September 7, 2013

Morgan Keegan to Pay $60,000 Fine Over Inadequate Supervision Over SBA Pools and Sales

Morgan Keegan & Co. has agreed to pay the Financial Industry Regulatory Authority $60,000 over allegations that its Small Business Administration Desk bought small business loans guaranteed by the gov’t from regional banks in this country and then pooled together the loans with qualities that were similar, securitizing them into SBA pools and then selling them to institutional clients.

When the demand for these pools started to go down, the inventory at the Desk went up a lot and stayed over Morgan Keegan’s allowable levels so that they seemed lower than what was actual and therefore in compliance with what was allowed. As a result, the head trader went into fake pool trades totaling about $82 million.

Per FINRA’s findings, because of the fake trades, Morgan Keegan thought its SBA loan levels went down down by $75 million. Also, aside from allegedly making the false trades happen, the trader moved forward the dates of settlement on a repeated basis, continuing to move the date ahead whenever a settlement date was approaching. This gave him more time so he could sell the SBA pools, leading to the generation of correct and cancel tickets for trades that went on for several months. The head trader later admitted his wrongdoing and Morgan Keegan fired him.

The SRO found that Morgan Keegan's supervisory system and written supervisory procedures (WSP) for government loans were not adequate enough that they were able to prevent the fictitious trading that the head trader engaged in. FINRA also said that the firm lacked a way to monitor SBA loans that were more than four months old, as well as aged SMA pools, nor did it have a system for comparing and confirming ex-clearing transactions or one to assess transactions that were modified or cancelled to determine if they were reasonable.

FINRA says that Morgan Keegan did not properly address the SBA Desk inventory positions’ marking because the firm’s WSPs mandated that SBA pools get marked monthly, rather than daily. The WSPs did not properly prevent the head trader from approving his own transactions without a supervisor overseeing his actions.

Even as it submitted its Letter of Acceptance, Waiver, and Consent to FINRA, accepting the fine and ensure and consenting to the sanctions described, Morgan Keegan did not deny or admit to any wrongdoing.

Financial Industry Regulatory Authority


More Blog Posts:
Previous Dissent by Arbitrator is Not Reason to Vacate Award Morgan Keegan Was Ordered to Pay Investors, Says District Court, Stockbroker Fraud Blog, April 8, 2013

Court Upholds Ex-NBA Star Horace Grant's $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker Fraud Blog, October 30, 2012

Morgan Keegan Must Buy Back Auction-Rate Securities and Pay $110,500, Says District Judge, Institutional Investor Securities Blog, February 12, 2013

Continue reading "Morgan Keegan to Pay $60,000 Fine Over Inadequate Supervision Over SBA Pools and Sales" »

February 12, 2013

Morgan Keegan Must Buy Back Auction-Rate Securities and Pay $110,500, Says District Judge

A US District judge is ordering Morgan Keegan & Co. to repurchase auction-rate securities and make a payment of $110,500 in an ARS lawsuit filed by the SEC that accuses the financial firm of misleading investors about these investments’ risks. The SEC contends that the $2.2B in securities that the firm sold left clients with frozen funds when the market failed in 2008.

Even after the financial firm started buying back ARS—it has since repurchased $2B in ARS of its own accord—the SEC decided to proceed with its securities case. The Commission contends that even as the ARS market failed, Morgan Keegan told clients that the securities being sold came with “zero risk” and were short-term investments that were liquid.

Now, Judge William Duffey Jr. has found that although Morgan Keegan’s brokers did not act fraudulently, some of them acted negligently when they left out key information and made misrepresentations when selling the securities. This including not apprising investors about the risk of failure, liquidity loss, or that interest rates might vary.

Duffey is the same judge who dismissed this very case in 2011. However, last May, the US Court of Appeals in Atlanta overturned his decision after determining that he wrongly found that verbal comments made to certain customers were not material because of disclosures that could be found on the financial firm’s web site.

