Resolving complaints on Morgan Keegan troubles already has $2B price tag
If time is money, Birmingham-based Regions Bank is all but guaranteed to see a rising price tag for resolving federal and state complaints that misleading advice from subsidiary Morgan Keegan caused investors to lose about $2 billion.
By the end of the second quarter, Regions had placed its expected expenditures for investment firm Morgan Keegan’s troubles at $200 million, a sum that contributed significantly to earnings losses for the quarter.
“Although we have not reached final settlement, based on the current status of negotiations, we recorded a non-tax deductible $200-million charge representing the estimate of probable loss,” Hall said in detailing the bank’s second quarter performance to analysts.
The most recent delay in resolving the complaints occurred last week when the Mississippi Secretary of State’s Office agreed to postpone an Oct. 5 hearing originally scheduled for Memphis-based Morgan Keegan & Co. to answer claims that misleading statements to investors in Mississippi and elsewhere caused them to lose $2 billion from 2006 to 2007.
Postponement of the hearing that was to be held last Tuesday gives Morgan Keegan, the investment arm of Regions Bank, more time to prepare not only for the Mississippi case but for hearings on complaints filed by investment regulators in four other Southern states and the federal Securities & Exchange Commission.
The U.S. Financial Industry Regulatory Authority has also lodged complaints that seek fines, repayment of profits and restitution to 13,000 investors, including Mississippians who lost $30 million buying toxic asset-filled bond funds peddled by Morgan Keegan.
Policy prohibits the financial regulatory agency from giving details on hearings or their scheduling, a spokesman said.
Regulators charge that Morgan Keegan passed off seven bond funds packed with risky structured products – particularly subordinated tranches of asset- and mortgage-backed securities, including sub-prime products. Those investments caused the funds to experience serious financial difficulties beginning in early 2007 and led to their collapse later that year. Brokers — and printed sales material — led investors to believe they were buying medium risk funds, regulators say.
This was especially true with the Regions Morgan Keegan Select Intermediate Bond Fund, according to the Financial Industry Regulatory Authority, also known as FINRA. Morgan Keegan marketed the fund “as a relatively safe and conservative fixed income mutual fund investment when, in fact, the fund was exposed to undisclosed risks associated with its investment in mortgage- and asset-backed securities and subordinated tranches of structured products,” FINRA said.
Morgan Keegan created an illusion of security around the risky finds, FINRa alleged. Financial advisors were not told of the funds’ true risk, the agency said.
Nor were the prospects for steep losses revealed in Preferred Fund Profiles the firm prepared for use with customers or in the advertising slicks it distributed, FINRA added.
Morgan Keegan’s hearing with Mississippi regulators likely will be rescheduled for January or February, according to Joseph Borg, director of the Alabama Securities Commission. The hearing was to have been held in the Montgomery office of Borg’s agency.
Alabama, Kentucky and South Carolina joined Mississippi in creating a task force that filed a joint complaint against Morgan Keegan & Co. and Morgan Keegan Asset Management in early April. The states had sought a joint hearing at which Morgan Keegan would address their complaints but the firm insisted on separate hearings, Borg said. Each hearing will be in Montgomery, because it is centrally located to each state, he added.
Morgan Keegan was to go before a federal judge in Atlanta on Oct. 13 but the judge’s retirement forced a rescheduling of that hearing, Borg said. A date will be set once a new judge is assigned to the case, he added.
Mississippi and the other states are unlikely to grant any additional delays, even if it requires the investment firm to answer the SEC complaint at the same time as those of the states. Borg said. “We’re not in a mind to put it off much longer.”
In its complaint, the Securities and Charities Division of the Mississippi Secretary of State’s Office claims Morgan Keegan:
• Made material omissions and misrepresentations in marketing materials;
• Made material omissions and misrepresentations in regulatory filings;
• Withheld information from and misrepresented information concerning the funds to the Morgan Keegan sales force;
• Provided preferential treatment to certain customers;
• Failed to make suitable recommendations concerning purchase and concentration of the funds in customer accounts;
• Failed to adequately supervise their employees;
• Obstructed the due diligence process.
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