Reeling From Legal Troubles, Morgan Keegan to be Sold

Morgan Keegan is up for sale, according to news reports from both the Wall Street Journal and the New York Times. The potential sale comes on the heels of news that the Memphis-based investment bank will pay $210 million to settle a massive fraud case.

In the spring of 2010, the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and five southern states joined forces to file the civil action against Morgan Keegan. Probes into Morgan Keegan had actually begun a year earlier. Those probes focused on how Morgan Keegan fabricated the value of the mortgage-backed securities that supported seven of its mutual and closed-end funds, the brokerage’s sales practices, and what Morgan Keegan advisers were and were not disclosing to investors.

Instead of going to a federal trial, Morgan Keegan and subsidiary Morgan Asset Management agreed to pay $200 million for the benefit of investors, plus $10 million in penalties to state regulators in Tennessee, Alabama, Kentucky, Mississippi, and South Carolina, as well as other states.

Nearly 40,000 investors lost $1.5 billion in seven mutual and closed-end funds that Morgan Keegan sold in 2007 and 2008.

The settlement agreement also:

• Requires fund manager James Kelsoe of Memphis to pay $500,000 and be barred from involvement in the securities industry, and comptroller Joseph Thompson Weller to pay a $50,000 penalty.

• Prohibits Morgan Keegan and Morgan Asset Management from selling such proprietary funds for two years.

• Subjects the company to extra audits and examinations from state regulatory authorities.

• Requires Morgan Keegan and Morgan Asset Management to retain, at their expense, an independent auditor if they resume selling proprietary investment products before Jan. 1, 2016.

• Mandates both companies to specially train all their registered agents and investment advisers, including on suitability and risks of investments.

• Prohibits Morgan Keegan and Morgan Asset Management from having one person hold the dual positions of general counsel and chief compliance officer.

• Does not stop state securities regulators from pursuing charges against three Morgan Keegan employees who were named in the proceedings but did not join the consent order: Brian B. Sullivan, president of Morgan Asset management; Gary S. Stringer, investments director for Morgan Keegan’s Wealth Management Services; and Michele F. Wood, the funds’ chief compliance officer.

• Requires Morgan Keegan and Morgan Asset Management to cooperate in any administrative proceedings against Sullivan, Stringer or Wood.