SEC claim that Morgan Keegan misled ARS investors is nixed

Judge: “Failure to predict the market does not amount to securities fraud”

Jun 29, 2011 @ 10:31 am

A U.S. judge rejected Securities and Exchange Commission claims that Regions Financial Corp.'s Morgan Keegan brokerage unit misled investors about $2.2 billion in auction-rate securities before the market for the instruments collapsed in 2008.

“The SEC has not introduced any evidence to show that Morgan Keegan instituted a companywide policy encouraging its brokers to misrepresent ARS liquidity risks,” U.S. District Judge William S. Duffey Jr. said today in a summary judgment in Atlanta. The “failure to predict the market does not amount to securities fraud.”

The SEC sued Morgan Keegan in July 2009, claiming it encouraged brokers to push the debt before the $330 billion market froze in February 2008, and customers weren't told about the growing risk the securities could become difficult to sell. Since then, dozens of banks have returned billions of dollars to harmed investors.

John Nester, an SEC spokesman, said the agency is considering whether to appeal. A phone call after normal business hours to Tim Deighton, a spokesman for Birmingham, Alabama-based Regions, wasn't immediately returned.

Federal and state regulators have sanctioned banks for selling auction-rate securities as safe, cash-like investments. The instruments are typically municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically reset through an auction.

Customer Complaints

The SEC cited testimony of four customers claiming they were misled by Morgan Keegan brokers who allegedly said ARS were “cash equivalents” and “completely liquid,” according to the judgment. Duffey faulted the agency for arguing those investors' claims were true for others.

“The SEC is attempting to bootstrap the investor-specific impact of the misrepresentations alleged by four individual investors as a grounds to seek relief for a whole class of investors without any evidence that the other investors received similar oral misrepresentations,” Duffey said in the judgment.

In a separate case last week, two Morgan Keegan units agreed to pay about $200 million to settle regulators' claims they published inaccurate asset values for subprime-mortgage backed securities and sold shares to investors based on inflated prices. Regions said it will consider “strategic alternatives” for the Morgan Keegan unit.

--Bloomberg News

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