Looks like eight Tennessee-based mutual fund directors bent the rules too far.

The Securities Exchange Commission has charged the former members of the boards of directors overseeing five Memphis, Tenn-based mutual funds for fraud.

The funds managed by Memphis, Tenn.-based Morgan Asset Management, which invested in some securities backed by subprime mortgages, were found to have overstated the value of their securities as the housing market was on the brink of financial crisis in 2007. Fair-valued securities make up the more than 60% of the funds' net asset values (NAV).

The SEC alleges that the eight directors delegated their fair valuation responsibility to a valuation committee, without providing meaningful substantive guidance on and insufficient efforts to learn how fair valuation determinations were being made. According to securities laws, fund directors are responsible for determining the fair value of fund securities for which market quotations are not readily available.

The eight directors are: J. Kenneth Alderman of Birmingham, Ala.; Jack R. Blair of Germantown, Tenn.; Albert C. Johnson of Hoover, Ala.; James Stillman R. McFadden of Germantown; Allen B. Morgan Jr. of Memphis; W. Randall Pittman of Birmingham; Mary S. Stone of Birmingham; and Archie W. Willis III of Memphis.

The SEC and other regulators also previously charged the funds' managers — Memphis, Tenn.-based Morgan Keegan & Company and Morgan Asset Management, and two employees — with fraud, charges the firms agreed to pay $200 million to settle.

The SEC's Division of Enforcement had alleged that Morgan Keegan calculated inaccurate NAVs for five funds managed by Morgan Asset. The two employees also charged with fraud were portfolio manager James C. Kelsoe, Jr., and head of the fund accounting department Joseph Thompson Weller.

“While it is understood that fund directors typically assign others the daily task of calculating the fair value of each security in a fund’s portfolio, at a minimum they must determine the method, understand the process, and continuously evaluate the appropriateness of the method used,” stated William Hicks, Associate Regional Director of the SEC’s Atlanta Regional Office, in a SEC press release.

The investigation was conducted by members of the SEC's Atlanta Regional Office and the Asset Management Unit.

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