SEC Reaches $200 Million Subprime Settlement With Investment Firms

WASHINGTON, D.C. - (Mealey's) Investment adviser Morgan Asset Management Inc., broker-dealer Morgan Keegan & Co. Inc. and employees of both firms have agreed to pay more than $200 million to settle claims related to subprime mortgage-backed securities, according to a Securities and Exchange Commission administrative order issued June 22 (In the Matter of Morgan Asset Management, Inc., et al., No. 3-13847, SEC).


Under the terms of the settlement agreement, Morgan Keegan and Morgan Asset "shall jointly and severally pay" $25 million in disgorgement and prejudgment interest and a $75 million civil penalty to the Securities and Exchange Commission. 

Morgan Asset portfolio manager James C. Kelsoe Jr. will also pay $500,000 in penalties and will be barred from the securities industry by the SEC, while Morgan Keegan Controller Joseph Thompson Weller will pay a $50,000 penalty. 

In addition, in the administrative order, the SEC found that Morgan Keegan "failed to employ reasonable pricing procedures and consequently did not calculate accurate 'net asset values' (NAVs) for the funds" and that Morgan Keegan published inaccurate daily NAVs and sold shares to investors at inflated prices. 

Moreover, the SEC found that Kelsoe fraudulently "prevented a reduction in the NAVs of the funds that should otherwise have occurred as a result of the deterioration in the subprime securities market in 2007." 

The SEC, along with the Financial Industry Regulatory Authority (FINRA) and a task force of state regulators from Alabama, Kentucky, Mississippi, Tennessee and South Carolina, brought the enforcement action on April 10, 2010. 

The SEC alleges that the defendants caused the false valuation of subprime mortgage-backed securities in five funds managed by Morgan Asset from January 2007 to July 2007 in violation of Section 8A of the Securities Act of 1933, Sections 4(c), 15(b)(4), 15(b)(6), 21C of the Securities Exchange Act of 1934, Sections 9(b) and 9(f) of the Investment Company Act of 1940, Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940 and Rule 102(e)(l)(iii) of the SEC's Rules of Practice. 

[Editor's Note:  Full coverage will be in the June issue of the LexisNexis Financial Services Litigation Report.  In the meantime, the administrative order is available at or by calling the Customer Support Department at 1-800-833-9844.  Document #88-110627-031R.  For all of your legal news needs, please visit] 

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