The Securities and Exchange Commission charged the broker-dealer Morgan Keegan & Co. and two employees with fraud Wednesday, saying they manipulated the prices of bond funds that were suffering steep losses. The Financial Industry Regulatory Authority also filed its own complaint in the matter.
The SEC announced administrative proceedings against the Memphis firm — which is owned by Regions Financial Corp. — and two employees to consider charges that they fraudulently overstated the value of securities backed by subprime mortgages.
The SEC said Morgan Keegan failed to employ "reasonable procedures to internally price the portfolio securities" in five funds managed by Morgan Asset Management, and thus did not accurately calculate their "net asset values." Morgan Keegan "recklessly published" the inaccurate daily net asset values for the funds, and sold shares to investors based on the inflated prices, the SEC alleges.
The SEC charges that James C. Kelsoe Jr., the portfolio manager of the funds and an employee of Morgan Keegan, arbitrarily instructed the firm's fund accounting department to make "price adjustments" that increased the fair values of certain portfolio securities.
The SEC's enforcement division further alleged that Kelsoe actively screened and manipulated the pricing quotes obtained from at least one broker-dealer. The SEC contends that from at least January to July of 2007, Kelsoe had his assistant sent about 262 "price adjustments" to fund accounting. In many instances, the SEC said those adjustments were arbitrary and did not reflect fair value.
In a separate statement, Finra filed a complaint against Morgan Keegan, alleging the firm misled customers regarding the risks of the bond funds, which Finra claims cost investors well over $1 billion.