Today Finra and the SEC, in connection with regulators from Alabama, Kentucky, Mississippi, South Carolina and Tennessee, unveiled the settlement, which surrounded Morgan's use of mortgage-backed and asset-backed securities inside the funds. And the Birmingham, Alabama-based bank confirmed that it has hired Goldman Sachs "to explore potential strategic alternatives for Morgan Keegan," which has more than 1,200 advisors.
As for Morgan Asset Management and Regions Morgan
Keegan Trust, they are not part of the strategic review.
"The resolution of this legacy regulatory matter gives Regions greater flexibility with respect to the Morgan Keegan franchise and the ability to explore opportunities that are consistent with our strategic and capital planning initiatives," stated Grayson Hall, president and CEO of Regions.
The scandal in question actually predates the recent financial crisis, spanning from January 2006 through September 2007. Since then, Regions has faced numerous investor lawsuits and arbitration claims over the funds. Regions even dumped its own manager, Morgan Asset Management, and PM James Kelsoe, from the funds three years ago, hiring Hyperion Brookfield Asset Management as a sub-advisor [see The MFWire, 4/22/2008].
The SEC found that, thanks to the sub-prime assets, Morgan calculated and published inaccurate NAVs for the funds in questions. Finra singled out the Regions Morgan Keegan Select Intermediate Bond Fund (one of the seven)and Morgan's marketing and sales materials regarding it.
Of the $210 million, $200 million will go to investors. The SEC will $25 million in disgorgement and interest and $75 million in penalties into a Fair Fund for the seven funds' shareholders. Another $100 million will go into a state fund for distribution. Kelsoe himself will pay $500,000 in penalties and is barred from the industry, and comptroller Joseph Weller will pay $50,000. And up to $10 million in penalties will go to the five states.
Company Press Release
BIRMINGHAM, Ala., Jun 22, 2011 -- Regions Financial Corp. (NYSE:RF) announced today that its brokerage and investment banking subsidiary, Morgan Keegan & Company, Inc., and its asset management subsidiary, Morgan Asset Management, have agreed to a settlement of previously disclosed regulatory matters with the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and a group of state securities regulators with respect to issues concerning certain mutual funds and closed-end funds (the RMK Funds), a business that Morgan Asset Management divested in 2008.
As part of the settlement, Morgan Keegan and Morgan Asset Management agreed to pay $210 million, of which $200 million will be placed into two Fair Funds for the benefit of investors in the RMK Funds in any state. The full amount of the settlement was previously accrued.
Regions also announced that with these regulatory matters settled, and as part of its ongoing capital planning process, it has retained Goldman, Sachs & Co. to explore potential strategic alternatives for Morgan Keegan as Regions evaluates how best to manage its capital to increase shareholder value. Morgan Asset Management and Regions Morgan Keegan Trust are not included in this review.
Regions President and CEO Grayson Hall said, "Morgan Keegan has been a subsidiary of Regions since 2001 and is a leading brokerage and investment banking firm based in the Southeast and a very valuable franchise. However, the resolution of this legacy regulatory matter gives Regions greater flexibility with respect to the Morgan Keegan franchise and the ability to explore opportunities that are consistent with our strategic and capital planning initiatives.
"Regions is committed to continuing to provide a full range of products and services seamlessly to its customers, including through a continuing relationship with Morgan Keegan," Hall said.
John Carson, CEO of Morgan Keegan said, "Morgan Keegan is excited by the opportunity to further develop the brand that we have built over the last 40 years. Morgan Keegan's core businesses remain strong and, with this settlement behind us, we look forward to continuing to serve our individual, institutional and investment banking clients and to growing our business."
The $210 million payment consists of:
$200 million paid into two Fair Funds, one administered under instructions from the SEC, and another administered under instructions from the states, with $100 million to be paid into each of the two funds; and
A penalty of up to $10 million to be paid to those states that join in the settlement.
The five states initially included in the settlement are: Alabama, Kentucky, Mississippi, South Carolina, and Tennessee. The $10 million state penalty will be shared among any participating states.
An Administrator will identify the investors in the Funds who suffered losses, evaluate investor claims and distribute the funds.