Morgan Keegan Trial Judge to Decide SEC Case He Dismissed, Bloomberg.com, November 26, 2012


More Blog Posts:
Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds, Institutional Investor Securities Blog, December 17, 2012

Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker fraud Blog, October 30, 2012

Continue reading "Morgan Keegan Must Buy Back Auction-Rate Securities and Pay $110,500, Says District Judge " »

December 17, 2012

Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds

The U.S. Securities and Exchange Commission has filed civil charges against Morgan Keegan founder Allen Morgan Jr. and several other former mutual fund board members for allegedly failing to supervise the managers accused of inaccurately pricing toxic mortgage-backed assets prior to the financial crisis. According to Reuters, this is a rare attempt by the regulator to hold a mutual fund’s board accountable for manager wrongdoing and it is significant. (Fund manager James Kelsoe hasconsented to pay a $500,000 penalty related to this matter and he is barred from the securities industry in perpetuity. Comptroller Joseph Thompson Weller consented to pay a $50,000 penalty.)

Last year, Morgan Keegan and Morgan Asset Management consented to pay $200 million to settle SEC subprime mortgage-backed securities fraud charges accusing them of causing the false valuations of the securities in five funds and failing to use reasonable pricing methods. (This allegedly led to “net asset values” being calculated for the funds.) The inaccurate daily NAVS would then be published and investors would buy shares at inflated prices. The funds’ value eventually declined significantly.

According to the Commission, the eight ex-board members violated laws mandating that fund directors help decide what a security’s fair value is when market quotations don’t exist. Instead of trying to figure out how fair valuation determinations work, the directors allegedly gave this task to a valuation committee but without providing “meaningful substantive guidance.”

Allen Morgan Jr., who is a Morgan Keegan cofounder, was CEO and Chairman until 2003.The seven other board members facing SEC charges include Kenneth Alderman, Mary S. Stone, W. Randall Pittman, Albert C. Johnson, James Stillman R. McFadden, Jack R. Blair, and Archie W. Willis III.

Already, Morgan Keegan is contending with over 1,000 arbitration lawsuits involving its bond funds that had invested in high risk MBS but were marketed as safe. When the subprime market collapsed, the funds lost up to 80% of their value.

Recently, Morgan Keegan and over 10,000 investors in a closed-end fund reached a $62 class million settlement. Lion Fund LP, the lead plaintiff and a Texas hedge fund, claimed that it had made a $2.1 million investment.

Morgan Keegan is owned by Raymond James (RJF), which bought the firm from Regions Financial Corporation. Other securities lawsuits still pending against it also involve conventional and open-ended funds.

Unfortunately, too many people and entities sustained huge losses because the risks of a number of types of securities leading up to the global crisis and the housing bubble’s implosion were downplayed by financial firms and their representatives. At Shepherd Smith Edwards and Kantars, our subprime mortgage-backed securities lawyers represent investors throughout the US. Contact our securities law firm today.

SEC Charges Eight Mutual Fund Directors for Failure to Properly Oversee Asset Valuation, SEC, December 10, 2012

SEC Order
(PDF)


More Blog Posts:
Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

Morgan Keegan & Company Ordered by FINRA to Pay $555,400 in Texas Securities Case Involving Morgan Keegan Proprietary Funds, Stockbroker fraud Blog, September 6, 2011

Morgan Keegan Ordered by FINRA to Pay RMK Fund Investors $881,000, Stockbroker Fraud Blog, April 24, 2011

Continue reading "Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds" »

November 27, 2012

Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal

Almost a year and a half after US District Judge William Duffey Jr. dismissed the SEC’s lawsuit accusing Morgan Keegan & Co. of misleading thousands of auction-rate securities investors about the risks involved with these investments, he must now rule on the same case again. This latest trial in federal court comes after the 11th U.S. Circuit Court of Appeals in Montgomery, Alabama dismissed Duffey’s decision on the grounds that he erred when he concluded that the verbal comments made by brokers to four clients were immaterial because of disclosures that were on the retail brokerage firm’s website. Morgan Keegan is a Raymond James Financial (RJF.N) unit.

In SEC v. Morgan Keegan & Company Inc., regulators are claiming that the brokerage firm told its clients that over $2B securities came with no risk, even as the ARS market was failing, and that the investments were short-term and liquid. The commission filed its ARS fraud lawsuit against the broker-dealer in 2009.

