Memphis broker Morgan Keegan & Co. faces fraud charges by the Securities and Exchange Commission (SEC). The SEC announced the charges on April 7, accusing Morgan Keegan and two employees of defrauding investors by deliberately inflating the value of risky mortgage securities that cost investors more than $2 billion.
According to the SEC’s complaint, Morgan Keegan allegedly failed to employ reasonable procedures to “internally price the portfolio securities in five funds managed by Morgan Asset and, consequently, did not calculate accurate net asset values (NAVs) for the funds.” Morgan Keegan recklessly published these inaccurate daily NAVs and sold shares to investors based on the inflated prices, the SEC said.
“This scheme had two architects – a portfolio manager responsible for lies to investors about the true value of the assets in his funds, and a head of fund accounting who turned a blind eye to the fund’s bogus valuation process,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, in a statement.
The portfolio manager cited by the SEC is James C. Kelsoe Jr., who the SEC says manipulated prices of low-quality investments to make his funds appear more appealing to investors. The complaint further alleges that Kelsoe convinced staff members in Morgan Keegan’s fund accounting department to accept 262 “price adjustments” during the first seven months of 2007 that hid the deteriorating value of Morgan Keegan’s ill-fated bets on mortgage-backed securities and other toxic structured products.
Joseph Thompson also was named in the SEC’s complaint. The SEC accuses Thompson, who was in charge of reviewing prices within the Morgan Keegan funds, of failing to ensure that the securities in the funds were properly priced.
The Financial Industry Regulatory Authority (FINRA) also filed a complaint against Morgan Keegan on April 7, alleging that the firm misled customers about the risks of the bond funds and used false and misleading sales materials to market the funds. FINRA is seeking an unspecified fine and restitution for affected investors.
“This was a slick operation, it was devastating,” said the Rev. Richard Bland in an April 7 story by the Dow Jones Newswires. According to the story, Bland’s Alabama-based United Prison Ministries International lost more than $200,000 in the Morgan Keegan bond funds. “They took all that money from us,” Bland said.