Morgan Keegan & Co. and an affiliated company have agreed to pay $200 million to settle fraud charges brought by the U.S. Securities and Exchange Commission and five states, including Kentucky.
Last year, the government investigators accused the brokerage firm of costing investors more than $2 billion through reckless business practices. Regulators alleged that Memphis-based Morgan Keegan overstated the value of funds backed by subprime mortgages.
"The falsification of fund values misrepresented critical information exactly when investors needed it most — when the subprime mortgage meltdown was impacting the funds," Robert Khuzami, director of the SEC's Division of Enforcement, said in a statement. "Such misconduct does grievous harm to investors."
The settlement announced Wednesday will see $100 million go to the SEC with $75 million of that placed into a fund for the benefit of investors who were harmed. Morgan Keegan will pay an additional $100 million into a state fund to be distributed to investors in Alabama, Kentucky, Mississippi, South Carolina and Tennessee.
The Kentucky Department of Financial Institutions said that more than 2,000 Kentucky investors sustained about $50 million in losses. About $11 million in restitution will be paid to Kentucky investors.
Investors will be notified and required to file a claim with the fund administrator to recover damages, the Department of Financial Institutions said in a statement.
The settlement prohibits Morgan Keegan from creating, offering or selling any proprietary fund for two years and requires mandatory training to all agents and advisers for the next three years.
Two employees — former portfolio manager James C. Kelsoe Jr. and comptroller Joseph Thompson Weller — have agreed to pay penalties of $500,000 and $50,000, respectively. Kelsoe has been barred from the securities industry by the SEC.
Investigations continue against three others.
None of the employees operated in Kentucky, where Morgan Keegan has seven offices, including one in Lexington.