The SEC filed two actions yesterday naming market professionals. The first, against Tennessee-based broker dealer Morgan Keegan & Company, tracks many others — but unlike its predecessors it did not settle and was filed shortly after a Wells Notice. SEC v. Morgan Keegan & Co., Inc., Civil Action No. 09-CV-1965 (N.D. Ga. Filed July 21, 2009). The second, against New York City investment adviser Perry Corp., involved allegations similar to those in the high profile CSX/Children’s Defense Fund case from last year and did settle. In the Matter of Perry Corp., Admin. Proc. File No. 3-13561.

The civil injunctive action filed against Morgan Keegan is based on claims that the broker dealer made misrepresentations when selling auction rate securities to its customers between November 1, 2007 to March 20, 2008. Specifically, the complaint alleges that during the period shortly prior to the crash of the auction rate securities market, the firm misrepresented the risks of ARS, selling them as safe and highly liquid investments comparable to money market funds. Morgan Keegan failed to tell its customers that there were increasing concerns about the safety of the ARS market in the months before the crash and that there were auction failures. Rather, the complaint, which alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(c), claims that the firm sold over $900 million ARS during this period.

The allegations in the Morgan Keegan complaint echo those of other actions the Commission has brought based on the collapse of the ARS. See, e.g., SEC v. Banc of America Securities LLC, Civil Action No. 09-CIV-5170 (S.D.N.Y. June 3, 2009) (settled ARS in which settlement required buyback on specific terms); SEC v. Deutsche Bank Securities, Inc., No. 09-CIV-5174 (S.D.N.Y. Filed June 3, 2009) (same) (both discussed here). It is however, the first such action filed by the SEC against a seller of ARS that was not settled at the time of filing. Indeed, many of the settlements in these cases were preceded by agreements in principle and frequently involved the resolution of similar claims with state regulators. It is also unusual for a regulated entity such as Morgan Keegan to litigate a civil injunctive action with the Commission. See also Litig. Rel. 21143 (Jul. 21, 2009).

Morgan Keegan follows the filing of an 8-K last week by Regions Financial Corp., the parent of the broker dealer. The filing states that on July 9, 2009 Morgan Keegan and three of its employees received a Wells Notice. The staff’s investigation, and apparently the predicate for its proposed enforcement action, is “certain mutual funds formerly managed by Morgan Asset Management, Inc.” according to the 8-K.

Perry Corp., centers on a claim that the investment adviser intentionally failed to file a Schedule 13D after acquiring nearly a 10% stake in Mylan Laboratories, Inc., which was in discussions to acquire King Pharmaceuticals, Inc. Perry failed to file, according to the Order for Proceedings, because it did not want to alert the market place about its holdings. Ultimately the proposed 2004 Mylan-King deal failed.

At the time the merger talks were under way, Perry Corp. implemented a strategy known as “merger arbitrage,” according to the Order. Under this strategy, the firm’s profit depended on the spread in value between the shares of the acquirer and the target company. That spread would be a function of how the market viewed the likelihood that the transaction would be consummated. As the likelihood of closure increases, the spread narrows. Perry intended to acquire Mylan shares and vote in favor of the transaction.

In acquiring the Mylan shares, Perry sought to minimize risk. Accordingly, the firm entered into a series of swap transactions designed to fully hedge its financial exposure from the Mylan shares. The transactions provided that Perry would be reimbursed for any decrease in the market price of Mylan shares by the counterparty who received a fee. Through these swap transactions Perry was able to acquire the voting rights to nearly 10% of Mylan’s shares without any economic risk.

Perry chose not to file a Schedule 13D based on advice it obtained after shopping for legal opinions. A Schedule 13D at the time had to be filed within ten days by any person who acquired beneficial ownership of more than 5% of a voting class of equity securities registered under Exchange Act Section 12. If however, a market professional such as Perry acquires the shares in the ordinary course of its business a Schedule 13G can be filed, which has a longer filing period. Perry shopped for and obtained legal advice from outside counsel stating that it could file a Schedule 13G. That opinion was based on the notion that the securities were acquired in the ordinary course of business. Perry’s regular outside counsel, as well as another firm, told the investment adviser that a Schedule 13D should be filed.

To settle the action Perry consented to the entry of a censure and a cease and desist order from committing or causing any violations and any future violations of Section 13(d) and Rule 13d-1. In addition, the firm agreed to pay a civil penalty of $150,000. In the Matter of Perry Corp. , Admin. Proc. File No. 3-13561 (Jul. 21, 2009) (available here).

A similar case last involving efforts to conceal a significant holding of voting shares from the market place through the use of synthetic securities was CSX v. Children’s Investment Fund, No. 08-2899 (2nd Cir. Sept. 15, 2008) (discussed here). There the court found violations of Section 13(d) where two hedge funds did not legally own, but effectively controlled the voting power of shares through the use of equity swaps. That action involved a proxy contest for seats on the board of CSX by two hedge funds as discussed here. The hedge funds contended they did not have to file a Schedule 13D, a position supported in a letter from the Division of Corporation Finance.