RF Regions Financial Corporation

According to a regulatory filingfrom the Securities and Exchange Commission (SEC), Regions Financial Corp.’s (RF) subsidiaries Morgan Keegan & Co. and Morgan Asset Management has agreed to pay $200 million to settle down fraud charges related to subprime mortgage-backed securities. They were involved in fraudulently marketed mutual funds.

The SEC alleged Regions' subsidiaries of fraud related to the sale of proprietary Regions Morgan Keegan (RMK) Bond Funds. Memphis, Tennessee-based Morgan Keegan, a brokerage arm of Regions, as well as former portfolio manager James C. Kelsoe Jr. and comptroller Joseph Thompson Weller were all accused in the administrative proceeding held in 2010. They were alleged for misrepresenting subprime mortgage-backed securities in five funds and also manipulating prices managed by Morgan Asset Management from January 2007 to July 2007.

Financial Industry Regulatory Authority (FINRA) and a force of state regulators from Alabama, Kentucky, Mississippi, Tennessee and South Carolina all joined the SEC for taking action against Morgan Keegan.

Morgan Keegan & Co. is fined for overstating the value of mortgage investments during housing bubble and misguided buyers of its funds with false sales materials. The misrepresentation of fund values harmed investors to a considerable extent. According to SEC, Morgan Keegan failed to come up with rational pricing procedures, published inaccurate information and sold shares to investors based on inflated prices.

The investors suffered significant losses due to their investments in this product when the housing market collapsed. As part of its settlement, Regions also consented to improve its reviews and approval of its mortgage securities transactions.

It is estimated by regulators that over 30,000 investors lost over $1.5 billion in the seven RMK branded bond funds. These Morgan Keegan bond funds include Regions Morgan Keegan Select High Income, RMK High Income Fund, RMK Strategic Income Fund, Regions Morgan Keegan Select Intermediate Bond Fund, RMK Multi-Sector High Income and RMK Advantage Income (later rebranded under the "Helios" brand of funds).

The SEC levied $75 million penalty and $25 million in compensation of the total fraud charges. The remaining $100 million will go to the state fund to be distributed to the affected investors. In addition, Morgan Keegan agreed not to make valuations of securities for investment funds for three years. Further, SEC ordered Kelsoe to pay $500,000 fine and ban permanent securities industry and Thompson Weller will have to pay $50,000 penalty and one-year suspension.

Earlier this week, JPMorgan Chase & Co.’s (JPM) U.S. broker-dealer affiliate, J.P. Morgan Securities LLC, has agreed to pay $153.6 million to settle charges with the SEC. The SEC had alleged the bank of misleading investors in a synthetic collateralized debt obligation (CDO) known as Squared CDO 2007-1 that was tied to the U.S. housing market.

Regions is plying strategic options for the part-sale of its Morgan Keegan & Co. brokerage unit as part of its ongoing capital planning process. According to a press release, Regions has hired Goldman Sachs Group Inc. (GS) to explore alternatives for its Morgan Keegan unit. Morgan Asset Management and Regions Morgan Keegan Trust are not included in this review.

Regions acquired Morgan Keegan in 2001. The subsidiary has more than 300 offices in 20 states and provides brokerage and investment-banking services.

Since 2007, Regions is posting annual loss though recorded profits in the last two quarters, and is yet to receive regulatory approval to repay $3.5 billion government bailout money. According to the Wall Street Journal, Regions is putting up Morgan Keegan for sale in a bid to raise capital and repay the federal government for its funds.

The SEC has stepped up its investigation on Wall Street companies enquiring about a number of major banks' actions ahead of the financial crisis that plunged the country into the most severe recession since the 1930s. Last year, Goldman settled a charge by paying $550 million for not disclosing the buyers the role of a hedge fund firm in formulating the CDOs and betting on them for performing poorly in the open market.

While such charges will dent Regions’ reputation and its financials, this will be a relief for investors, who have lost their hard-earned money in such investments. Moreover, after the settlement, Regions will be able to explore opportunities consistent with its strategic and capital planning initiatives.

Regions currently retain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Moreover, considering the fundamentals, we maintain a “Neutral” recommendation on the stock.

 
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