Archive for the “SEC Investigation” Category

Broker/dealers are apparently facing new scrutiny from the Financial Industry Regulatory Authority (FINRA). According to a May 27 article by Investment News, FINRA is actively investigating broker/dealer underwriters of subprime securities. In addition, FINRA allegedly is preparing to bring more enforcement actions for selling Regulation D deals - i.e. private placements.

According to the Investment News story, FINRA allegedly wants to know whether various broker/dealers reported incorrect data when they created the subprime securities. If the data was incorrect, it could include misstatements by firms about the default rates for the underlying mortgages used to create the mortgage-backed securities.

This same issue was the subject of a fraud lawsuit filed in April by the Securities and Exchange Commission (SEC) against Goldman Sachs.

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.

Broker/dealer Morgan Keegan has been granted an administration hearing over allegations that the company cost investors more than $2 billion because of fraudulent and reckless business practices.

The hearing will take place Oct. 5 in Montgomery, Ala., at the offices of the Alabama Securities Commission.

The Securities Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and four states have charged Morgan Keegan with fraud and reckless business practices, accusing the company and several employees of overstating the value of several bond funds backed by risky mortgages and using false and misleading sales materials.

The two Morgan Keegan employees who are named in the charges by regulators are James Kelsoe and Joseph Weller. Weller heads Morgan Keegan’s accounting department.

The regulatory charges facing Morgan Keegan are in addition to hundreds of arbitration claims that have been filed by investors.

Our affiliation of securities 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.

Troubled investment bank Morgan Keegan has been granted an administration hearing regarding legal issues tied to a group of RMK bond funds and allegations that the products cost investors more than $2 billion in losses because of Morgan Keegan’s fraudulent and reckless business practices.

The hearing will take place Oct. 5 in Montgomery, Ala., at the offices of the Alabama Securities Commission.

Several states, including Mississippi, Alabama, Kentucky and South Carolina, as well as the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) filed administrative actions on April 7 against Morgan Keegan. The focus of their actions concerns allegations that Morgan Keegan and several high-ranking employees overstated the value of funds backed by subprime mortgages and used false and misleading sales materials to tout the funds to investors.

The federal and state charges are in addition to hundreds of arbitration claims that have been filed by investors against Morgan Keegan over losses in the bond funds. Class-action lawsuits also have been leveled against the company.

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.

Investors in Wiregrass, Alabama, are suing Morgan Keegan & Co. after losing about $13 million in the RMK funds. The 100 investors thought they were buying supposedly safe-as-CDs investments. Only later did they learn - as did thousands of investors throughout the country - that the funds were backed by risky mortgage-related securities and other toxic structured financial products. When the financial crisis hit, the funds plummeted in value.

State and federal regulators filed fraud charges against Morgan Keegan and several high ranking company executives earlier this week. Among the allegations: Morgan Keegan misled investors and brokers about the risks of the funds and misrepresented their value.

One investor who lost big to Morgan Keegan is Georgia Smith. As reported April 9 by the Dothan Eagle, the retired teacher moved her money from reliable municipal bonds into other securities on the recommendation of a Morgan Keegan representative. She ended up losing her entire investment.

“They just sold us junk bonds; that was all,” Smith said in the article.

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.

Morgan Keegan’s James Kelsoe is known as a Wall Street financial guru. Now the former portfolio manager of several collapsed Morgan Keegan bond funds (RMK Funds) is at the center of fraud allegations by state regulators and the Securities and Exchange Commission (SEC).

The SEC, state regulators and the Financial Industry Regulatory Authority (FINRA) coordinated their filing of charges against Kelsoe, Morgan Keegan and Morgan Asset Management on April 7, accusing all three of misleading investors about the risks associated with a group of Morgan Keegan bond funds. Kelsoe is accused of allegedly ordering Morgan Keegan’s accounting department to overstate the value of the funds, which were supported by risky mortgage-related securities.

Collectively, investors have lost $2 billion in six of the Morgan Keegan funds, which include: Regions Morgan Keegan Select High Income, RMK High Income Fund, RMK Strategic Income Fund, Regions Morgan Keegan Select Intermediate Bond Fund, RMK Multi-Sector High Income and RMK Advantage Income Fund.

In addition to Kelsoe, the SEC is going after Morgan Keegan’s Joseph Thompson Weller. Weller, who was head of the Fund Accounting Department, is accused of “recklessly publishing” inaccurate information about the RMK funds and selling shares to investors based on the inflated prices.

“This misconduct masked from investors the true impact of the subprime mortgage meltdown on these funds,” said William Hicks, associate director in the SEC’s Atlanta Regional Office, in an April 7 story in the Memphis Flyer.

As for Kelsoe, he was at one time known throughout Wall Street as an investing wizard. In 2002, he told Bloomberg that part of the secret to his financial prowess was being able to properly value mortgage-backed bonds. Now, he’s being charged with falsifying the values of those mortgage-backed bonds.

“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, the SEC’s director of enforcement, in a statement.

All of the allegations leveled on April 7 are civil matters, not criminal.

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.

