Morgan Keegan to pay SEC $200 million to settle subprime MBS fraud charges
Securities brokerage firm Morgan Keegan & Co. and investment manager Morgan Asset Management agreed to a $200 million settlement with the Securities and Exchange Commission Wednesday to settle fraud charges related to the valuation of subprime mortgage-backed securities.
Former employees James Kelsoe and Joseph Weller also agreed to settle with the regulator and pay additional fines of $500,000 and $50,000, respectively, for their actions in the fraud scheme.
In April, the SEC brought administrative proceedings against the two Memphis, Tenn.-based companies and the two former employees alleging that they falsely represented the value of subprime MBS in five funds managed by Morgan Asset Management. Kelsoe served as portfolio manager for the funds, which include the Helios High Income Fund, the Helios Multi-Sector High Income Fund, the Helios Strategic Income Fund, the Helios Select Fund and the Helios Advantage Income Fund.
Between January and July 2007, Kelsoe instructed Morgan Keegan's fund accounting department to make price adjustments to the fair value of certain portfolio securities, according to the SEC. Sometimes these adjustments ignored lower valuations conducted by outside parties, as part of pricing protocol, and often lacked a reasonable basis, the regulator said.
"Through his actions, Kelsoe fraudulently prevented a reduction in the (net asset values) of the funds that should otherwise have occurred as a result of the deterioration in the subprime securities market in 2007," the SEC said in its June 22 order. "His misconduct occurred in the context of a nearly complete failure by Morgan Keegan to employ the fair valuation policies and procedures adopted by the funds’ boards of directors to fair value the funds’ portfolio securities."
Weller was head of fund accounting at Morgan Asset Management and a member of the valuation committee. The SEC claimed he "knew, or was reckless in not knowing," the violations to the valuation procedures that were being made.
As part of the settlement brought by the SEC, in conjunction with the Financial Industry Regulatory Authority and several state regulators from Alabama, Kentucky, Mississippi, Tennessee and South Carolina, Morgan Keegan is required to pay $25 million in disgorgement and interest, as well as a $75 million penalty to the SEC. Morgan Keegan must also pay $100 million to a state fund.
Of the penalty, $175 million will go to investors who were harmed in the transaction, the SEC said.
Regions Financial Corp. ($9.02 -0.14%), the parent company of Morgan Keegan, said the company will use this opportunity reevaluate internal procedures. Regions said it brought in Goldman, Sachs & Co. to explore strategic alternatives on how best to manage Morgan Keegan's capital.
"The resolution of this legacy regulatory matter gives Regions greater flexibility with respect to the Morgan Keegan franchise and the ability to explore opportunities that are consistent with our strategic and capital planning initiatives," said Grayson Hall, president and chief executive officer of Regions. "Regions is committed to continuing to provide a full range of products and services seamlessly to its customers, including through a continuing relationship with Morgan Keegan."
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