The Fair Funds are available to investors in every state without regard to whether their state is participating in the settlement.
About Regions Financial Corporation
Regions Financial Corporation, with $132 billion in assets, is a member of the S&P 500 Index and is one of the nation's largest full-service providers of consumer and commercial banking, trust, securities brokerage, mortgage and insurance products and services. Regions serves customers in 16 states across the South, Midwest and Texas, and through its subsidiary, Regions Bank, operates approximately 1,800 banking offices and 2,200 ATMs. Additional information about Regions and its full line of products and services can be found at www.regions.com.
About Morgan Keegan
Morgan Keegan & Company, Inc., a full-service brokerage and investment banking firm, is the securities brokerage arm of Regions Financial Corp. (NYSE: RF). Headquartered in Memphis, Tenn., Morgan Keegan serves individual and institutional investors in over 300 offices in 20 states. Additional information about Morgan Keegan can be found at www.morgankeegan.com.
Washington, D.C., June 22, 2011 – The Securities and Exchange Commission, state regulators, and the Financial Industry Regulatory Authority (FINRA) announced today that Morgan Keegan & Company and Morgan Asset Management have agreed to pay $200 million to settle fraud charges related to subprime mortgage-backed securities. Two Morgan Keegan employees also agreed to pay penalties for their alleged misconduct, including one who is now barred from the securities industry.
The Memphis-based firms, former portfolio manager James C. Kelsoe Jr., and comptroller Joseph Thompson Weller were accused in an administrative proceeding last year of causing the false valuation of subprime mortgage-backed securities in five funds managed by Morgan Asset Management from January 2007 to July 2007. The SEC’s order issued today in settling the charges also finds that Morgan Keegan failed to employ reasonable pricing procedures and consequently did not calculate accurate “net asset values” for the funds. Morgan Keegan nevertheless published the inaccurate daily NAVs and sold shares to investors based on the inflated prices.
The SEC brought its enforcement action in coordination with FINRA and a task force of state regulators from Alabama, Kentucky, Mississippi, Tennessee and South Carolina.
“The falsification of fund values misrepresented critical information exactly when investors needed it most – when the subprime mortgage meltdown was impacting the funds,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Such misconduct does grievous harm to investors.”
William Hicks, Associate Director for the SEC’s Atlanta Regional Office, added, “This enforcement action makes clear that the SEC will deal firmly with those who abuse their responsibility to assign accurate values to securities or other assets held by funds.”
The SEC’s order finds that Kelsoe instructed Morgan Keegan’s fund accounting department to make arbitrary “price adjustments” to the fair values of certain portfolio securities. The price adjustments ignored lower values for those same securities provided by outside broker-dealers as part of the pricing process, and often lacked a reasonable basis. In some instances, when price information was received that was substantially lower than current portfolio values, fund accounting personnel acted at the direction of Kelsoe and lowered values of bonds over a period of days in a series of pre-planned reductions to values at or closer to the price confirmations. As a result, during the interim days, the Morgan Keegan did not price those bonds at their current fair value.
The SEC’s order further finds that Kelsoe screened and influenced the price confirmations obtained from at least one broker-dealer. Among other things, the broker-dealer was induced to provide interim price confirmations that were lower than the values at which the funds were valuing certain bonds, but higher than the initial confirmations that the broker-dealer had intended to provide. The interim price confirmations enabled the funds to avoid marking down the value of securities to reflect current fair value. In some instances, Kelsoe induced the broker-dealer to withhold price confirmations, where those price confirmations would have been significantly lower than the funds’ current valuations of the relevant bonds.
According to the SEC’s order, through his actions Kelsoe fraudulently prevented a reduction in the NAVs of the funds that should otherwise have occurred as a result of the deterioration in the subprime securities market in 2007. His misconduct occurred in the context of a nearly complete failure by Morgan Keegan to employ the fair valuation policies and procedures adopted by the funds’ boards of directors to fair value the funds’ portfolio securities.