Just as in the high-profile case involving two former Bear Stearns hedge fund managers, e-mails may be the smoking gun in the latest charges against Memphis broker Morgan Keegan & Co. On April 7, the Securities and Exchange Commission (SEC), five state regulators and the Financial Industry Regulatory Authority (FINRA) hit Morgan Keegan with enforcement actions in connection to several bond funds that have cost investors some $2 billion in losses.

FiNRA’s complaint focuses on the sales materials that Morgan Keegan used to promote the funds to investors - materials that FINRA alleges were “false and misleading.” In addition, the complaint cites several damning e-mail messages from Morgan Keegan executives.

As reported April 7 by the Wall Street Journal, in one e-mail dated May 15, 2007, Morgan Keegan’s director of investments (whom the complaint refers to as “GS”) states that he is worried about the risks of a fund’s exposure to asset-backed securities.

“Mr. & Mrs. Jones don’t expect that kind of risk from their bond funds,” GS wrote. “I’d bet that most of the people who hold that fund have no idea what it’s actually invested in. I’m just as sure that most of our [financial advisers] have no idea what’s in that fund either.”

It turns out that “GS” is Gary Stringer, director of investments for the Morgan Keegan’s Wealth Management Services division.

Another e-mail from Kim Escue, a fixed-income analyst for Morgan Keegan’s Wealth Management Services division, describes how her attempts to update the division’s research about one of the Morgan Keegan bond funds were thwarted by James Kelsoe and his assistants.

“They have let me sit for nearly three weeks with no comments, feedback, or information that I have requested,” Escue wrote in the July 2007 e-mail.

The states involved in the enforcement action include Tennessee, Alabama, South Carolina, Mississippi and Kentucky. All five want to bar Morgan Keegan from conducting business in their state.

In a separate action, the SEC has charged Morgan Keegan, Morgan Asset Management and two employees - former portfolio manager James Kelsoe and Joseph Thompson Weller, who headed up Morgan Keegan’s Fund Accounting Department - with fraud.

According to SEC’s complaint, Kelsoe and Weller failed to accurately calculate the net asset values for the funds, while Morgan Keegan “recklessly published” the inaccurate daily net asset values for the funds and sold shares to investors based on the inflated prices.

The SEC’s Enforcement Division further accuses Kelsoe of actively screening and manipulating the pricing quotes obtained from at least one broker/dealer. From at least January to July of 2007, Kelsoe had his assistant send about 262 “price adjustments” to fund accounting, the SEC said. In many instances, those adjustments were arbitrary and didn’t reflect fair value.

“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’s Division of Enforcement.

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.

On April 7, the Securities and Exchange Commission (SEC), four states and the Financial Industry Regulatory Authority (FINRA) joined together to charge Morgan Keegan & Co. Morgan Keegan Asset Management and several employees of misleading of investors about the risks of several Morgan Keegan bond funds. In its complaint, the SEC alleges that the Memphis-based broker, along with former portfolio manager James Kelsoe, used fictitious securities values to make losses in the funds appear much smaller than they actually were.

The states’ administrative action seeks to revoke the registrations of both Morgan Keegan and Morgan Keegan Asset Management, prohibiting the companies from selling securities in Kentucky, Mississippi, South Carolina and Alabama. Tennessee also joined the lawsuit on April 8.

All five states are seeking unspecified administrative penalties and restitution for investors.

The focus of both the administration action and the SEC’s complaint is on six proprietary bond funds that lost approximately $2 billion dollars from March 31, 2007, to March 31, 2008. State and federal regulators contend that Morgan Keegan marketed and sold the funds to investors as conservative investments when in actuality the products were heavily concentrated in risky mortgage-related securities.

Morgan Keegan has since sold the funds to Hyperion Brookfield Asset Management.

Today, Morgan Keegan faces a slew of investor lawsuits. As reported by April 8 by the Business Courier of Cincinnati, 81 cases have been heard to date, with claimants seeking a total of about $47.9 million in damages. In those cases, Morgan Keegan has paid a total of $8 million to claimants.

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.

Recent news coverage has not been rosy for Regions Financial Corp., the parent company of Memphis-based Morgan Keegan. In its second quarter, Regions posted $244 million in net losses versus $206 million in profits during the same period in 2008. Adding to the bank’s woes is news from the Securities and Exchanges Commission (SEC) that the regulator issued a Well notice to Regions subsidiary Morgan Keegan in July, as well as to Morgan Asset Management Company and three employees, informing them to get ready for future enforcement action over violations of federal securities laws. 

Morgan Keegan also received a Wells notice from Financial Industry Regulatory Authority (FINRA), which stated discipline actions against the brokerage were forthcoming in connection to sales of a group of proprietary mutual funds.

The now-controversial funds at the focus of the SEC and FINRA regulatory notices are the same funds facing hundreds of arbitration claims by investors who allege that Morgan Keegan misrepresented the products as low-risk and high-yield investments. In truth, the funds held huge concentrations of subprime mortgages and corporate junk bonds.

The risky composition of the RMK funds eventually spelled financial disaster for investors beginning in the summer of 2007 and the subsequent collapse of the housing market. Since then, investors have filed scores of arbitration claims with FINRA, winning a total of about $4 million in awards so far.

