JACKSON, Miss. -- Four states, including South Carolina, and federal regulators have taken action against Morgan Keegan & Co., accusing the brokerage firm of costing investors, including retirees, more than $2 billion through fraudulent and reckless business practices.
The states of Mississippi, Alabama, Kentucky and South Carolina along with the Securities and Exchange Commission and the Financial Industry Regulatory Authority announced administrative actions Wednesday against the Memphis, Tenn.-based company, which is owned by Birmingham, Ala.-based Regions Financial Corp.
Regulators allege Morgan Keegan overstated the value of funds backed by subprime mortgages and used false and misleading sales materials. No criminal charges have been filed.
"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 office.
Morgan Asset Management, the subsidiary that managed the funds, and several individuals who work at the two companies also face charges.
State regulators are hoping to force Morgan Keegan to repay investors and to bar the companies from doing business in the states. FINRA, an independent regulator of U.S. securities firms, also is seeking to recover funds for investors, as well as levying unspecified fines. The SEC is waiting on the outcomes of their hearings to decide what actions should be taken. Those actions could include fines, censure, having their licenses revoked and being barred from the securities industry altogether.
In a statement, Morgan Keegan said it has cooperated fully with the investigations of the SEC, FINRA and the states.
"We have always held our obligations to our clients and to regulatory law with the utmost seriousness," the statement said. "We are disappointed at the decision by these agencies and the states to bring charges which we believe are meritless and based upon erroneous hindsight analysis. We will vigorously refute these charges."
State regulators accused the companies and four individuals -- James C. Kelsoe, Brian B. Sullivan, Gary Stringer and Michele Wood -- of misrepresenting the value of the funds and the risk involved and misclassifying the securities held within those funds to entice people to invest.
The states also alleged preferential treatment was given to some customers to the detriment of others and that even after the funds had collapsed, investors were told to continue to hold and buy the funds.
According to the states' filing, Morgan Keegan targeted customers who owned low-risk CDs and those who were retired or nearing retirement, then concentrated too much of their investments into the risky funds without revealing the amount of risk they would be taking on.
"Morgan Keegan made these funds seem a lot more diversified and a lot less risky than they were," said Joseph Borg, director of the Alabama Securities Commission.
The SEC filed similar complaints against Morgan Keegan, Morgan Asset Management, but focused primarily on the actions of two employees -- Kelsoe and Joseph Thompson Weller, who was head of Morgan Keegan's fund accounting department.