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Blotter May 2010

Subprime Backed Securities Bite Morgan Keegan

The Securities and Exchange Commission issued administrative proceedings against Memphis, Tenn.-based firms Morgan Keegan & Company and Morgan Asset Management and two employees accused of fraudulently overstating the value of securities backed by subprime mortgages.

The SEC alleges that Morgan Keegan did not have reasonable procedures to internally price the portfolio securities in five funds managed by Morgan Asset Management, and did not calculate accurate “net asset values” (NAVs) for the funds. The SEC further alleges Morgan Keegan published the inaccurate daily NAVs, and sold shares to investors based on these inflated prices.

According to the SEC complaint, from at least January 2007 to July 2007, James C. Kelsoe, Jr., the portfolio manager of the funds, arbitrarily recommended approximately 262 “price adjustments” to the firm's fund accounting department, which increased the fair values of certain portfolio securities. Kelsoe also routinely instructed the fund accounting department to ignore month-end quotes from broker-dealers that were supposed to be used to validate the prices the firm had assigned to the funds' securities. With many of the funds' securities backed by subprime mortgages, Kelsoe's actions fraudulently prevented a reduction in the NAVs of the funds that otherwise should have occurred as a result of the deterioration in the subprime securities market. A hearing will be scheduled before an administrative law judge.

Hot Cup of Fraud

The SEC charged Enrique F. Villalba Jr., a Cuyahoga Falls, Ohio investment advisor, and his firm Money Market Alternative L.P., with fraud for lying about his investment strategy, fabricating account statements to hide losses, and using investor money to buy property and pay unrelated business expenses.

The SEC's complaint alleges that Villalba solicited investors in California, Illinois, Ohio, Tennessee and Washington through his investment advisory business by touting an investment strategy that he falsely claimed was conservative and relatively risk-free.

Villalba raised more than $39 million in client funds over a 13-year period, promising clients that he would preserve their principal investment while still earning them returns of 8 to 12 percent annually by investing in securities. Instead, he allegedly traded predominantly in commodity futures contracts and suffered more than $17 million in trading losses. Villalba also made Ponzi-like payments to some investors, and misappropriated more than $4.1 million of investor funds for his management fees, salary and company overhead. Neither Villalba nor Money Market Alternative L.P. is registered with the SEC under the securities laws.

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