ANOTHER ACTION AGAINST MORGAN KEEGAN
First, it was auction rate securities. Now, it is fund pricing tied to sub-prime loans. The aftermath of the market crisis is leaving Morgan Keegan & Co. facing two SEC actions. Last year, the Commission filed an action against the firm based on its auction rate securities sales practices, discussed here. Now an administrative proceeding charging fraud has been filed against the firm involving its calculation of NAV for five funds tied to sub-prime mortgages. In the Matter of Morgan Asset Mangement, Inc., File No. 3-1847 (April 7, 2010).
The action named as respondents Morgan Asset, a registered investment adviser, Morgan Keegan, a broker dealer, James Kelso, Jr., a senior portfolio manager for Morgan Asset and Joseph Weller, an employee of Morgan Keegan where he was controller and head of its Fund Accounting Department. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206.
The NAV for five funds was materially inflated as a result of fraudulent conduct by the respondents during the period January 2007 through July 2007 according to the Order. Morgan Keegan was the principal underwriter and exclusive distributor of the shares of five funds. The board of each fund delegated the responsibility for calculating NAV to Morgan Keegan. Within the firm, that task was done in the Fund Accounting Department, headed by Respondent Weller. The department was supervised by the Valuation Committee.
Each fund held securities backed by sub-prime mortgages. During the first half of 2007, Mr. Kelso actively screened and manipulated the dealer quotes Fund Accounting and the Independent Auditor obtained from at least one broker-dealer. Mr. Kelso is also alleged to have made arbitrary price adjustments that increased the fair values of certain portfolio securities, while failing to inform the firm when he obtained information indicating that the Fund’s prices for certain securities should be reduced. The policies of the five funds regarding valuation and procedures requiring that dealer quotes be obtained for certain securities were not followed. Likewise, firm procedures required that there be documentation and a review by the Valuation Committee when there was an pricing override of the type made here, were not followed. As a result Mr. Kelso fraudulently forestalled declines in the published NAVs for the five funds.
The Commission has ordered that the matter be set for a hearing.