In early July, regional brokerage firm Morgan Keegan received a Securities and Exchange Commission (SEC) Wells Notice notifying the firm they are investigating the possible violation of securities laws believed to be related to the RMK Bond and Income Funds.
The notice does not mean the SEC will ultimately take action but in about half of the cases, once a Wells notice is issued, enforcement action of some kind follows.
The full text of the Wall Street Journal article appears below:
NEW YORK (Dow Jones)–The threat of possible civil charges against Morgan Keegan could help lighten the burden for many investors who filed arbitration claims against the brokerage, attorneys say.
Regions Financial Corp. (RF), which owns Morgan Keegan, disclosed in a mid-July securities filing that it received a Wells notice from the Securities and Exchange Commission on July 9. In it, the SEC warned the company that it may pursue enforcement action for possible violations of securities laws involving “certain mutual funds.”
While not naming the funds, the SEC said they were managed by Morgan Asset Management Inc., part of Morgan Keegan, a regional brokerage firm based in Memphis, Tenn. Seven funds run by Morgan suffered sizable losses in 2007 and 2008 because of exposure to collateralized debt obligations and other mortgage-related holdings, and numerous investors have filed claims against the company.
Regions transferred management of the funds last July to Hyperion Brookfield Asset Management Inc. of New York.
A Wells notice doesn’t mean for certain that the SEC will initiate an enforcement proceeding. It does give the recipient an opportunity to demonstrate why the SEC shouldn’t. The commission only approves about half of the recommendations for action made by its staff, according to Jahan P. Raissi, a San Francisco-based securities litigation attorney and former enforcement attorney for the SEC.
It should, however, make securities arbitrators more inclined to order Morgan Keegan to provide unhappy investors with copies of certain documents they believe will help their claims against the company, investors’ lawyers say.
The funds have been the subject of a flood of claims by investors who were hit by losses and who blame Morgan Keegan, charging that it, among other things, misrepresented its securities and sold them to investors for whom they weren’t suited.
The company has fought the claims and challenged investors’ rights to some documents. “The fight that Morgan Keegan is putting on is unbelievable,” says Brian Smiley, president of the Public Investors Arbitration Bar Association, or Piaba, a Norman, Okla.-based group of attorneys who represent investors.
Steven Caruso, a New York-based attorney who represents investors, says Morgan Keegan hasn’t voluntarily shared documentation concerning its valuation of positions in funds or email communication between those involved in management and operation of its mutual funds.
Arbitration panels have ordered Morgan Keegan to produce the documents “in very few cases,” Caruso said. But the Wells notice is likely to change that pattern.
“That notification has to influence arbitrations when the issue of discovery of regulatory documents comes up,” he says.
Raissi said, “The fact the enforcement staff thinks there’s something there is helpful and significant in determining the relevance of documents in arbitration proceedings.”
However, arbitration panels don’t generally allow a Wells notice to influence their ultimate decision in a case, he said. “They’re pretty good about being objective.”
Kathy Ridley, a Morgan Keegan spokeswoman, said the brokerage has produced required documents, subject to arbitration rules. She said that some investors haven’t produced certain documents, such as tax returns, required by arbitration rules.
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