A prominent Southern financial firm will pay $200 million to settle civil charges that it defrauded investors, including many in Georgia, who bought into funds that included subprime mortgage loans that soured when the housing market tanked.
Regulators announced the settlement Wednesday with Morgan Keegan & Co., an investment firm based in Memphis.
They had accused Morgan Keegan, Morgan Asset Management and two of its executives of miscalculating and overstating the value of mortgage-backed securities during 2007. The securities were included in five mutual funds marketed under the brand name Helios.
Officials estimated total damages to investors at about $1.5 billion after the value of the securities plunged. That includes about $70 million in losses suffered by Georgia investors. Nationwide, more than 39,000 investors were affected, including some in nearly every state.
“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 Securities and Exchange Commission’s enforcement division, said in a statement.
As the SEC’s Atlanta regional office announced the settlement, Morgan Keegan’s parent, Birmingham-based Regions Financial, simultaneously announced it is considering “strategic options” for the Memphis unit. Translation: It’s for sale.
Wednesday’s deal, in which Morgan Keegan neither admitted nor denied wrongdoing, is the latest regulatory rebuke to a major financial firm in the wake of the financial meltdown. Many believe it was propelled, if not caused, by the widespread “bundling” and reselling of risky subprime loans.
On Tuesday, JPMorgan Chase & Co. agreed to pay $153.6 million to settle claims it misled investors in complex mortgage pools as the housing market tanked. A year ago, Goldman Sachs & Co. entered into a $550 million settlement with the SEC, the largest ever, over its marketing of certain mortgage-backed securities.
Brink Dickerson, a securities attorney at Troutman Sanders in Atlanta, said the Morgan Keegan settlement “reflects the SEC’s continuing decision not to let these cases go.”
“I don’t think they’re going to stop until they extract a settlement from each of the companies they think was an active participant,” Dickerson said.
State regulators from Alabama, Tennessee, Mississippi, South Carolina and Kentucky, as well as the financial industry’s independent regulatory group, were part of the settlement.
The $200 million will be split into two funds to repay investors. Morgan Keegan will pay up to an additional $10 million for costs to administer the funds. The settlement amounts to about 13 cents for each dollar lost. It does not prohibit investors from seeking their own claims against the company, officials said.
Helios fund investors ran the gamut from large institutional groups to wealthy clients and average consumers.
Former Morgan Keegan executives James Kelsoe Jr. and Joseph Weller, identified as the architects of the firm’s misvaluations, settled with regulators. Kelsoe agreed to a ban from the securities industry and will pay a $500,000 fine. Weller agreed to a $50,000 fine.
Morgan Keegan also is prohibited for three years for making valuations of securities for investment funds.
The Georgia Secretary of State’s office will contact investors in the state and will post updates about the case on its website, said Vincent Russo, general counsel for the office. He also said the case could result in fines of about $500,000 paid to the state by Morgan Keegan.
William Hicks, associate director of the SEC in Atlanta, said at a news conference that the settlement “signals the importance we place on telling investors the truth.”
Regions has hired Goldman Sachs, a move that portends a sale of all or parts of Morgan Keegan. Morgan Asset Management and Regions Morgan Keegan Trust are not on the block, however.
Regions is the Birmingham-based parent of Regions Bank, the sixth-largest bank in metro Atlanta by deposits. It owes $3.5 billion under the Troubled Asset Relief Program.
Chris Marinac, bank analyst with FIG Partners in Atlanta, said “ultimately selling [Morgan Keegan] makes the bank more attractive and unlocks funds to assist on TARP repayment.”
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