A federal appeals court on Wednesday revived a U.S. Securities and Exchange Commission lawsuit accusing Morgan Keegan & Co of fraudulently misleading investors about the safety of auction-rate securities it sold.
The 11th U.S. Circuit Court of Appeals in Montgomery, Alabama, said a federal district judge in Atlanta erred in finding that the alleged misrepresentations made by Morgan Keegan brokers about the debt were not material. It sent the case back to the district court for more proceedings.
Morgan Keegan is a unit of Raymond James Financial Inc (RJF.N), which on April 2 bought the brokerage from Regions Financial Corp (RF.N) for $1.2 billion.
Once $330 billion in size, the auction-rate securities market froze in February 2008 when dealers stopped supporting it, leaving many investors with losses on largely illiquid debt.
The Morgan Keegan case is one of the rare large-scale auction-rate cases to be addressed in court.
In its 2009 lawsuit, the SEC accused Morgan Keegan of hiding the debt's risks, including by telling customers that the debt carried "zero risk" or was "just like a money market" fund.
Last June, U.S. District Judge William Duffey in Atlanta found that Morgan Keegan had adequately disclosed the risks. He also said the SEC must show more than "a few isolated instances of alleged broker misconduct" to hold Morgan Keegan responsible.
But a three-judge 11th Circuit panel concluded that "the brokers' misleading statements and failure to disclose the known liquidity risk of auction-rate securities could have been viewed by the reasonable investor as having significantly altered the total mix of information made available."
The panel also said Morgan Keegan, having known that more auctions were failing in late 2007 and early 2008, was not excused by having given customers "general cautionary language" about the debt on the back of its trade confirmations.
Amy Rudolph, a lawyer for Morgan Keegan, said the company had no comment on the decision. Raymond James spokesman Patrick Kavanaugh declined to comment. Regions spokeswoman Evelyn Mitchell had no immediate comment. The SEC did not immediately respond to requests for comment.
Former New York Attorney General Andrew Cuomo, now the state's governor, convinced more than a dozen banks and brokerages to buy back more than $61 billion of auction-rate debt. Charles Schwab Corp (SCHW.N) refused to settle and in October won the dismissal of a lawsuit by Cuomo.
Raymond James is based in St. Petersburg, Florida, and Regions in Birmingham, Alabama.
The case is SEC v. Morgan Keegan & Co, 11th U.S. Circuit Court of Appeals, No. 11-13992.
(Reporting by Jonathan Stempel in New York; Editing by Andre Grenon, Phil Berlowitz and John Wallace)