On Wednesday, Regions Financial Corporation’s (RF) securities brokerage unit, Morgan Keegan was accused of misrepresenting fraudulent investments in risky securities by four state regulators, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). The four states involved are the states of Mississippi, Alabama, Kentucky and South Carolina.
Morgan Keegan, its sister company Morgan Asset Management (MAM) and certain of its employees have been slapped with charges amounting to $2 billion in relation to overstating the sale of proprietary Regions Morgan Keegan (RMK) bond funds. According to the plaintiffs, the defendants violated the federal and securities’ law of U.S. and failed to present the true value and risks related to the RMK funds.
Additionally, the SEC has charged Morgan Keegan and MAM of dishonoring certain federal rules in 2007 by not disclosing the true value and risk related to six of the RMK bond funds. The plaintiffs have alleged that Morgan Keegan deluded their clients by posing a safe outlook on their investments in the RMK funds, which were actually reported to be heavily invested in subprime mortgages and other toxic waste assets.
However, Morgan Keegan has retaliated by charging back the plaintiffs for making allegations that are factually inaccurate. In its defense, Morgan Keegan clarified that it invested over $100 million of the firm’s capital in shares of two of the hardest-hit funds in order to repay the shareholders who desired to vend off their fund shares.
While the FINRA and the SEC seek to recover funds of the investors and levy undisclosed fines, the four state regulators want Morgan Keegan to repay its investors in the states and wishes to restrict the company’s future business operations in these regions.
Nevertheless, this is not the first time that Morgan Keegan’s investment practices have been questioned in public. Recently, in Mar 2010, Morgan Keegan had been charged by about $3.6 million in relation to two arbitration cases that were filed against it by two bond investors, alleging that their investments in RMK bond funds suffered losses of 50% to 67% in 2007.
Morgan Keegan is facing legal challenges in state and federal court as well as a number of remaining arbitration claims before FINRA. Last year, Regions Financial, the parent company, said that it received a Wells notice from the SEC, saying that it was looking into the funds and might bring a civil action against the firm.
If these charges are held valid in the final hearings, Morgan Keegan will not only have to face severe financial penalties but it will also deface the investors’ confidence and trust in the company and its investment portfolio.
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