* Investors stuck with $1.2 bln in debt, SEC says
* Debt marketed as cash equivalent, SEC says
* Morgan Keegan says surprised, been cooperating with SEC
(Adds Morgan Keegan comment, Charles Schwab case)
By Jonathan Stempel
NEW YORK, July 21 Morgan Keegan & Co, a unit of
Regions Financial Corp (RF.N), was sued on Tuesday by U.S.
regulators for allegedly leaving customers stuck with $1.2
billion of auction-rate securities that became illiquid.
In a lawsuit filed in federal court in Atlanta, the U.S.
Securities and Exchange Commission demanded that Morgan Keegan
buy back debt sold to customers before March 20, 2008, forfeit
$4.3 million of underwriting and distribution fees, and pay a
Morgan Keegan spokesman Eric Bran said the brokerage was
"surprised and disappointed" by the SEC actions. He said Morgan
Keegan has been cooperating with the regulator, and has been
repurchasing auction-rate debt from clients since early 2009.
Auction-rate debt has rates that reset in periodic auctions
and was often marketed by brokers as a cash substitute. After
the $330 billion market froze in February 2008 when dealers
stopped taking part in auctions, many investors could not sell
the debt, or could sell it only at a loss.
In its lawsuit, the SEC accused Memphis, Tennessee-based
Morgan Keegan of failing to disclose the debt's liquidity
risks, even after it stopped supporting the market.
"Morgan Keegan brokers told various customers that
auction-rate securities carried 'zero risk' or were
'guaranteed' and were 'fully liquid,' 'cash alternatives,'
'just like a money market,' 'as liquid on a weekly basis as
cash,' a 'liquid and safe investment,' or a 'totally liquid (7
day) money parking account,'" the complaint said.
As of July 15, 2009, Morgan Keegan customers still held
$272 million of illiquid auction-rate debt, the SEC said.
More than 20 firms, including many of the largest U.S.
banks, have agreed to buy back in excess of $61 billion of
auction-rate debt and pay hundreds of millions of dollars of
fines, through settlements with regulators including the SEC
and New York Attorney General Andrew Cuomo.
The latest to settle, TD Ameritrade Holding Corp (AMTD.O),
agreed on Monday to buy back $456 million of the debt. Charles
Schwab Corp SCHW.O on Monday rejected a demand by Cuomo to
settle a similar probe or face a possible lawsuit.
Morgan Keegan in March received a "Wells notice" from the
SEC indicating that civil charges might be forthcoming. A Wells
notice gives a recipient a chance to mount a defense.
Also on Tuesday, Regions posted a $244 million
second-quarter net loss applicable to common shareholders, its
second quarterly loss in three quarters, hurt by deterioration
in the credit quality of commercial and real estate loans.
The case is SEC v. Morgan Keegan & Co, U.S. District Court,
Northern District of Georgia (Atlanta), No. 09-1965.
(Reporting by Jonathan Stempel, editing by Matthew Lewis and