Under the settlement, Morgan Keegan is required to pay $25 million in disgorgement and interest and a $75 million penalty to the SEC to be placed into a Fair Fund for the benefit of investors harmed by the violations. Morgan Keegan will pay $100 million into a state fund that also will be distributed to investors. The firms are additionally required to abstain from involvement in valuing fair valued securities on behalf of investment companies for three years. Kelsoe agreed to pay $500,000 in penalties and be barred from the securities industry by the SEC, and Weller agreed to pay a penalty of $50,000.
The SEC’s case originated from an SEC examination by Barbara Martin, Glen Richards and Christopher Ray. The matter was investigated by Steve Donahue, Jack Westrick and Ed Saunders. The case was litigated by Graham Loomis, Rob Gordon, John O’Halloran, Shawn Murnahan, Jerome Dewitt, Debbie Moore and Eunita Holton with the assistance of valuation specialist Rick Mayfield. The case was brought under the supervision of Atlanta Regional Director Rhea Dignam and Associate Regional Director William Hicks.
WASHINGTON -- The Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC) and five state regulators from Alabama, Kentucky, Mississippi, South Carolina and Tennessee announced today that each has settled enforcement proceedings against Morgan Keegan & Company, Inc. Morgan Keegan will pay restitution of $200 million for customers who invested in seven affiliated bond funds, including the Regions Morgan Keegan Select Intermediate Bond Fund (Intermediate Fund). Morgan Keegan's affiliate, Morgan Asset Management, managed the funds.
FINRA found that from the beginning of Jan. 2006 to the end of Sept. 2007, Morgan Keegan marketed and sold the Intermediate Fund to investors using sales materials that contained exaggerated claims, failed to provide a sound basis for evaluating the facts regarding the fund, were not fair and balanced, and did not adequately disclose the impact of market conditions in 2007 that caused substantial losses to the value of the Intermediate Fund.
The Intermediate Fund invested predominantly in structured products, including mezzanine and subordinated tranches of structured securities including sub-prime products. Morgan Keegan marketed the Intermediate Fund as a relatively safe, investment-grade fixed income mutual fund investment when, in fact, the fund was exposed to risks associated with its investments in mortgage-backed and asset-backed securities, and subordinated tranches of structured products. By the beginning of 2007, Morgan Keegan was aware that the Intermediate Fund was experiencing difficulties related to the holdings in the fund impacted by turmoil in the mortgage-backed securities market yet failed to adequately disclose those risks in the sales materials or internal guidance. In March 2007, when adverse market conditions began to affect the fund, over 54 percent of the portfolio was invested in asset-backed and mortgage-backed securities, and 13.5 percent was invested in subprime products.
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "FINRA acknowledges the efforts of the Securities and Exchange Commission and state securities regulators in resolving this matter against Morgan Keegan and providing restitution to harmed investors. Firms must ensure that their marketing materials fully and accurately describe the products they sell, including the attendant risks and any relevant information about market conditions that may impact those products. By not fully disclosing the risks, Morgan Keegan portrayed the Intermediate Fund as a safer investment than it was."
FINRA's settlement includes findings that Morgan Keegan failed to establish, maintain and enforce an adequate supervisory system, including written supervisory procedures reasonably designed to achieve compliance with NASD rules. Morgan Keegan's supervisory system and written procedures were not reasonably designed to ensure that its sales literature disclosed certain information as to risk and did not contain exaggerated claims. As a result, Morgan Keegan failed to adequately describe the nature, holdings and certain risks of the Intermediate Fund. In addition, beginning in 2007 when the particular risks associated with the Intermediate Fund's holdings began to impact negatively the holdings in the fund, Morgan Keegan failed to take steps reasonably designed to revise its advertising materials to inform customers of the specific risks of investing in the fund under the current market conditions.
This investigation was conducted by Gino Ercolino, David Fenimore, Gregory Firehock, Theresa Ridder and Richard Santiago of the Enforcement Department, with the assistance of FINRA's Advertising Regulation Department.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2010, members of the public used this service to conduct 17.2 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this complaint, as well as other disciplinary documents, in FINRA's Disciplinary Actions Online database.
FINRA is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business—from registering and educating industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit www.finra.org.