On June 22, 2011, the SEC, state regulators and FINRA announced that Morgan Keegan agreed to pay $200 million to settle fraud charges related to valuations of subprime mortgage-backed securities held by five Morgan Keegan funds. The settlement also prohibits Morgan Keegan from valuing fair valued securities on behalf of funds for three years. Finally, two employees of Morgan Keegan, including the funds’ portfolio manager, agreed to pay $500,000 and $50,000 in penalties, respectively.
The SEC found that Morgan Keegan and the two employees caused the false valuation in 2007 of subprime mortgage-backed securities in five funds managed by Morgan Keegan. According to the SEC, Morgan Keegan failed to employ reasonable pricing procedures with respect to the valuation of the funds’ portfolio securities, which resulted in the calculation and dissemination of inaccurate net asset values. Specifically, the SEC found that the funds’ portfolio manager instructed the fund accounting department to make arbitrary “price adjustments” to the fair values of certain portfolio securities that ignored lower values for those same securities provided by outside broker-dealers as part of the pricing process, and often lacked a reasonable basis. The SEC also found that the portfolio manager instructed fund accounting to lower values over a period of days, instead of when pricing information was received. Moreover, the SEC found that the portfolio manager screened and influenced the price confirmations received from at least one broker-dealer.