According to recent analyses of the Morgan Keegan funds, losses in the funds entailed more than $2 billion between March 31, 2007, and March 31, 2008.

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.

It was in the 1990s that the Shelby County, Tennessee, government first entered into a contractual agreement with Memphis-based Consulting Services Group (CSG) for advice on how to allocate its pension fund assets and on which money managers to hire. One of those money managers eventually included Morgan Asset Management, a subsidiary of Morgan Keegan & Co. Today, both companies - CSG and Morgan Keegan - are the subject of ongoing investigations and possible enforcement actions by the Securities and Exchange Commission (SEC) for misleading investors.

CSG has been identified as channeling clients’ money into Ponzi schemes, including the notorious one run by Bernie Madoff. It’s also being questioned by the SEC and New York Attorney General Andrew Cuomo for its role in the so-called “pay-to-play” pension fund consulting scandal in New York.

Meanwhile, Morgan Keegan, Morgan Asset Management and three unidentified employees were put on notice by the SEC earlier this month to expect legal action in the relating to various types of securities and financial products that Morgan Asset Management managed and which the SEC believes Morgan Keegan misrepresented to investors.

The products in question include several Morgan Keegan mutual funds whose values plummeted in 2007 and 2008 because of the underlying investments they contained. Those investments, which Morgan Keegan allegedly marketed to investors as stable investments, included high concentrations of risky and untested securities. 

In addition, the SEC filed a federal complaint against Morgan Keegan in early July over its sales of auction-rate securities. Again, the agency claims Morgan Keegan misrepresented the nature of risks associated with the instruments to investors.

As for Shelby County, the account that Morgan Asset Management oversees is comprised of intermediate bond funds; securities in that account are currently valued at $3.6 million. The account was opened nine years ago with $20 million, according to a July 24 article in the Memphis Daily News. At the pension board’s request, Morgan Asset Management recently began disposing of securities in the fund; the $3.6 million in securities is what remains. The fund should be completely liquidated within the next three to six months, according to the article. Once that happens, Shelby County will no longer have a relationship with Morgan Asset Management.

CSG’s future role in managing Shelby County’s finances is still unclear, though given the fact it has a long history of regulatory black eyes against it - the most recent being the New York state pension fund scandal - county officials may finally start to scrutinize the company’s practices in earnest. Some food for thought might include a recent article in the June 8 issue of Forbes magazine. The story provided a cautionary tale on the pension fund consulting industry, citing CSG as one of the biggest players. Among the highlights: 

• In the 1990s, CSG began steering clients into hedge funds, including its own and others that paid finder’s fees. One CSG client was municipally owned Memphis Light, Gas & Water. In 1997, Memphis Light discovered CSG was collecting $800,000 annually in commissions from a Florida money manager. The utility’s pension replaced CSG later that year as its consultant.

• In 1998, CSG signed up Shelby County and its $670 million pension fund as a new client. CSG put Shelby County into five funds of funds, which invested in 120 hedge funds. That “strategy” subjected Shelby County to three layers of fees that together cost between 2.5% and 3.25% annually, plus 20% of any profits. Last year, the pension lost 25% of the assets it had invested in CSG’s hedge fund program, net of fees.

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.

Investors across the country are finally hearing from authorities what they privately believed for more than a year: Memphis-based Morgan Keegan misrepresented a batch of mutual funds that ultimately produced billions of dollars in losses because of close ties to the subprime mortgage market. Investors’ beliefs were confirmed earlier this month when Morgan Keegan’s parent company, Alabama-based Regions Financial Corp., disclosed in a regulatory filing that the Securities and Exchange Commission (SEC) was poised to bring formal charges against Morgan Keegan and its asset management unit over performance issues of the collapsed Morgan Keegan funds. 

As reported July 31 by the Wall Street Journal, the presence of the Wells Notice is a positive sign for aggrieved investors in the RMK funds, since Morgan Keegan hasn’t voluntarily shared documentation concerning its valuation of positions in funds or email communication between those involved in management and operation of its mutual funds.

“That notification has to influence arbitrations when the issue of discovery of regulatory documents comes up,” said Steven Caruso, a New York attorney with Maddox Hargett & Caruso, in the article.

Since 2008, hundreds of investors have filed arbitration claims against Morgan Keegan and at least seven troubled bond funds (collectively known as the “RMK Funds”). The focus of investors’ claims concerns how Morgan Keegan characterized the bond funds as corporate bonds and preferred stocks. In reality, the underlying investments in the funds included high-risk and speculative investments such as subprime mortgage securities and collateral debt obligations (CDOs).  

Those investments ultimately had catastrophic financial consequences on investors. Losses in the RMK funds reached more than $2 billion between March 31, 2007, and March 31, 2008.

Regions’ disclosure of the Wells notices suggests federal regulators are very close to taking action against Morgan Keegan for the problems related to the funds.

A Wells notice serves as formal notification that the SEC will bring civil charges.

In July 2008, Regions transferred management of several of the RMK funds in question to New York-based Hyperion Brookfield Asset Management.

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.