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SEC To Regions Morgan Keegan: Mismanagement, Misrepresentation

Several Regions Morgan Keegan bond funds that lost more than $1 billion of investor assets have resulted in enforcement actions against Morgan Keegan & Co. and its asset management unit, Morgan Asset Management Inc., by the Securities and Exchange Commission (SEC), four states and the Financial Industry Regulatory Authority (FINRA).

Among the allegations, federal and state regulators say that Morgan Keegan mismanaged and misrepresented the funds to both investors and brokers, as well as manipulated the net asset value of the funds.

As reported April 7 by Investment News, regulators say they have evidence showing that James Kelsoe, the former portfolio manager of the Morgan Keegan funds, was allowed to work with little or no supervision.

“The actions taken by regulators today are long overdue,” said Scott Shewan, president of the Public Investors Arbitration Bar Association, in the Investment News story.

The Morgan Keegan funds in question invested in risky mortgage-backed securities. As a result, the value of the funds plummeted in 2007 and 2008 following the collapse of the housing market.

The states that joined the SEC to bring actions against Morgan Keegan include Alabama, Kentucky, Mississippi and South Carolina.

In addition to Morgan Keegan and Morgan Asset Management, regulators also are targeting Joseph Weller, head of the Morgan Keegan fund accounting department; Brian Sullivan, president and chief investment officer of Morgan Asset Management; Gary Stringer, director of investments for Morgan Keegan’s Wealth Management Services division; and Michele Wood, chief compliance officer of the Morgan Keegan funds.

The latest charges by the SEC and state regulators could serve as further evidence to help thousands of investors who have filed lawsuits and arbitration claims against Morgan Keegan with FINRA. For instance, regulators claim that the president of Morgan Asset Management, Carter Anthony, was told by Morgan Keegan president Doug Edwards and former president Allen Morgan not to supervise Kelsoe. The time period involved was from 2001 through 2006,

In an October 2009 deposition, attached to the states’ complaint, Anthony stated the following:

“Time and time again I was told by [Mr.] Morgan and [Mr.] Edwards [to] leave [Mr.] Kelsoe alone, he’s doing what we want him to do, he’s also a little bit strange, he gets mad easy, leave him alone; and I left him alone. I did what I was told to do.”

Another potentially damning piece of evidence is a May 2007 email sent by Gary Stringer, who headed Morgan Keegan’s Wealth Management Services division. That e-mail reads:

“What worries me about this [Regions Morgan Keegan Select Intermediate] bond fund is the tracking error and the potential risks associated with all that asset-backed exposure. Mr. & Mrs. Jones don’t expect that kind of risk from their bond funds. The bond exposure is not supposed to be where you take risks. I’d bet that most of the people who hold that fund have no idea what’s [sic] it’s actually invested in. I’m just as sure that most of our FAs have no idea what’s in that fund either.”

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