UPDATE 10:30 p.m.: Morgan Keegan has issued a statement disagreeing with the assertions by regulators and saying their actions "are misdirected and factually inaccurate." Read the company's statement here.
As originally reported:
Today's action by two regulatory agencies against Memphis-based Morgan Keegan & Co. Inc. and its once high-flying fund manager Jim Kelsoe will doubtless come as welcome news to several wealthy Nashville-area residents who lost millions in subprime-mortgage funds that Kelsoe ran.
The Securities and Exchange Commission today brought fraud charges against Morgan Keegan, Kelsoe and J. Thompson Weller, head of the firm's fund accounting department. And in a separate complaint, the Financial Industry Regulatory Authority accused Morgan Keegan of "using false and misleading sales materials" to pitch seven of its funds and of causing more than $1 billion in investor losses.
The SEC's administrative order in the case, available at this link, gives a detailed account of the manipulation of fund prices allegedly practiced by Kelsoe and others at Morgan Keegan, a unit of Birmingham's Regions Financial Corp.
"Each Fund held securities backed by subprime mortgages, and the market for such securities deteriorated in the first half of 2007," the order states. "Kelsoe’s actions fraudulently forestalled declines in the NAVs [net asset values] of the funds that would have occurred as a result of the deteriorating market, absent his intervention. Morgan Keegan fraudulently published NAVs for the Funds without following procedures reasonably designed to determine that the NAVs were accurate."
The SEC's account echoes accusations made in numerous investor lawsuits during the past two years. Nashville attorneys Naill Falls and John Veach have filed such complaints on behalf of at least eight local plaintiffs as well as more than a dozen others from other areas. Those filings give a sense of the damage done locally by the alleged fraud.
Joe Ledbetter, who co-founded Houston's restaurant in 1977 and later originated the Bricktops chain, invested some $4.3 million in Morgan Keegan's bond funds. Local wine broker Vicki P. Turner and two family members Owned "millions of dollars worth" of the securities, according to their complaint.
Retired Nashville real estate developer Richard Freeman and his wife Mary claim in their lawsuit that the alleged fund-fiddling cost them "a great deal of money." Ed Karrels, co-owner of Old Natchez Country Club, also cites unspecified but "substantial" losses in his legal complaint.
Other Nashville-area investors who have sued include Donna Freeman Kelley of Belle Meade ($1.3 million invested), Ronda L. Hardwick of Brentwood ($500,000), Miriam E. Woods of Franklin ($500,000), Robert G. Anderson and Nashville construction firm R. G. Anderson Co. Inc. of Nashville, ($300,000), and Ernest and Patricia A. Fitzgerald of Gallatin ($265,000).
Suffering the largest losses among the plaintiffs has been the family of the late State Sen. Carl Koella Jr. (R-Maryville). Family members and their company, Rockford Manufacturing Co., as well as the company's 401(k) savings plan, sank more than $10 million between them in the troubled Morgan Keegan funds.
A federal judge has consolidated the lawsuits brought by Falls and Veach into a multi-district case to be adjudicated in West Tennessee.
The SEC and FINRA each plan to hold proceedings that will determine whether the defendants are to face financial sanctions and other punishment.
In a statement issued to media outlets, Morgan Keegan spokesman Eric Bran expressed disappointment at the agencies' decisions to bring charges. "We have always held our obligations to our clients and to regulatory law with the utmost seriousness," Bran said. Calling the accusations "meritless and based upon erroneous hindsight analysis," he said the firm "will vigorously refute these charges."