During opening statements at this latest trial, prosecutors again contended that the brokers did not tell the investors that their cash could become frozen indefinitely. Reports Bloomberg News, orange grower John Tilis, who is a witness in this case, said that he decided to invest $400K in ARS in 2007 because he thought they were a safe place to keep his money until he had to pay taxes in April the next year. Tilis claims that the firm’s broker had informed him that he would be easily able to get his funds when he needed them. Yet when Tilis attempted to do so, he said that all the broker would tell him is that the ARS couldn’t be sold. (Morgan Keegan later refunded his principal.)

The SEC is arguing that Morgan Keegan found out about a number of failed auctions in November of 2007. In March 2008, one month after even more auctions had begun failing, the brokerage company started mandating that customers that wanted to buy ARS sign statements noting that they were aware that it might be some time before the investments became liquid again.

Meanwhile, Morgan Keegan is maintaining that it did not fail to inform clients about the risks involved in auction-rate securities, which had a history of being very “safe and liquid.” The firm contends that not being able to predict the future is not the same as securities fraud (Duffey noted this same logic when he dismissed the SEC lawsuit last year), and that even prior to the SEC lawsuit, it bought back $2B in ARS from clients. Morgan Keegan says that those who took part in the buyback program did not lose any money.

Morgan Keegan Trial Judge to Decide SEC Case He Dismissed, Bloomberg, November 26, 2012

U.S. SEC fraud lawsuit vs Morgan Keegan revived, Reuters, May 2, 2012

SEC v. Morgan Keegan & Company Inc. (PDF)


More Blog Posts:

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities, Institutional Investor Securities Blog, May 8, 2012

Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker fraud Blog, October 30, 2012

Morgan Keegan & Company Ordered by FINRA to Pay $555,400 in Texas Securities Case Involving Morgan Keegan Proprietary Funds, Stockbroker fraud Blog, September 6, 2011

Continue reading " Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal" »

October 12, 2012

FINRA Securities Fraud Roundup: Guggenheim Securities Fined $800K For Failure to Supervise CDO Traders, Brokerage Firm Managing TIC Securities Doesn’t Have to Arbitrate Investor Claims, & Investor Award in Morgan Keegan Funds is Upheld

FINRA is fining Guggenheim Securities, LLC $800,000 for allegedly not supervising two collateralized debt obligation traders accused of hiding a trading loss. The traders are Alexander Rekeda and Timothy Day. Rekeda, who is the financial firm’s ex-CDO Desk head, has to pay $50,000 and is suspended for a year. Day’s fine is $20,000 and he received a four month suspension. By settling, none of the parties are denying or admitting to the FINRA securities charges.

Due to a failed trade, the CDO Desk at Guggenheim acquired a €5,000,000 junk-rated tranche of a CLO in October 2008. When the desk was unable to sell the position, Rekeda and Day convinced a hedged fund client to buy the collateralized loan obligation for $950,000 more than it had initially agreed to pay by misrepresenting the CLA. FINRA said that to conceal the CLO position’s trading loss, the two traders gave the customer order tickets that upped the CLO position’s price and lowered the price of other positions. Day, allegedly at Rekeda’s order, is accused of lying to the client when the latter asked about the price modifications by saying that the CLO position had a third-party seller that had settled the trade at a higher price and wanted the customer to pay this rate. The client agreed, and, in exchange, Day and Rekeda said that they would compensate the customer via other transactions, including waiving the fees owed related to resecuritization transactions, adjusting the prices on several other CLO trades, and providing a payment in cash. No records, however, indicate that these transactions were related to the CLO overpayment.

In other FINRA securities news, the U.S. Court of Appeals for the Eighth Circuit has affirmed a district court’s ruling that a broker-dealer that acted as the managing broker-dealer in a Tenant in Common securities cannot be compelled to arbitrate claims filed by investors of the failed enterprise. In Berthel Fisher & Co. Financial Services Inc. v. Larmon, Judge Michael Melloy agreed that for the SRO’s purposes, the investors are not the financial firm’s “customers.”

The FINRA securities case stems from a ’07 and ’08 securities offering involving investors that bought TIC securities that were issued by Minnesota limited liability companies. Berthel Fisher & Co. Financial Services Inc. acted as the managing broker-dealer that put together a number of FINRA-registered brokerages, the Selling Group Members, that offered the securities to their clients, including these investors. However, the court said that per Fleet Boston Robertson Stephens Inc. v. Innovex Inc., a relationship doesn’t exist between Berthel and the Investors despite the latter’s contention that the brokerage firm failed to conduct proper due diligence on the offerings. Rather, held the 8th circuit, a customer is defined as one with a business relationship with a FINRA member that directly involves brokerage/investment services.

