The SEC yesterday charged Nashville-based broker/dealer Morgan Keegan for misleading thousands of investors about the risks of auction rate securities (ARS). Further, the SEC alleges that the firm pushed illiquid auction rate securities on thousands of clients long after it knew the market had frozen. The firm announced it had received a Wells Notice from the SEC last week.
“Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms’ ARS auctions began to fail,” said Robert Khuzami, director of the SEC’s Division of Enforcement in the SEC press release. “As we’ve done in our enforcement actions against other firms, the SEC is firmly committed to restoring liquidity to Morgan Keegan customers who purchased ARS.”
Meanwhile, Morgan Keegan apparently didn’t see these charges coming. The firm said in a statement that it had already been trying to make its investors whole:
“Frankly, we are both surprised and disappointed by the SEC’s actions. In the wake of a market collapse that occurred virtually overnight, we have made restoring liquidity for investors holding auction rate securities a high priority. Contrary to assertions made by the SEC, Morgan Keegan has been continuously repurchasing ARS held by our clients since early 2009, while also cooperating extensively with the SEC throughout its investigative process. Morgan Keegan has employed the firm’s capital to repurchase approximately $56 million in ARS from more than 485 individual investors. Additionally, the firm’s investment bankers have assisted issuers of ARS in successfully refunding some 62 issues totaling more than $874 million par value. The result of these efforts has been a reduction in our clients’ exposure to ARS from $2.2 billion in early 2007 to $365 million today.”
According to the SEC, Morgan Keegan sold approximately $925 million of ARS to its customers between Nov. 1, 2007, and March 20, 2008, but failed to inform its customers about increased liquidity risks for ARS even after the firm decided to stop supporting the ARS market in February 2008.
Morgan Keegan is a subsidiary of Regions Financial, which has been struggling of late. Yesterday, Regions reported a worse than expected $244 million Q2 earnings loss. (The firm received a $3.5 billion in TARP funds.) Region’s Nashville b/d has had its share of bad publicity since the market collapse. Investors in 10 of the firm’s mutual funds, in particular its Regions High Income and Regions Select Intermediate Bond Fund, experienced near total losses (thanks largely to big subprime bets), which have spawned dozens of arbitrations, according to FINRA, as well as class-action lawsuits that allege the risks taken by the funds were not properly disclosed.
In June, asset manager State Street also received a Wells Notice from the SEC regarding disclosure and management of its fixed income investments (also containing bets on subprime) before the market collapse.