Morgan Keegan Fined in Late Trading Scandal
Morgan Keegan & Co. was ordered by The Securities and Exchange Commission to pay more than $550,000, including a $100,000 fine, for its part in a widespread scandal involving the late-trading of mutual funds. According to the SEC, Morgan Keegan, the Memphis-based investment advisory arm of Regions Financial Corp. (NYSE: RF), allowed clients to make trades in mutual funds after the close of the market. The practice is known as late trading. The company agreed to pay $558,000, including a $100,000 fine without admitting or denying the claims, and to implement additional procedures and controls to prohibit future violations.
The scandal broke when an investigation was initiated by New York’s former Attorney General into late-trading in mutual funds. The victims of the mismanagement are other mutual fund shareowners whose portfolios are raided by the trading.
The illegal trading was accomplished by entering trades in mutual fund shares at that day’s closing price of the funds, but after the market closed. This gave the traders an advantage of knowing of events and after-hours trading prices on shares owned by the funds. The practice included disguising the trades to appear as if entered earlier in the day. Often client and even firm identities were also hidden.
Morgan Keegan Hit for Research and Lost Emails
The Securities and Exchange Commission levied sanctions against the brokerage firm of Morgan Keegan & Company, including a fine of $875,000, for not disclosing it received compensation from investment banking clients that were the subject of Morgan Keegan research analyst reports over a period of several years. The sanctions were also regarding charges by the SEC that Morgan Keegan failed to preserve business-related e-mail records as required under the federal securities law. A Morgan Keegan spokeswoman said her firm had since addressed the disclosure requirements and improved its e-mail storage policy. The SEC fined Morgan Keegan for these securities violations, and entered a cease-and-desist order to prevent future violations. The firm accepted the sanctions and agreed to pay the fine without accepting any blame or liability for its actions.
Morgan Keegan Sued over Short-Sale Allegations
In 2006, a Toronto-based insurance company filed suit in New Jersey seeking $5 billion in damages from several U.S. hedge funds and investment banks, including Morgan Keegan & Co., alleging these funds and firms participated in a short-selling scheme that "severely harmed" the insurance company. The suit describes a "highly negative" report from Morgan Keenan intended to create "an immediate and dramatic" drop in Fairfax shares. Morgan Keegan called the claims "outrageous."
The Ontario Securities Commission proposed rule amendments from the Canadian Depository for Securities Ltd., allowing it to enforce U.S. rules regarding short selling. The Canadian insurer soon claimed that Morgan Keegan and others worked together to enter into harmful short-selling in its stock. This, it alleged, violated various state laws, including the New Jersey Racketeer Influenced and Corrupt Organizations Act (RICO) allowing it to seek treble damages.
Fairfax Financial Holdings Ltd. is one of several Canadian based companies which have sued U.S. firms claiming such improper activities. The gist of the suits concerns short-selling strategies in which trades were made without disclosing ownership of securities and without disclosing whether the sales were "long," "short" or "short exempt."
An analyst with Morgan Keegan was singled out as collaborating with certain hedge funds to develop "extreme criticisms" of Fairfax to support the shorting strategies. He "continued [a] relentless litany of negative reports in support of his clients' enormous short positions, re-broadcasting ... standard criticisms, inventing others and consistently attempting to neutralize the increasingly positive news out of Fairfax," the lawsuit states.
As for short selling itself, "there's nothing wrong with it, per se; it is just a way of casting a vote in the marketplace," said a spokesman for AIMA Canada who is also a managing director at Integra Capital Management Corp. of Toronto. "On the other hand, in the hands of unscrupulous operators, it can do real damage to a company."
Morgan Keegan Fined for ‘Auction Rate’ Violations
Morgan Keegan & Company, Inc. and a dozen other firms agreed to pay a total of $13 million to settle charges for violations in the auction rate securities market for municipal and corporate bonds. The Securities and Exchange Commission found that, between January 2003 and June 2004, each firm engaged in practices that were not adequately disclosed to investors, which constituted violations of the securities laws. The practices had the effect of favoring certain customers over others, favoring the issuer of the securities over investors, or vice versa. Furthermore, since the firms were under no obligation to guarantee against a failed auction, investors may not have been aware of the liquidity and credit risks associated with certain securities.
Morgan Keegan Broker Fined for Excessive Markups
The National Association of Securities Dealers, Inc. (NASD) asserted charges that persons at various firms, including Morgan Keegan, charged its clients “excessive markups” on securities. Such price markups are often disclosed but sometimes in language the ordinary investor can not understand. Municipal bonds are issued by thousands of state and local governmental entities with varying interest “coupon” rates and maturities. Because there are so many differing bonds outstanding prices are seldom published. Bond salespersons can thus disguise large mark-ups more easily than on U.S. Treasury or even corporate bonds and notes.
The NASD alleged that a former broker at Morgan Keegan & Co. charged too much on numerous bond sales, including bonds sold by St. James Parish, La., to raise money for solid-waste disposal. Markups charged some Morgan Keegan customers ranging from 4% to over 7%. An industry rule-of-thumb is that markups on securities should be below 5% unless exceptional circumstances exist. Markups on bonds should usually be lower unless default is looming.
In the case involving the Morgan Keegan broker, the bonds "were readily available in the marketplace, and Murphy offered no special services justifying an increased markup," the NASD alleged. The broker was fined and sanctioned for his role, while the firm was not.
The Municipal Securities Rulemaking Board (MSRB) is seeking more transparency in the $2 trillion municipal market, with individuals owning nearly a third of such bonds. Yet, many Wall Street firms have been accused of dragging their feet to resist the change.
