Florida Securities Fraud Lawyer Blog

The SEC, state regulators, and FINRA have announced today that Morgan Keegan & Co. and an affiliate have agreed to pay $200 million to settle fraud charges related to subprime mortgage-backed securities. Two Morgan Keegan employees also agreed to pay penalties for their misconduct,

The SEC's order settling the charges finds that Morgan Keegan failed to employ reasonable pricing procedures and consequently did not calculate accurate "net asset values" for the funds. Morgan Keegan nevertheless published the inaccurate daily NAVs and sold shares to investors based on the inflated prices.

The SEC's order finds that James Kelsoe, Morgan Keegan's former portfolio manager, instructed Morgan Keegan's fund accounting department to make arbitrary "price adjustments" to the fair values of certain portfolio securities. The price adjustments ignored lower values for those same securities provided by outside broker-dealers as part of the pricing process, and often lacked a reasonable basis. In some instances, when price information was received that was substantially lower than current portfolio values, fund accounting personnel acted at the direction of Kelsoe and lowered values of bonds over a period of days in a series of pre-planned reductions to values at or closer to the price confirmations. As a result, during the interim days, Morgan Keegan did not price those bonds at their current fair value.

The SEC's order further finds that Kelsoe screened and influenced the price confirmations obtained from at least one broker-dealer. Among other things, the broker-dealer was induced to provide interim price confirmations that were lower than the values at which the funds were valuing certain bonds, but higher than the initial confirmations that the broker-dealer had intended to provide. The interim price confirmations enabled the funds to avoid marking down the value of securities to reflect current fair value. In some instances, Kelsoe induced the broker-dealer to withhold price confirmations where those price confirmations would have been significantly lower than the funds' current valuations of the relevant bonds.

Under the settlement, Morgan Keegan is required to pay $25 million in disgorgement and interest and a $75 million penalty to the SEC to be placed into a Fair Fund for the benefit of investors harmed by the violations. Morgan Keegan will pay $100 million into a state fund that also will be distributed to investors. The firms are additionally required to abstain from involvement in valuing fair valued securities on behalf of investment companies for three years. Kelsoe agreed to pay $500,000 in penalties and be barred from the securities industry by the SEC, and Joseph Weller agreed to pay a penalty of $50,000.

Adam T. Rabin
McCabe Rabin, P.A.
www.mccaberabin.com

The SEC and FINRA have issued an investor alert to educate investors about the risks of structured notes with principal protection. These products, notwithstanding their names, have substantial risks.

Structured notes with principal protection have a zero-coupon bond - which pays no interest until the bond matures -- with an option or other derivative product with a payoff connected to a certain index, asset, index or benchmark. The underlying index, asset, or benchmark may vary from currencies, commodities and spreads between interest rates.

The investor is entitled to participate in a return that is linked to a specified change in the value of the underlying asset. But the investor needs to know that these notes might be structured in a way such that their upside exposure to the underlying asset, index or benchmark is limited or capped.

Investors who hold these notes until maturity usually get back some of their investment, even if the underlying asset, index or benchmark declines. The protection levels vary, however, with some of these products guaranteeing as low as ten percent.

SEC and FINRA warn that structured notes with principal protection can have complicated pay-out structures that can make it hard to accurately assess their risk and potential for growth. Investors further should know that these notes should be aware that they could tie up their principal for upwards of a decade with the possibility of no profit on their initial investment.

In recent years, structured notes with principal protection have the subject of many a FINRA arbitration and often have been recommended by brokers as safe investments, where they were unsuitable for the customer.