On April 7, 2010, the securities regulators of four states, the United States Securities and Exchange Commission, and FINRA brought charges against Morgan Keegan, Morgan Asset Management, Mr. James Kelsoe and key Morgan Keegan employees alleging that they participated in a massive fraud in connection with the purchase, sale, marketing, pricing and public filings of all of the RMK funds.
All of these complaints allege violations of the anti-fraud provisions of state and federal laws or FINRA’s rules and all of them point to the basic similarity of all of the RMK funds. As described at ¶ 16 of the State complaint:
All six (6) Funds were largely invested in the lower, implicitly leveraged and most risky “tranches,” or slices, of structured debt instruments…The Funds were comprised of many of the same holdings… The Funds were highly correlated, meaning they behaved like each other under similar market conditions. The combination of risky lower tranche holdings, mirrored holdings among the Funds, and the high correlation of the Funds caused investors owing more than one of these funds to have a heightened risk due to over-concentration.
On June 22, 2012, Joseph P. Borg, Director of the Alabama Securities Commission (ASC); Robert Khuzami, Enforcement Director of the U.S. Securities and Exchange Commission (SEC), and Brad Bennett, Executive Vice President and Enforcement Director of the Financial Industry Regulatory Authority (FINRA), announced the entry of consent orders and administrative orders against Morgan Keegan, Morgan Asset Management, and some of their employees.
The investigation and findings centered around the seven proprietary mutual funds sold by Morgan Keegan broker dealers to over 30,000 account holders. Those seven Morgan Keegan funds lost approximately $1.5 billion from March 31, 2007 through March 31, 2008.
Beginning on page 22 of the Alabama Securities Commission Consent Order, the Commission set out the penalties imposed on Morgan Keegan, Morgan Asset Management, and James Kelsoe:
- MKC, MAM, and Kelsoe will CEASE AND DESIST from violating the [Alabama Securities] Act, and will comply with the Act (¶ 4);
- Pursuant to this Alabama Consent Order and related Consent Orders of the States of Tennessee, South Carolina, Kentucky, the offer of settlement in SEC Admin. Proceeding and the FINRA Letter of Acceptance, Waiver and Consent, MKC and MAM shall pay in resolution of all of these matters, within ten (10) days of the entry of the SEC order the sum of Two Hundred Million Dollars ($200,000,000.00)…. (¶ 5);
- MKC and MAM shall pay the sum of One Million Seven Hundred Ten Thousand Three Hundred Eighty Seven Dollars ($1,710,387.00) to the ASC as a monetary settlement and investigative costs…. (¶ 6);
- MKC and MAM shall also pay the sum of Twenty-three Thousand Dollars to the North American Securities Administrators Association (“NASAA”) as reimbursement for its costs, expended on states behalf (¶ 7);
- Kelsoe shall cause to be paid the sum of Fifty Thousand Dollars ($50,000.00) to the ASC as a monetary penalty…. (¶ 8);
- As additional consideration for the dismissal of the administrative proceeding by the ASC, Kelsoe does hereby agree to the revocation of all existing registrations and/or licenses and to an Order of Permanent Bar…. (¶ 9);
- MKC, MAM, and all of their existing and future affiliates and subsidiaries are prohibited from creating, offering or selling a proprietary fund that is a registered investment company and is marketed and sold to investors other than institutional and other qualified investors…for a period of two (2) years from the entry of the first of the State Consent Orders to be entered in this matter…. (¶ 12);
- MKC and MAM shall provide, for a period of three (3) years, to all of their registered agents and investment adviser representatives mandatory, comprehensive, and ongoing (i) product/offering training on each of the proprietary products/offerings that they sell or recommend to clients, and (ii) training on suitability and risks of investments generally…. (¶ 18);
- One person shall not simultaneously hold the positions of General Counsel and Chief Compliance Officer for either Respondent. (¶ 21);
- Respondents MKC, MAM, and Kelsoe agree not to make or permit to be made any public statement denying, directly or indirectly, any findings in this Consent Order or creating the impression that this Consent Order is without factual basis…. (¶ 25)
Beginning on page 10 of The Securities and Exchange Commission June 22, 2011 Order Making Findings and Imposing Remedial Sanctions, the SEC set out the penalties imposed on Morgan Keegan, Morgan Asset Management, and James Kelsoe. Key sanctions include:
- Morgan Keegan shall not, for a period of three years from the date of the Order, be involved in, or responsible for, recommending to, or determining on behalf of, a registered investment company’s board of directors or trustees or such company’s valuation committee, the value of any portfolio security for which market quotations are not readily available; (¶ 32A)
- Morgan Asset shall not, for a period of three years from the date of the Order, be involved in, or responsible for, recommending to, or determining on behalf of, a registered investment company’s board of directors or trustees or such company’s valuation committee, the value of any portfolio security for which market quotations are not readily available; (¶ 34A)
- Morgan Keegan and Morgan Asset undertake to, pursuant to and in compliance with this Order and with orders being entered in Joint Administrative Proceedings…and the sanctions described in Financial Industry Regulatory Authority Letter of Acceptance, Waiver and Consent, jointly and severally pay the total sum of $200 million, including disgorgement, interest and penalties to be ordered in this matter; (¶ 36)
- Kelsoe undertakes to, pursuant to and in compliance with this Order and with orders being entered in the State Proceedings, pay $500,000 in penalties…; (¶ 37)
- Respondents Morgan Keegan and Morgan Asset are censured; (¶ IV A)
- Respondent Morgan Keegan shall cease and desist from committing or causing any violations any future violations of, Section 34(b) of the Investment Company Act and Rules 22c-1 and 38a-1 promulgated under the Investment Company Act; (¶ IV B)
- Respondent Morgan Asset shall cease and desist from committing or causing any violations and any future violations of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, and Section 34(b) of the Investment Company Act and Rules 22c-1 and 38a-1 promulgated under the Investment Company Act; (¶ IV C)
- Respondent Kelsoe shall cease and desist from committing or causing any violations and any future violations of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, and Section 34(b) of the Investment Company Act and Rules 22c-1 and 38a-1 promulgated under the Investment Company Act; (¶ IV D)
- Respondent Kelsoe be, and hereby is barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and is prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter; (¶ IV F)
- Respondent Kelsoe be, and hereby is, barred from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock; (¶ IV G)
- Respondents Morgan Keegan and Morgan Asset shall jointly and severally pay disgorgement of $20,500,000 and prejudgment interest of $4,500,000 to the Securities and Exchange Commission, and a civil penalty of $75,000,000 to the Securities and Exchange Commission, within ten (10) business days of the entry of this Order; (¶ IV K)
- Respondent Kelsoe shall pay a civil penalty of $250,000 to the Securities and Exchange Commission, within ten (10) days of this Order.
Regions Bank, the parent company of Morgan Keegan, is now trying to sell Morgan Keegan.
If you or someone you know lost money in the RMK bond funds or if you have questions about the regulatory findings, please contact the attorneys at The Frankowski Firm at 888-741-7503 to discuss your potential legal remedies.