Regions Settles Mortgage Fraud - Analyst Blog
June 23 2011 - 8:30AM
Zacks
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.
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
REGIONS FINL CP (RF): Free Stock Analysis Report
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