Posted in: FINRA | SEC | Greedy Brokers | Breach of Fiduciary Duty | Risky Investments | RMK Funds |
The Security and Exchange Commission, the Financial Industry Regulatory Authority and four states have filed administrative action against Morgan Keegan & Co. Thursday, accusing the firm of defrauding investors of more than $2 billion.
Four individuals with the Memphis-based firm - James Kelsoe, Gary Stringer, Brian Sullivan, and Michele Wood - were also charged with misrepresenting the value and risk attributed to Regions Morgan Keegan (RMK) Select bond funds.
According to an SEC release, Kelsoe, 46, operated as senior portfolio manager for Morgan Keegan’s funds, and instructed the firm’s accounting department to arbitrarily inflate the fair value of securities which included numerous RMK funds. The SEC also alleged Stringer, who was a CPA for the accounting department, ignored that these funds were being improperly priced and marketed.
“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,” Robert Khuzami, Director of the SEC’s Division of Enforcement said in the SEC statement.
Regulators learned of the brokers’ involvement after Carter Anthony, former president of Morgan Keegan, was questioned under oath last October by the SEC. Anthony described Kelsoe as a moneymaking star given a long leash by management.
“Time and time again I was told ... ‘Leave Kelsoe alone, he’s doing what we want him to do, he’s also a little bit strange, he gets mad easy, leave him alone,’” Kelsoe said in his October testimony. “And I left him alone. I did what I was told to do.”
Why a president of a broker-dealer was afraid to confront one of his brokers is unclear, but Kelsoe’s funds were regarded as the best performing in the country, the Memphis Daily News said. That is, before 2007.
Morgan Keegan marketed their bonds as being safer than socks, without disclosing in their marketing materials that these investments - backed by the sub-prime mortgage market - were high-risk and volatile. When the mortgage market crumbled and Morgan Keegan funds plummeted in value, investors discover they were nearly impossible to sell.
Since four different RMK Funds invested primarily in the real estate market, while making the funds appear more diversified, around $2 billion of investor money was lost in under a year.
Morgan Keegan targeted customers who owned low-risk securities and those who were retired or nearing retirement, the Associated Press said.
“Morgan Keegan violated our advertising rules, our supervision rules and our rule requiring every firm and every broker to abide by just and equitable principals of trade,” James Shorris, FINRA’s acting chief of enforcement told the AP.
State regulators from Alabama, Florida, Georgia, Illinois, Kentucky, Louisiana, Missouri, Tennessee, Texas and South Carolina all contributed to the latest investigation against Morgan Keegan.
Morgan Keegan is owned by Birmingham, Alabama-based Regions Financial Corporation, who were also named in the complaints. Also implicated was another Regions Financial subsidiary, Morgan Asset Management, which dually employed Kelsoe and Weller.
On Friday, FINRA sent letters to 50 broker-dealers warning them to change the way they relate bonds to investors. Brokers were additionally warned not to market ratings for specific bonds unless they had been calculated by independent, third-party agencies. In the past, it has been the practice for many firms, including Morgan Keegan, to score their own bonds-making it easier to weight averages in their favor.
FINRA’s charge against SEC specifically states it mislead investors and brokers in the sales of funds. If you saw your portfolio crash during the sub-prime mortgage meltdown, contact one of our attorneys for a free consultation of your case.
