The $200 million civil settlement with Regions Financial Corp.'s brokerage unit this week was the sort of case that the Securities and Exchange Commission and state regulators believe should guide industry behavior.
"You're supposed to take lessons from this," Joseph Borg, director of Alabama's securities commission, said at a joint press conference. Such efforts to "look for a short-term buck" were at the heart of the financial crisis, he said.
But not all the lessons to be drawn from the case are of the sort that regulators might like. Though the more than yearlong investigation laid out extensive evidence that Morgan Keegan & Co. employees actively misled investors in a series of bond funds by hiding losses and manipulating pricing information, it also signals the limits of current enforcement.
The recovery is less than a seventh of what the SEC says investors lost in narrowly restricted period from 2006 to 2007. The securities evaluation firm that allegedly furnished doctored pricing quotes for Morgan Keegan was not even identified in the SEC documents. The government's investigation started long after a slew of lawsuits making similar allegations had already been filed. And while a former Morgan Keegan fund manager has been banned from the securities industry, the comptroller who allegedly oversaw baseless fair-value adjustments continued to work for Morgan Keegan until roughly the time of the SEC settlement. He has since "voluntarily resigned," Morgan Keegan said.
None of this should be seen as a rebuke to the staff that assembled the investigation and then negotiated a settlement, said Vernon Vander Weide, a former SEC enforcement attorney who is leading a class action against some of the Morgan Keegan funds. But the settlement's explicit effort not to block plaintiffs' attorneys appears to be a tacit admission of the federal government's limited capacities, Vander Weide said.
One detail supporting this idea is that state regulators appear to have pursued a broader case against Morgan Keegan than the SEC did. State securities commissions would normally be expected to take a backseat in an investigation of alleged fraud on such a scale, but officials like Borg appear to have been instrumental in sharing the load with the SEC.
"They fought this case for a year plus, and they're saying '$200 million is a princely sum, and this is all we can do,' " Vander Weide said. "You need to look at what the SEC's tools are, how Congress and the federal judiciary has tied the SEC's hands."
That is not either state or federal regulators' position, of course. At the press conference announcing the settlement, an SEC official handling the case suggested the settlement's size was in part dependent on Morgan Keegan's capacity to bear its cost.
"I wouldn't characterize the number as low," said Bill Hicks, an SEC regional associate director. "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."
Even though plaintiffs' attorneys must clear a far higher bar to obtain records or recoup investor damages — unlike the SEC, they have to prove that the Morgan Keegan misconduct was directly responsible for specific losses — they are likely better prepared for a protracted legal fight. Under the right circumstances, plaintiffs' attorneys can readily produce the resources and staffing to review millions of documents. The SEC is better equipped to force those documents' production, it isn't as well positioned to leverage them.
The Morgan Keegan case may demonstrate that. Despite starting their work more than two years after the first class actions were filed, the SEC and its state partners were the first to turn up records suggesting that Morgan Keegan employees had failed to give investors adequate information about its funds' holdings and accounting.
"Mr. and Mrs. Jones don't expect that kind of risk from their bond funds," one executive groused to another in an email opining that neither investors nor Morgan Keegan's sales staff had been adequately informed about the nature of the investments. His colleague responded that "I really think you have a big sell job on your hands, an uphill battle! Note I copied no one on this email."
Details like these are powerful and embarrassing, akin to the recent emails described in JPMorgan Chase & Co.'s Squared Collateralized Debit Obligation settlement that characterize the company as "soooo pregnant" with a bad deal it was struggling to unload on investors. But just as the SEC stopped short of trying to prove that JPMorgan Chase knowingly committed fraud — the settlement pins it only with negligence — enforcement officials seem to have negotiated a settlement in the Morgan Keegan case that leaves much of its authority in reserve.
That such information becomes public as a result of investigations does support enforcement officials' claim that the government is more than capable of slapping a significant price on a firm.
"Firms forget that your biggest asset is not the money coming in but your reputation," Borg said at the settlement conference. "The reputational damage is something that the firms forget to take into account."
This is probably true. But so is the idea that, when it comes time to discuss the full extent of alleged financial damage to investors, a firm such as Morgan Keegan need not worry about seeing a government attorney sitting across the table.