Meantime, in the U.S. District Court for Northern District of Alabama, investors who were involved in the now failed Morgan Keegan investment funds were pleased to hear that the FINRA arbitration award they were granted in their derivatives case has been affirmed. The plaintiffs accused Morgan Keegan & Co. Inc. of misleading them to the point that they agreed to get involved in high-risk investment funds despite their conservative goals. The funds lost over 90% of their value and the investors alleged breach of fiduciary duty, Alabama Securities Act violations, rule violations, and other tort law causes of action.

After the arbitration panel chose to issue an award to the investors, Morgan Keegan sought to have it vacated by claiming that the FINRA panel went beyond its powers by considering derivatives claims and granting an award on the grounds of alleged wrongdoing by nonmembers and nonparties. The district court, however, disagreed, saying that there is enough evidence to find that the arbitrators did not exceed their authority in deciding to hear the investors' claims.

FINRA Fines Guggenheim Securities $800,000 for Failing to Supervise CDO Traders; Two Traders Sanctioned for Efforts to Hide Loss, FINRA, October 11, 2012

Berthel Fisher & Co. Financial Services Inc. v. Larmon (PDF)

Butterworth v. Morgan Keegan & Co. Inc.


More Blog Posts:

Institutional Investor Securities Roundup: Biremis, Corp. Settles Securities Violation Charges with Industry Bar, FINRA Contacts Broker-Dealers About Conflicts of Interest Via Sweeps Letters, & Regulators Examine Financial Market Infrastructures, Institutional Investor Securities Blog, August 8, 2012

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities, Institutional Investor Securities Blog, May 8, 2012

Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court, Stockbroker Fraud Blog, September 13, 2012

May 8, 2012

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities

The 11th U.S. Circuit Court of Appeals has revived the US Securities and Exchange Commission’s fraud lawsuit against Morgan Keegan & Co. accusing the financial firm of allegedly misleading investors about auction-rate securities. The federal appeals court said that a district judge was in error when he found that alleged misrepresentations made by the financial firm’s brokers were immaterial. The case will now go back to district court. Morgan Keegan is a Raymond James Financial Inc. (RJF) unit.

The SEC had sued Morgan Keegan in 2009. In its complaint, the Commission accused the financial firm of leaving investors with $2.2M of illiquid ARS. The agency said that Morgan Keegan failed to tell clients about the risks involved and that it instead promoted the securities as having “zero risk” or being “fully liquid” or “just like a money market.” The SEC demanded that Morgan Keegan buy back the debt sold to these clients.

In 2011, U.S. District Judge William Duffey ruled on the securities fraud lawsuit and found that Morgan Keegan did adequately disclose the risks involved. He said that even if some brokers did make misrepresentations, the SEC had failed to present any evidence demonstrating that the financial firm had put into place a policy encouraging its brokers-dealers to mislead investors about ARS liquidity. Duffey pointed to Morgan Keegan’s Web site, which disclosed the ARS risks. He said this demonstrated that there was no institutional intent to fool investors. He also noted that a “failure to predict the market” did not constitute securities fraud and that the Commission would need to show examples of alleged broker misconduct before Morgan Keegan could be held liable.

Citing the US Supreme Court’s ruling in Basic v Levinson, the circuit court found that the misleading statements made by Morgan Keegan brokers and the alleged failure to reveal the known risks involving ARS could have easily been perceived by a reasonable investor to be a modification of the information about ARS that Morgan Keegan had made available. The 11th circuit panel also said that seeing as Morgan Keegan knew there were auctions that were failing in 2007 and early 2008, giving clients "general cautionary language" about the debt behind trading confirmations was not enough. (Although the panel agreed that a written disclosure of the risks involved could trump any sales pitch omissions, it pointed to circuit precedent, which did not allow this “as a matter of law.”)

The appeals court rejected the district judge’s narrow focus on how many alleged victims there might have been, as well as his emphasis on the Commission having to prove institutional intent.

