On April 7, 2010, the Financial Industry Regulatory Authority (FINRA) filed a complaint against Morgan Keegan & Company, Inc., charging the brokerage firm with marketing and selling seven Regions Morgan Keegan bond mutual funds to investors using false and misleading sales materials. Investors have lost more than $1 billion in these Morgan Keegan bond funds. In addition to an unspecified fine, FINRA is seeking disgorgement of all ill-gotten profits and full restitution for affected investors.
From Jan. 1, 2006, through Dec. 31, 2007, Morgan Keegan sold over $2 billion of the bond funds, which were invested heavily in risky structured products – particularly, subordinated tranches of asset- and mortgage-backed securities, including sub-prime products. Those risky investments caused the funds to collapse.
In its complaint, FINRA alleges that Morgan Keegan’s misleading sales materials, combined with Morgan Keegan’s misleading and deficient internal guidance and failure to train its brokers about the risks, led Morgan Keegan’s brokers to make material misrepresentations to investors. The problems were especially bad with respect to the Regions Morgan Keegan Select Intermediate Bond Fund – which was marketed as a relatively safe and conservative fixed-income mutual fund when, in fact, the fund was exposed to undisclosed risks associated with its investment in mortgage- and asset-backed securities and subordinated tranches of structured products.
FINRA also alleges that, despite losses in the bond funds caused by the turmoil in the mortgage-backed securities market, most notably in the sub-prime home equity arena – Morgan Keegan failed, in any of its 2007 sales materials related to any of the bond funds, to disclose this to customers or that a substantial portion of the bond funds’ portfolios were affected by the poor market conditions.
In its complaint, FINRA alleges that, in Morgan Keegan’s research, investment advice and performance updates to its brokers about the Intermediate Fund, it failed to disclose the material characteristics and risks of investing in the fund, misstated the appropriate use of the fund and otherwise portrayed the fund as a safer investment than it was, even though the firm was aware of material, special risks that made the fund unsuitable for many retail investors. FINRA also alleges that Morgan Keegan failed to ensure the accuracy of the advertising materials prepared by the fund manager and distributed by the firm, and failed to ensure that those materials disclosed all material risks, were not misleading, and did not contain exaggerated claims.
Morgan Keegan failed to train its brokers regarding the features, risks and suitability of the fund and, in its communications with its brokers, the firm failed to adequately describe the nature of the holdings and material risks of the Intermediate Fund.
In early 2007, when Morgan Keegan became aware of the adverse market effects on it Regions Morgan Keegan bond mutual funds, the firm failed to timely warn its brokers or change its advertising materials to reflect the significant negative effect the market was having on the performance of the securities that comprised the bond funds that Morgan Keegan brokers continued to sell. Even worse, the firm reassured, rather than warned, its sales force about the riskiness of the bond funds. As a result, some of the firms brokers were unaware of the then-turbulent market’s effects on the funds and failed to disclose the negative effects caused by market forces.