The Mississippi Secretary of State’s office estimates that Morgan Keegan has defrauded Mississippians of $30 million through selling risky, sub-prime mortgage-backed securities. The state, along with Alabama, Kentucky and South Carolina, has filed administrative charges against Morgan Keegan & Company and Morgan Asset Management.
Due to unethical practices, Morgan Keegan lost approximately $2 billion in mutual funds between March 31, 2007, and March 31, 2008, affecting an estimated 13,000 customers, officials have said.
Mississippi’s Secretary of State announced at a press conference April 7 that the office is seeking to stop the company from doing business in the state and an to impose an administrative penalty.
The federal Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), which is overseen by the SEC, are also pursuing Morgan Keegan. Representatives from the agencies attended the conference held at the state Capital in Jackson.
The agencies want Morgan Keegan to disgorge ill-gotten profits and provide full restitution to investors.
No criminal charges have been filed. In Mississippi criminal charges would have to come from the Attorney General. Memphis-based Morgan Keegan is allowed to operate until the agencies issue their final orders. The firm is owned by Regions Financial Corporation, which has not been charged with wrong doing.
In Mississippi Morgan Keegan may request a hearing, which would be moderated by an independent evaluator, who would then report back to the Secretary of State’s office. After the office issues a final order, any appeals could be made to the Chancery Court of the First Judicial District of Hinds County.
The Secretary of State alleges that the company made misrepresentations in marketing materials, misinformed and withheld information from its sales force, and provided preferential treatment to some customers, among other allegations.
Secretary of State Delbert Hosemann said the firm targeted retirees or CD holders. In its investigation, the office conducted on-site branch exams in seven states and has reviewed more than 100,000 e-mails, Hosemann said. The majority of Morgan Keegan employees were ignorant of the company’s unethical practices, he said.
Approximately 1,200 Mississippians invested in Morgan Keegan’s Select Intermediate Bond Fund, and approximately 500 invested in the Select High Income Fund. There may be some overlap in the two categories, the Secretary of State’s office said.
The SEC’s Division of Enforcement alleges that the company failed to use reasonable procedures to price the securities in five funds managed by Morgan Asset and consequently did not calculate accurate “net asset values” (NAVs) for the funds, the agency said in a statement. Morgan Keegan recklessly published the inaccurate daily NAVs and sold shares to investors based on inflated prices, the SEC said.
“This scheme had two architects – a portfolio manager responsible for lies to investors about the true value of the assets in his funds, and a head of fund accounting who turned a blind eye to the fund’s bogus valuation process,” said Robert Khuzami, director of the SEC enforcement division, in a statement.
Morgan Asset’s portfolio manager named in the case is James C. Kelsoe Jr. of Memphis.
This is a “text book example” of how different regulators should coordinate efforts to protect investors, said Bill Hicks, SEC associate director for the Atlanta Regional Office, at the Jackson meeting.
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