* Rare action seeks to hold board members accountable for
* Morgan Keegan founder served as head for 34 years
By Sarah N. Lynch and Suzanne Barlyn
WASHINGTON, Dec 10 U.S. securities regulators
filed civil charges against eight board members of mutual funds
run by Morgan Keegan, including one of the firm's founders,
saying they failed to oversee managers who inaccurately priced
toxic mortgage-backed assets leading up to the financial crisis.
The charges from the U.S. Securities and Exchange Commission
on Monday against the firm's founder Allen Morgan Jr. and seven
others marked a rare effort by the agency to hold the board of a
mutual fund responsible for wrongdoing by its manager.
Such boards are supposed to represent the interests of the
shareholders who own the funds - not those of a manager or
sponsor. But the SEC has rarely held board members accountable
when funds run into trouble, prompting criticism that the system
of oversight is too weak.
The SEC said the eight former board members had violated
laws requiring fund directors to help determine the fair value
of securities when market quotations are not available. The
directors delegated the responsibility to a valuation committee
without "providing meaningful substantive guidance on how fair
valuation determinations should be made," the SEC said.
Five of Morgan Keegan's bond funds had loaded up on
mortgage-backed securities during the real estate bubble. But
when prices started to drop in 2007, the funds mispriced the
securities to hide large losses, the SEC said. The value of the
funds ultimately plunged.
The directors also made no meaningful effort to learn how
the fair values were determined, the SEC added.
"Investors rely on board members to establish an accurate
process for valuing their mutual fund investments," SEC
Enforcement Director Robert Khuzami said. "Otherwise, they are
left in the dark about the value of their investments and
handicapped in their ability to make informed decisions."
HOLDING DIRECTORS ACCOUNTABLE
Mercer Bullard, a University of Mississippi law professor
and an advocate for fund investors, said the case was
significant because the SEC has rarely pursued charges against
mutual fund directors.
"The mere fact of charging the independent directors would
reflect a fundamental shift in the SEC's investment-management
enforcement strategy," Bullard said.
The case comes about 1 1/2 years after Morgan Keegan, now a
unit of Raymond James Financial Inc, agreed to pay $200
million to settle fraud charges in a related case tied to the
subprime mortgage crisis.
A star manager at the firm, James Kelsoe, also agreed to pay
$500,000 in penalties and be barred from the securities industry
The 2011 settlements with regulators included details of how
Kelsoe used risky mortgage-backed securities to inflate his
Neither the brokerage nor Kelsoe admitted or denied the
The seven other board members charged by the SEC are Kenneth
Alderman, W. Randall Pittman and Mary S. Stone of Birmingham,
Alabama; Albert C. Johnson of Hoover, Alabama; Jack R. Blair and
James Stillman R. McFadden of Germantown, Tennessee, and Archie
W. Willis III of Memphis, Tennessee.
Attorneys for Alderman and Morgan, who lives in Memphis,
could not be reached immediately. Lawyers f or the other
defendants said they intended to fight the charges.
"The SEC has chosen to ignore a host of facts and
circumstances which demonstrate that these directors at all
times acted diligently and in good faith during the
unprecedented market turmoil of 2007," the lawyers said in a
Allen Morgan, Jr. co-founded Morgan Keegan in 1969 and
served as its chairman and chief executive from its inception
until 2003. In 2002, he was also chairman of the retail
brokerage industry's trade group, then called the Securities
The SEC's charges against the board members could add fuel
to a wave of litigation against the company, depending on the
allegations and ultimate findings, lawyers say.
Morgan Keegan has faced more than 1,000 customer arbitration
cases over the bond funds, which invested in risky
mortgage-backed securities while being marketed as being safe.
The funds later lost as much as 80 percent of their value as the
subprime market imploded in 2007 and 2008. Some of those cases
are still winding through the Financial Industry Regulatory
Authority's arbitration system.
"It's a good development for people who still have cases
remaining," said Andrew Stoltmann, a Chicago-based lawyer who
has represented investors in arbitrations involving the funds.
"It illustrates that the fraud went to the highest level of
Morgan Keegan, including the directors and the named person of
In October, Morgan Keegan and thousands of investors in a
closed-end fund at issue agreed to a $62 million settlement,
subject to court approval. Shares of closed-end funds represent
a stake in a portfolio of securities. There are a fixed number
of these shares so they don't offer the same liquidity as
open-end funds' shares.
Other pending litigation includes a class action suit
stemming from the open-ended, or conventional, funds at issue.
All board members named in the SEC's action on Monday are also
defendants in that case, according to the plaintiff's lawyer.
Regions Financial Corp, the former owner of Morgan
Keegan, retained responsibility for the fund litigation.