Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, April 8, 2010

FINRA, SEC and State Regulators Charge Morgan Keegan with Misleading Investors about Bond Funds

FINRA, SEC and NASAA all announced the initiation of proceedings against Morgan Keegan for misleading investors about bond funds that were heavily invested in subprime mortgages.  FINRA filed a complaint against Morgan Keegan & Company, Inc., charging the firm with marketing and selling seven affiliated bond funds to investors using false and misleading sales materials – costing investors well over $1 billion. In addition to an unspecified fine, FINRA is seeking disgorgement of all ill-gotten profits and full restitution for affected investors.  According to the FINRA release, from Jan. 1, 2006, through Dec. 31, 2007, Morgan Keegan sold over $2 billion of the bond funds. The funds were invested heavily in risky structured products – particularly, subordinated tranches of asset- and mortgage-backed securities, including sub-prime products. Those investments caused the funds to experience serious financial difficulties beginning in early 2007 and led to their collapse later that year.

 The Securities and Exchange Commission announced administrative proceedings against Morgan Keegan & Company and Morgan Asset Management and two employees accused of fraudulently overstating the value of securities backed by subprime mortgages.  In addition, securities regulators in Alabama, Kentucky, Mississippi and South Carolina announced that they are jointly filing an administrative action as the result of a multistate investigation of Morgan Keegan & Co. Inc. At the center of the investigation were six bond mutual funds sold by Morgan Keegan broker dealers to approximately 13,000 customers. Those six bond mutual funds lost approximately $2 billion dollars from March 31, 2007 to March 31, 2008.

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