by T. GormanPosted on Posted in SECActions

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.

by T. GormanPosted on Posted in SECActions

The Commission essentially concluded its action arising out of a scheme by Adnan M. Khashoggi, a well known Saudi arms dealer, and Ramy Y. El-Batrawi others based on the manipulate the of the shares of GenesisIntermedia, Inc. (“GENI”) while misappropriating more than $130 million. SEC v. El-Batrawi, Case No. CV-06-2247 (C.D. Cal. Filed Apr. 13, 2006). According to the complaint, Defendants El-Batrawi and Khashoggi obtained most of the money by loaning about 15 million shares of GENI stock through Native Nations Securities Inc. and other brokers to Deutsche Bank Securities Limited in exchange for cash. The scheme was facilitated by defendants Richard Evanglista, Wayne Breedon and others who lead Native Nations and Deutsche Bank to believe that the shares of GENI loaned were from a reputable brokerage firm. In fact, most of the stock came from Mr. El-Batrawi and Ultimate Holdings, an offshore entity controlled by him and Mr. Khashoggi.

Part of the scheme centered on inflating the share price of GENI. Messrs. El-Batrawi, Khashoggi, Breedon and Evanglista accomplished this by engaging in several manipulative practices. Those include reducing the supply of GENI stock while maintaining control of the float, promoting a short squeeze after they had sold their shares, paying financial commentators to tout the stock and making false statements in periodic filings and press releases. In addition, thousands of trades were placed through nominee accounts to create the appearance of widespread investor interest.

Each of the defendants settled with the Commission, except Ultimate Holdings which is defunct and Mr. Khashoggi. Mr. El-Batrawi consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions and an officer/director bar for five years. Mr. Jacobson consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a)(3) and Section 13(a)(5). He also agreed to pay a penalty of $15,000. Richard Evangelista agreed to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. He also agreed to the entry of an order requiring him to pay disgorge of $25,000 and a penalty of $15,000 as well as an order barring him from association with a broker dealer in a parallel administrative proceeding. Mr. Breedon consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. All financial payments were waived based on financial condition. GenesisIntermedia consented to being delisted in a related administrative proceeding. See also Litig. Rel. 21475 (Apr. 2, 2010).