Federal Court Rules For Morgan Keegan In SEC's ARS Fraud Case
June 28 2011 - 6:25PM
Dow Jones News
The sales tactics used by Morgan Keegan during the turmoil in
the auction-rate securities market did not amount to fraud, a
federal court ruled Tuesday, handing the embattled brokerage a
victory.
Morgan Keegan's "failure to predict the market does not
constitute securities fraud," ruled William S. Duffey Jr., a U.S.
District judge in Atlanta.
The Securities and Exchange Commission had sued Morgan Keegan, a
unit of Regions Financial Corp. (RF), in July 2009, asking the
court to force the brokerage to buy back illiquid auction-rate
securities because it allegedly failed to warn customers
appropriately of the risks involved.
The SEC wasn't immediately available for comment Tuesday.
The SEC complaint said Morgan Keegan sold about $647 million of
ARS to its customers in just three months in early 2008, but failed
to warn them about increased risks even as the market collapsed and
Morgan Keegan executives raised red flags as early as February
2008.
Investors in auction-rate securities, long-term debt instruments
whose prices reset in periodic short-term auctions, were trapped in
the investments after the $330 billion market collapsed in early
2008. Regulators have successfully pushed Wall Street firms and
brokerage houses to buy back billions in the deals.
Duffey cited in his ruling Tuesday several instances where
Morgan Keegan clients testified they were told, in various forms,
ARS were "as good as cash." But the judge also found that the firm
quickly changed its written disclosures to warn customers, making
various efforts to warn them.
"The disclosures and their availability were adequate," Duffey
ruled.
The victory comes just one week after Morgan Keegan settled a
separate SEC lawsuit that accused fund managers at the firm of
defrauding investors by inflating the value of risky
subprime-mortgage securities. Morgan Keegan in that case agreed to
pay roughly $200 million.
When the subprime settlement was announced, Regions Financial
also said it would look for alternatives for Morgan Keegan, hiring
Goldman Sachs Group Inc. (GS) to explore a possible sale.
-By David Benoit and Suzanne Barlyn, Dow Jones Newswires;
212-416-2458; david.benoit@dowjones.com
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