Investors were left in a financial bind when the $330 billion ARS market froze in February 2008. They could not get their now frozen money from this largely, illiquid debt, which was a shock to them seeing as most of them were told that auction-rate securities were liquid, like cash. Morgan Keegan and other financial firms have since been pursued by regulators, as well as investors seeking financial recovery.

Over the last few years, a number of financial firms have had to pay back billions in dollars of ARS to their clients. Our auction-rate securities lawyers have been helping investors recover such losses. Contact Shepherd Smith Edwards and Kantas, LTD, LLP today.

Broker Omissions Could Doom Morgan Keegan, Courthouse News Service, May 7, 2012

Fraud lawsuit vs Morgan Keegan revived, Chicago Tribune, May 2, 2012

SEC v. Morgan Keegan & Co., 11th U.S. Circuit Court of Appeal (PDF)


More Blog Posts:
Oppenheimer & Co. Must Buyback $6M in Auction-Rate Securities from Investor, Says FINRA Arbitration Panel, Institutional Investor Securities Blog, January 11, 2012

Raymond James Financial to Buy Morgan Keegan from Regions Financial for $930 Million, January 14, 2012

Texas Securities Fraud: Raymond James Financial Services Pays Elderly Senior Investor About $1.8M Following Loss of Appeal, Stockbroker Fraud Blog, December 2, 2011

January 14, 2012

Raymond James Financial to Buy Morgan Keegan from Regions Financial for $930 Million

This week, Regions Financial Corp. (NYSE: RF) issued a statement announcing that Raymond James Financial Inc. (RJF) will be paying it $930 million to purchase Morgan Keegan & Company, Inc. and related affiliates in a stock purchase agreement. (Regions Morgan Keegan Trust and Morgan Asset Management, however, are not part of the sale.) Prior to closing, Morgan Keegan will pay Regions $250 million. This agreement, of course, will have to receiver regulatory approvals and meet closing conditions.

Also per the agreement:
• For all litigation matters connected to pre-closing activities, Regions will protect Raymond James against these losses. Meantime, Regions will benefit from already existing reserves by Regions at Morgan Keegan.

• Raymond James’ Public Finance and Fixed Income businesses will be headquartered in Memphis, Tennessee, which is also Morgan Keegan’s main base.

• Raymond James and Regions will become involved in a number of business relationships that will benefit both parties.

Regions placed Morgan Keegan on the market last June.

The sale is expected to close during the first quarter of 2012. This stock purchase agreement would allow Raymond James to grow its retail brokerage network, turning it into one of the largest firms in the US.

According to Regions, the deal would give it additional revenue opportunities, as a result of its solid partnership with Raymond James, for loan referrals, processing relationships, and deposits. The sale would also help Regions pay the federal government back some of the $3.5 billion that it received during the height of the economic crisis in 2008. However, Regions also anticipates a $575 million to $745 million impairment charge from the deal.

The Wall Street Journal says that to keep some Morgan Keegan management and financial advisers from leaving in the wake of the sale, Raymond James intends to offer up to $215 million in retention payments (restricted stock units and cash) as part of the acquisition deal. Already, a number of key Morgan Keegan employees have placed their signatures to employment contracts with Raymond James. The deal ups Raymond James headcount of financial advisers to 6000—a 60% increase and a 1000 more than prior to the deal. This will rank it third behind Morgan Stanley Smith Barney and just under Bank of America Corp.'s (BAC) Merrill Lynch.

It’s Official: Raymond James Buys Morgan Keegan, for $930 Million, The Wall Street Journal, January 11, 2012

Raymond James Said to Near $930 Million Purchase of Broker Morgan Keegan, Bloomberg, January 11, 2012


More Blog Posts:
Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute, Institutional Investor Securities Blog, September 1, 2010

Morgan Keegan & Company Ordered by FINRA to Pay $555,400 in Texas Securities Case Involving Morgan Keegan Proprietary Funds, Stockbroker Fraud Blog, September 6, 2011

Claims Filed Against Morgan Keegan Division of Regions Financial Causes Shortage of Arbitrators, Stockbroker Fraud Blog, February 8, 2010

Continue reading "Raymond James Financial to Buy Morgan Keegan from Regions Financial for $930 Million" »

Contact Us

(800) 259-9010

Our Other Blog

Recent Entries