Securities Law Prof Blog

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

Thursday, May 3, 2012

Eleventh Circuit Reverses Summary Judgment for Morgan Keegan in ARS Action

In SEC v. Morgan Keegan & Co., Inc. (11th Cir. May 2, 2012), the appeals court reversed a summary judgment in favor of Morgan Keegan involving its sales of auction rate securities (ARS) between Jan. 2 and March 19, 2008. (Download SECv.MorganKeegan)  The SEC alleged that MK's brokers and marketing materials misrepresented ARS as cash alternatives and omitted to disclose that ARS carried liquidity risk.  MK based its summary judgment motion on the SEC's failure to meet the materiality requirement and argued that the SEC's evidence of oral misrepresentations made by four brokers to individual investors should not be included in the "total mix" of information available to the hypothetical reasonable investor.  According to MK, the SEC must demonstrate that MK misled the public as a whole and not just a few individual investors.

The problem for Morgan Keegan is the SEC enjoys the authority to seek
relief for any violation of the securities laws, no matter how small or

The court found no support for MK's argument that some minimum number of investors must be misled before finding its brokers' misrepresentations material in an SEC enforcement action.

MK also argued that its written disclosures rendered individual brokers' oral misrepresentations immaterial as a matter of law.   The court, however, was not persuaded that MK's manner of distributing its written disclosures was adequate for purposes of granting summary judgment to the firm.  The only written disclosures given directly to ARS purchasers during this time period were the trade confirmations, which did not provide any warning about liquidity risk and only referred the customers to the firm's website for "information regarding auction procedures," without providing a direct link to the ARS web page. 

The court emphasized that its holding was narrow and limited to materiality.

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