* Seemingly safe funds lost more than half their value
* "Strategic alternatives" sought for Morgan Keegan
* Sale could fetch up to $1.3 bln-analyst
* Shares of Regions close down 1.4 percent
(Adds analyst comment, closing share price)
By Joe Rauch and Jonathan Stempel
CHARLOTTE, N.C./NEW YORK, June 22 Regions
Financial Corp (RF.N) agreed to pay $210 million to settle
allegations that its Morgan Keegan brokerage fraudulently
marketed mutual funds and said it hired Goldman Sachs Group Inc
(GS.N) to explore strategic options for that unit.
Seven federal and state regulators including the U.S.
Securities and Exchange Commission had accused Morgan Keegan of
fraudulently misleading investors from January to July of 2007
about the risks of mutual funds filled with subprime mortgages,
and artificially inflating the funds' prices.
Wednesday's settlement was announced one day after the SEC
said another major bank, JPMorgan Chase & Co (JPM.N), agreed to
pay $153.6 million to settle charges it defrauded investors who
bought mortgage debt, also on the eve of the credit crisis.
The accord with Regions, a large U.S. southeast regional
bank based in Birmingham, Alabama, stemmed from roughly $1.5
billion of investor losses tied to five Morgan Keegan funds.
Some of these funds, including investment-grade funds
marketed as conservative investments for older investors, lost
more than half their value as credit conditions worsened.
The Select Intermediate Bond A fund, for example, fell 50.3
percent in 2007, while the Select High Income A fund fell 59.7
percent that year.
James Kelsoe, 49, a former star portfolio manager for
Morgan Keegan who oversaw the funds, agreed to a $500,000 fine
and permanent securities industry ban, the SEC said.
A Morgan Keegan comptroller, Joseph Thompson Weller, 46,
agreed to a $50,000 penalty and one-year suspension, it added.
"The falsification of fund values misrepresented critical
information exactly when investors needed it most -- when the
subprime mortgage meltdown was impacting the funds," SEC
enforcement chief Robert Khuzami said in a statement. "Such
misconduct does grievous harm to investors."
Regulators from Alabama, Kentucky, Mississippi, South
Carolina and Tennessee, and the Financial Industry Regulatory
Authority brokerage regulator, were also part of the accord. No
criminal charges were filed.
A lawyer for Kelsoe and Weller did not immediately return a
call seeking comment.
Regions previously set aside funds for the full settlement.
It will pay $200 million into funds administered by the SEC and
the states for investors, and a $10 million fine to the states.
The payment to the SEC fund includes a $75 million penalty.
TARP NOT YET REPAID
By hiring Goldman to explore "strategic alternatives" for
Morgan Keegan, Regions signaled it may sell part of Memphis,
Tennessee-based Morgan Keegan, which it has owned since 2001.
Regions has not posted an annual profit since 2007 and
unlike most other large U.S. banks has yet to receive
regulatory approval to repay the $3.5 billion it took from the
Treasury Department's Troubled Asset Relief Program (TARP).
The settlement "gives Regions greater flexibility with
respect to the Morgan Keegan franchise and the ability to
explore opportunities that are consistent with our strategic
and capital planning initiatives," Regions Chief Executive
Grayson Hall said in a statement.
Regions could expect $900 million to $1.3 billion from a
sale of Morgan Keegan, although the amount would depend on what
is sold, said Jefferson Harralson, bank analyst at Keefe
Bruyette and Woods Inc. He called the unit one of Regions'
Morgan Keegan has about 1,200 brokers in its private client
group and also has investment banking and capital markets
The bank said Morgan Keegan generated $1.32 billion of
gross revenue in 2010. It also said Morgan Asset Management and
Regions Morgan Keegan Trust are not part of its review.
"Regions needs a great deal of capital and selling Morgan
Keegan would be a great way to get part of the way there," said
Richard Bove, a banking analyst at Rochdale Securities LLC.
The bank also has roughly 1,771 branches in 16 states.
In its original complaint, the SEC accused Kelsoe of
directing his accounting department to make repeated, arbitrary
"price adjustments" to boost the perceived value of securities
in his funds. The regulator also said Weller failed to ensure
proper pricing for the securities and mutual funds.
It is rare for any bond mutual fund to suffer losses of the
magnitude suffered by the Morgan Keegan funds, and Morgan
Keegan has faced a slew of related arbitration proceedings.
"No investor is giving up any rights or any claims" in such
proceedings, Joseph Borg, director of the Alabama Securities
Commission, said on a conference call.
Hyperion Brookfield Asset Management Inc took over
management of some Morgan Keegan funds in 2008.
Regions shares closed down 9 cents, or 1.4 percent, at
$6.21 on the New York Stock Exchange.
(Additional reporting by Joseph A. Giannone in New York;
Editing by Andre Grenon, Dave Zimmerman and Steve Orlofsky)