Morgan Keegan & Company will be ponying up $200 million to settle allegations of exaggerated claims, failures in supervision and undisclosed investment risks, the Financial Industry Regulatory Authority announced Wednesday.
According to the (FINRA), the company will be making restitution to clients who invested in seven affiliated bond funds, including the Regions Morgan Keegan Select Intermediate Bond Fund (Intermediate Fund). The funds were managed by Morgan Keegan’s affiliate, Morgan Asset Management. Enforcement proceedings were brought not just by FINRA, but also by the Securities and Exchange Commission (SEC) and five state regulators from Alabama, Kentucky, Mississippi, South Carolina and Tennessee.
FINRA determined that the company, from January 2006 through September 2007, marketed and sold the Intermediate Fund to investors using sales materials that contained exaggerated claims, failed to provide a sound basis for evaluating the facts regarding the fund, were not fair and balanced, and did not adequately disclose the impact of market conditions that caused substantial losses to the value of the Intermediate Fund.
Investments in the Intermediate Fund were dominated by structured products, including mezzanine and subordinated tranches of structured securities including subprime products. The company marketed the fund as a relatively safe, investment-grade fixed income mutual fund investment when, according to FINRA, it was exposed to risks associated with its investments in mortgage-backed and asset-backed securities, and subordinated tranches of structured products.
Morgan Keegan was aware by the beginning of 2007, said FINRA, that the fund was having trouble because holdings in the fund were hit by difficulties in the mortgage-backed securities market. However, the company did not adequately disclose those risks, either in its sales materials or via internal guidance. In March 2007, when adverse market conditions took their toll on the fund, more than 54% of the portfolio was invested in asset-backed and mortgage-backed securities, and 13.5% was invested in subprime products.