State and federal regulators on Wednesday called their $200 million settlement with Regions Financial Corp. over improper fund-valuation practices at its Morgan Keegan & Co. brokerage a victory for investors.
"We wished this had never happened," said Joseph Borg, director of the Alabama Securities Commission, calling the settlement a reminder for financial firms that "their biggest asset is not the money coming in but their reputation."
In addition to the monetary settlement, which will go toward repaying the investors who lost an estimated $1.5 billion as a result of the manipulated evaluations, the enforcement action bars the company from involvement in issuing fair values for securities for three years.
Regions on Wednesday announced its plans to put Morgan Keegan up for sale. (Morgan Asset Management and Regions Morgan Keegan Trust will not be included, the company said.)
At issue was whether investors were adequately warned about the riskiness of subprime mortgage-backed securities held by certain mutual and closed-end funds operated by Morgan Keegan.
The enforcement action details Morgan Keegan's failure to properly address fair-value issues throughout its operations, from the funds' management to its accounting to its sales staff. The company "smoothed" declines, used arbitrary valuations and asked broker dealers to offer manipulated prices as benchmarks for the subprime assets in certain mutual and closed-end funds.
The company did not admit or deny any wrongdoing.
The Securities and Exchange Commission has barred James Kelsoe Jr., who oversaw the funds, from the securities industry and fined former Morgan Keegan comptroller Thomas Weller $50,000.
The misconduct identified in the order "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," the SEC wrote in an announcement of the action.
Asked why the SEC and state regulators settled for $200 million when alleged damages to investors were more than seven times that amount, SEC Associate Director Office Bill Hicks said that the SEC believed that $200 million was appropriate.
"I wouldn't characterize the number as low," he said. "It's the amount we ended up with as a negotiated amount between the parties. There's a benefit to making sure the company stays in business."
Both Hicks and Borg noted that the settlement does not impinge on investors' private efforts to recoup additional lost funds through arbitration or litigation. Asked why criminal charges had not been pursued in the case, Hicks said he could not speak for other federal agencies.
