Morgan Keegan Lawsuit Filed by SEC Over Auction Rate Securities

Federal regulators have filed a lawsuit against Morgan Keegan & Co. Inc. for allegedly bilking investors of nearly $925 million by misrepresenting the safety of auction-rate securities and the state of Alabama is threatening to take the company’s broker-dealer license.

The Securities Exchange Commission (SEC) filed the Morgan Keegan lawsuit in federal court in Alabama this week to force the company to buy back auction-rate securities sold to investors before March 20, 2008.

Morgan Keegan allegedly pushed auction rate bonds as safe, conservative investments, even as it was aware that the market for the instruments was collapsing. The lawsuit also calls for Morgan Keegan to forfeit $4.3 million in profits made from underwriting, brokerage and distribution fees.

Did You Know?

Millions of Philips CPAP Machines Recalled

Philips DreamStation, CPAP and BiPAP machines sold in recent years may pose a risk of cancer, lung damage and other injuries.

Learn More

The Alabama Securities Commission issued an “Order to Show Cause” on Tuesday, alleging that Morgan Keegan engaged in dishonest and unethical practices, failed to supervise their agents in the sale of auction rate securities, failed to disclose material facts to their customers and operated as a fraud. The company has less than a month to demonstrate that their license as a broker-dealer in the state should not be suspended or revoked.

Morgan Keegan is the investment banking and securities arm of Regions Financial Corp, with regional brokerage offices in Alabama and 18 other states throughout the southeastern United States.

At issue are $1.2 billion in auction-rate securities sold by Morgan Keegan from November 1, 2007 to March 20, 2008. Regulators say the company promoted the bonds as stable “good as cash” investments, and did not warn them that they could lose their liquidity. But in late 2007 the ARS market began to freeze, and by February 2008 banks had dumped $330 billion in ARS investments, eliminating the liquidity of the bonds.

Auction-rate securities are bonds which are bid on by investors and sold to the ones who will accept the lowest rate during auctions regularly held to determine the bonds’ interest rates. When banks withdrew their support for the bonds, investors were unable to sell, freezing their assets. The SEC’s complaint says that while the ARS market was crashing, Morgan Keegan continued to promote the bonds as stable and safe.

Some individual investors have also pursued lawsuits against Morgan Keegan for consequential damages caused by their inability to access the funds they were told would be a liquid, cash-equivalent.

Morgan Keegan has also faced substantial liability over losses suffered in several of their bond funds, such as the Morgan Keegan Select High Income Fund, High Income Fund, Strategic Income Fund, Select Intermediate Bond Fund, Multi-Sector High Income Fund and Advantage Income Fund. Although Morgan Keegan promoted these bond funds as conservative investment options that provide high yields without excessive credit risks, inappropriate investments in mortgage backed securities resulted in substantial losses for investors. Some estimates have suggested that Morgan Keegan arbitration claims filed by investors in these bond funds may end up costing the firm up to $200 million.


"*" indicates required fields

Share Your Comments

I authorize the above comments be posted on this page*

Have Your Comments Reviewed by a Lawyer

Provide additional contact information if you want an attorney to review your comments and contact you about a potential case. This information will not be published.

NOTE: Providing information for review by an attorney does not form an attorney-client relationship.

This field is for validation purposes and should be left unchanged.

More Top Stories