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Home > Cases > Morgan Keegan Bond Funds > Morgan Keegan Fraud: Latest Update

Morgan Keegan Fraud: Latest Update

Morgan Keegan fraud and lying to investors are two of the allegations cited on April 7 when state regulators filed an administrative action against Morgan Keegan & Co., Morgan Asset Management and several employees over a group of RMK bond funds that collectively lost $2 billion. Similar allegations of fraud and misrepresentation have been filed by the Securities and Exchange Commission (SEC).

The states - which include Alabama, Tennessee, South Carolina, Kentucky, and Mississippi - also allege that Morgan Keegan gave preferential treatment to certain customers to the detriment of others and that even after the funds collapsed retail investors were told to continue to hold and buy the funds.

The funds involved in the state and federal actions include: Regions Morgan Keegan Select Intermediate Bond Fund, Regions Morgan Keegan Select High Income Fund, Regions Morgan Keegan Advantage Income Fund, Regions Morgan Keegan High Income Fund, Regions Morgan Keegan Multi-Sector High Income Fund and Regions Morgan Keegan Strategic Income Fund. All of the funds were managed James Kelsoe, Jr., who is at center of the state and federal allegations.

According to the charges, Morgan Keegan, Morgan Keegan Asset Management and two employees, including Kelsoe, fraudulently overstated the value of securities backed by subprime mortgages.

“Morgan Keegan recklessly published these inaccurate daily NAVs and sold shares to investors based on the inflated prices,” the SEC said in a statement.

The SEC's Enforcement Division further alleges that Kelsoe actively screened and manipulated the pricing quotes obtained from at least one broker/dealer and that from at least January to July of 2007 Kelsoe instructed his assistant to send about 262 “price adjustments” to fund accounting. In many instances, those adjustments were arbitrary and didn't reflect fair value, according to the SEC.

The evidence in the case includes potentially damning e-mails by Morgan Keegan executives. A May 2007 e-mail from Gary Stringer, director of investments for Morgan Keegan's Wealth Management Services division, reads as follows:

“What worries me about this [Regions Morgan Keegan Select Intermediate] bond fund is the tracking error and the potential risks associated with all that asset-backed exposure. Mr. & Mrs. Jones don't expect that kind of risk from their bond funds. The bond exposure is not supposed to be where you take risks. I'd bet that most of the people who hold that fund have no idea what's [sic] it's actually invested in. I'm just as sure that most of our FAs have no idea what's in that fund either.”

In a separate but similar action, the Financial Industry Regulatory Authority (FINRA) also filed a complaint against Morgan Keegan on April 7, alleging that the investment firm lied to customers about the risks of the bond funds through “false and misleading” sales materials combined with “deficient internal guidance and failure to train its brokers about the risks.”

As reported April 9 by the Memphis Daily News, Morgan Keegan spokesman Eric Bran says the company will “vigorously refute these charges,” which he contends are based on “erroneous hindsight analysis.”

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. For a free case review please feel free to contact us.


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