AT A GLANCE
Name: Morgan Keegan & Co.
Local offices: Chattanooga and Cleveland with 16 financial advisors
Size: 300 offices in 20 states and 4,400 employees
Owner: Regions Financial Corp., parent of Regions Bank, acquired firm in 2001
Penalty: $200 million in fines for overstating value of mortgage investments
Investment losses: The SEC estimates investors lost $1.5 billion on the mortgage instruments
Future: Goldman Sachs Group Inc. is exploring strategic options for the firm, including a possible sale by Regions
Investment firm Morgan Keegan & Co. is paying $200 million to settle civil fraud charges that it overstated the value of mortgage investments just as the housing market was collapsing.
The Memphis-based investment firm, which operates offices in Chattanooga and Cleveland with 16 financial advisers, failed to use “reasonable” procedures to calculate the value of the mortgage investments and lured buyers of its funds with false sales materials, according to state and federal regulators.
Tennessee investors lost at least $300 million of the estimated $1.5 billion stripped in value from five bond funds sold to more than 30,000 investors nationwide, regulators said.
“The falsification of fund values misrepresented critical information exactly when investors needed it most — when the subprime mortgage meltdown was impacting the funds,” said Robert Khuzami, director of the U.S. Securities and Exchange Commission.
After the settlement with regulators was announced, Regions Financial Corp., the banking firm that bought Morgan Keegan in 2001, said it is putting Morgan Keegan up for sale. The investment bank Goldman Sachs & Co. is exploring options for the investment firm.
Half of the penalty will go toward compensating investors, but the regulatory agreement does not preclude civil lawsuits from investors who contend they were defrauded by Morgan Keegan, Khuzami said.
Despite its uncertain future, Morgan Keegan CEO John Carson said in a statement that the investment firm “is excited by the opportunity to further develop the brand.”
“With this settlement behind us, we look forward to continuing to serve our individual, institutional and investment banking clients and growing our business,” he said.
In a 43-page consent order with the Tennessee Department of Commerce and Insurance, regulators charged that Morgan Keegan failed to use “reasonable” procedures to calculate the value of securities in the funds backed by high-risk mortgages.
The firm misrepresented the value of the funds and the risk involved to entice people to invest, according to Barbara Doak of the state Department of Commerce and Insurance.
The SEC; regulators in Alabama, Kentucky, Mississippi, South Carolina and Tennessee; and securities industry regulators announced the settlement Wednesday. Two former employees of the firm also agreed to pay civil penalties, and one of the executives, James Kelsoe Jr., agreed to a ban from the securities industry.
In addition, Morgan Keegan agreed not to make valuations of securities for investment funds for three years.
Wednesday’s settlement with Morgan Keegan was the latest legal action by regulators in connection with the mortgage meltdown and financial crisis.
On Tuesday, Wall Street bank JPMorgan Chase & Co. agreed to pay $153.6 million to settle the SEC’s civil fraud charges that it misled buyers of complex mortgage investments just as the housing market was collapsing.
Regulators have been investigating a number of major banks’ actions ahead of the financial crisis that plunged the country into the most severe recession since the 1930s. More charges are expected.
Of the $200 million that Morgan Keegan agreed to pay, a $75 million penalty and $25 million in restitution was levied by the SEC. The remaining $100 million will go to a state fund, with the money to be distributed to investors who were harmed.
Regions, based in Birmingham, Ala., received $3.5 billion in taxpayer funds under the federal financial bailout in 2008 and hasn’t yet repaid the government.
Business Editor Dave Flessner and Associated Press writers Marcy Gordon and Greg Bluestein contributed to this report.
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