Four states including Kentucky and federal regulators have taken action against Morgan Keegan & Co., accusing the brokerage firm of costing investors, including retirees, more than $2 billion through fraudulent and reckless business practices.
Kentucky, Mississippi, Alabama, South Carolina, the Securities and Exchange Commission and the Financial Industry Regulatory Authority announced administrative actions Wednesday against the Memphis-based company, which is owned by Regions Financial Corp, based in Birmingham, Ala.
Regulators allege that Morgan Keegan overstated the value of funds backed by subprime mortgages and used false and misleading sales materials. No criminal charges have been filed.
"This misconduct masked from investors the true impact of the subprime mortgage meltdown on these funds," said William Hicks, associate director in the SEC's Atlanta office.
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Kentuckians lost more than $9.4 million in just one of the funds, according to the Kentucky Department of Financial Institutions. About 13,000 Kentuckians invested in the six funds, which lost $2 billion from March 31, 2007, to March 31, 2008.
Morgan Keegan said the charges are based on incorrect analysis of the facts and the law.
Morgan Asset Management, the subsidiary that managed the funds, and several people who work at the two companies also face administrative charges.
State regulators are hoping to force Morgan Keegan to repay investors and to bar the company from doing business in the states. FINRA, an independent regulator of U.S. securities firms, is seeking to recover money for investors and is levying unspecified fines. The SEC is waiting on the outcomes of their hearings to decide what actions should be taken. Those actions could include fines, censure, revocation of licenses and barring the company from the securities industry.
"We are taking an unprecedented step against a major regional brokerage firm," said Shonita Bossier, director of the Kentucky DFI Securities Division. "Aggressive enforcement action is appropriate given the extent of the losses to Kentucky investors because of misleading information and unsuitable recommendations."
Morgan Keegan spent $100 million buying back shares of two of the hardest-hit funds from dissatisfied shareholders, the company's general counsel, James Ritt, said in a statement.
"The public anger at the near collapse of the nation's financial infrastructure is understandable. However, the actions taken today are misdirected and factually inaccurate. We intend to defend vigorously against these charges," Ritt said.
Morgan Keegan has 10 branches in Kentucky, including one in Lexington.
Investors may call the Department of Financial Institutions at 1-800-223-2579 with questions or to file a complaint.