales materials, combined with the firm’s misleading internal guidance and inadequate training, misled its own financial advisors.”
Jeffrey Erez, a lawyer from Sonn & Erez, who has filed several investor arbitration cases and recently scored a victory against the firm, believes these regulatory actions add credibility to complaints filed by customers.
The seven bond funds were the Regions Morgan Keegan Select Intermediate Bond Fund (the Intermediate fund), the Regions Morgan Keegan Select High Income Fund, the Regions Morgan Keegan Select Short Term Bond Fund, the RMK High Income Fund, the RMK Strategic Income Fund, the RMK Advantage Income Fund, and the RMK Multi-Sector High Income Fund.
FINRA’s complaint singled out Morgan Keegan’s intermediate bond fund in particular, calling it “a risky, contrarian fund.”
Investors weren’t made aware of the risks that the fund faced, FINRA said. “Morgan Keegan failed to take reasonable steps to ensure that its sales force was aware of and disclosed material risks of the intermediate fund to investors,” the complaint stated.
When the subprime crisis hit and hurt these bond funds, “Morgan Keegan failed, in any 2007 sales materials related to any of the bond funds, to disclose these difficulties to customers or that a substantial portion of the bond funds’ portfolios were acutely affected by then-current economic conditions.”
FINRA is seeking “disgorgement of all ill-gotten gains and full restitution for affected investors” in addition to unspecified fines.
Meanwhile, in a separate but related action, the SEC charged Morgan Keegan and Morgan Asset Management (its investment advisor arm) and two employees with fraud. James Kelsoe, 46, the portfolio manager of the funds, was named as in the SEC case as was Joseph Thompson Weller, 44, who served as the firm’s controller and head of its Fund Accounting Department.
The firm and employees allegedly overstated the value of securities backed by subprime mortgages, according the federal agency. The FINRA complaint focuses on the point of sale of investments, while the SEC action focuses on the valuations.
The SEC's division of enforcement said that Morgan Keegan failed to use “reasonable procedures to internally price the portfolio securities in five funds managed by Morgan Asset, and consequently did not calculate accurate ‘net asset values’ for the funds,” according to a press release.