Securities Law Prof Blog

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

Thursday, June 30, 2011

Morgan Keegan Persuades Court That Written Disclosures of ARS Risks Trump Brokers' Oral Misstatements

A federal district court in Atlanta recently granted Morgan Keegan's motion for summary judgment in an SEC enforcement action involving auction rate securities (ARS).  In SEC v. Morgan Keegan & Co. (N.D. Ga. June 28, 2011), the court agreed with Morgan Keegan's argument that its written disclosures about liquidity risks trumped oral mistatements that MK brokers may have made to individual customers.  Among the written disclosures that the court highlighted were:

    (1) MK's ARS Manual (which tracked best practices set forth by SIFMA), which was sent to its ARS customers and posted on its website;

    (2) MK's annual newsletter to its customers that directed them to its website and ARS Manual;

    (3) its ARS Brochure available in its branch officers and upon request; and

    (4) Trade Confirmations that directed customers to its website and instructed them to contact MK within 10 days if the transaction was in error.

To counter the effect of the written disclosures, the SEC introduced the testimony of four customers who stated that their broker misrepresented the liquidity risks of ARS.  However, the court found such testimony from four customers insufficient:

Here, the SEC is attempting to bootstrap the investor-specific impact of the misrepresentations alleged by four individual investors as a grounds to seek relief for a whole class of investors without any evidence that the other investors received similar oral misrepresentations, without any evidence that Morgan Keegan encouraged or instructed its brokers generally to issue misleading statements, and without any evidence that other investors had not read the disclosures that were made in the variety of ways Morgan Keegan made them.

However, the court agreed with MK that:

that no reasonable juror could conclude that these four examples of alleged oral misrepresentations could conceivably “have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988).

The court emphasized that:

The SEC has not introduced any evidence to show that Morgan Keegan instituted a company-wide policy encouraging its brokers to misrepresent ARS liquidity risks.  The SEC also has not offered any evidence to show that Morgan Keegan was aware that its brokers were issuing misleading statements.

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