On Wednesday April 7, 2010, the Financial Industry Regulatory Authority (FINRA)issued a news release stating the SRO’s Department of Enforcement has filed an administrative complaint against Morgan Keegan & Company, Inc., alleging the firm marketed and sold seven affiliated bond funds (RMK Funds) to retail investors using false and misleading sales materials. The complaint also states the RMK funds invested heavily in structured products which caused them serious financial difficulties beginning in early 2007 and led to their collapse later that year, costing investors over a billion dollars. Finally, the complaint alleges Morgan Keegan misled its own Financial Advisors as to the funds holdings and risk profiles. The complaint,in addition to an unspecified fine, seeks disgorgement of all ill-gotten profits and full restitution for affected investors.
In addition to the FINRA action, the Securities and Exchange Commission SEC filed a Administrative Cease-and-Desist Proceeding as well as four invidual state (Alabama, Kentucky, Mississippi and South Carolina) securities regulators filed a Joint Notice of Intent to Revoke Registration and Impose Administrative Penalty alleging similar misconduct on the part of Morgan Keegan. The FINRA press release acknowledges cooperation between the various regulatory agencies in investigating and filing the three complaints.
The full FINRA release appears below:
FINRA Seeks Fine, Disgorgement of Profits, Full Restitution to Customers
Washington, DC — The Financial Industry Regulatory Authority (FINRA) announced today that it has filed a complaint against Morgan Keegan & Company, Inc., charging the firm with marketing and selling seven affiliated bond funds to investors using false and misleading sales materials – costing investors well over $1 billion. In addition to an unspecified fine, FINRA is seeking disgorgement of all ill-gotten profits and full restitution for affected investors.
From Jan. 1, 2006, through Dec. 31, 2007, Morgan Keegan sold over $2 billion of the bond funds. The funds were invested heavily in risky structured products – particularly, subordinated tranches of asset- and mortgage-backed securities, including sub-prime products. Those investments caused the funds to experience serious financial difficulties beginning in early 2007 and led to their collapse later that year.
In its complaint, FINRA alleges that the misleading sales materials, combined with the firm’s misleading and deficient internal guidance and failure to train its brokers about the risks, led Morgan Keegan’s brokers to make material misrepresentations to investors. This was particularly acute with respect to one of the funds – the Regions Morgan Keegan Select Intermediate Bond Fund – which was marketed as a relatively safe and conservative fixed income mutual fund investment when, in fact, the fund was exposed to undisclosed risks associated with its investment in mortgage- and asset-backed securities and subordinated tranches of structured products.
FINRA also alleges that, despite the negative impact on the bond funds in early 2007 – caused by the turmoil in the mortgage-backed securities market, most notably in the sub-prime home equity arena – Morgan Keegan failed, in any of its 2007 sales materials related to any of the bond funds, to disclose this to customers or that a substantial portion of the bond funds’ portfolios were acutely affected by then-current economic conditions.
In its complaint, FINRA further alleges that Morgan Keegan failed to establish, maintain and enforce an adequate supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with federal securities laws and FINRA rules.
Specifically, FINRA’s complaint alleges that:
In its research, investment advice and performance updates to its brokers regarding the Intermediate Fund, Morgan Keegan failed to disclose the material characteristics and risks of investing in the fund, misstated the appropriate use of the fund and otherwise portrayed the fund as a safer investment than it was, even though the firm was aware of material, special risks that made the fund unsuitable for many retail investors. Morgan Keegan failed to ensure the accuracy of the advertising materials prepared by the fund manager and distributed by the firm, and failed to ensure that those materials disclosed all material risks, were not misleading and did not contain exaggerated claims. Morgan Keegan failed to train its brokers regarding the features, risks and suitability of the fund and, in its communications with its brokers, the firm failed to adequately describe the nature of the holdings and material risks of the Intermediate Fund.
When Morgan Keegan became aware, beginning in early 2007, of the adverse market effects on the bond funds, the firm failed to timely warn its brokers or revise its advertising materials to reflect the disproportionately adverse effect the market was having on the performance of the securities that comprised the bond funds – which Morgan Keegan brokers continued to sell widely. At this time, the firm reassured, rather than warned, its sales force about the riskiness of the bond funds. As a result, some of the firm’s brokers were unaware of the then-turbulent market’s effects on the funds and failed to disclose the negative effects caused by market forces. FINRA acknowledges the cooperation in this matter of the Securities and Exchange Commission and state securities regulators.
Under FINRA rules, a firm or individual named in a complaint can file a response and request a hearing before a FINRA disciplinary panel. Possible remedies include a fine, censure, suspension or bar from the securities industry; disgorgement of gains associated with the violations; and payment of restitution. The issuance of a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint. Because this complaint is unadjudicated, interested persons may wish to contact the respondent before drawing any conclusions regarding the allegations in the complaint.
The law firm of Colling Gilbert Wright & Carter is currently investigating, filing and litigating arbitration claims on behalf of RMK Bond Fund investors. If you have lost money in a RMK Bond fund, please contact our office for a free case evaluation. Thank you.