Regions Financial Corp. will pay $210 million to settle federal and state regulatory charges involving subprime-mortgage-laden mutual funds managed by its investment banking subsidiary, Morgan Keegan & Co.
The bank announced today in a press release that it had hired The
Goldman Sachs Group Inc. to “explore potential strategic alternatives” for the investment bank. One potential alternative: selling the brokerage business and its approximately 1,250 advisers to another firm.
“For those of us who've been in the trenches with these guys, it's a sweet day,” said Andrew Stoltmann, a plaintiff's lawyer who focuses on investor claims against major brokerages.
He filed his first claim against the firm with the
Financial Industry Regulatory Authority Inc. in late 2007 and has brought close to 100 other claims since then. Mr. Stoltmann won an award of $1.5 million on behalf of former Chicago Bulls basketball player Horace Grant and still has seven other cases pending against Morgan Keegan.
The charges and settlement with the Securities & Exchange Commission, Finra and five state securities regulators relate to the firm's valuation of subprime-mortgage-backed securities in five fixed-income mutual funds managed by the asset management division Morgan Asset Management.
According to Finra, the firm made exaggerated performance claims and failed to disclose growing risks in the funds as the housing market declined in 2006-07.
The SEC accused former Morgan Keegan portfolio manager James C. Kelsoe Jr. of making arbitrary “price adjustments” to many of the mortgage-backed securities in the funds as they plummeted in value. The result was the publication of inaccurate net asset values for the five funds, the commission said.
“The falsification of fund values misrepresented critical information exactly when investors needed it most — when the subprime mortgage meltdown was impacting the funds,” said Robert Khuzami, director of the SEC's Division of Enforcement.
About 39,000 investors lost $1.5 billion in the investments, according to regulators. They will receive $200 million of the settlement amount.
Mr. Kelsoe agreed to pay a $500,000 penalty and was barred from the securities industry. Former company comptroller Joseph Thompson Weller agreed to pay a $50,000 fine.
A spokesperson for Regions Financial declined to comment on the settlement.
InvestmentNews was unable to immediately contact Mr. Kelso or Mr. Weller or their attorneys.
Regions booked a $200 million charge for the Morgan Keegan regulatory proceedings in the second quarter of last year.
But the settlement isn't the end of the matter for Regions and Morgan Keegan. There are still many arbitration claims before Finra on the matter, and Mr. Stoltmann expects the huge settlement may bring even more investors who lost money in the funds out of the woodwork.
“I expect my phone to be ringing off the hook for the next two weeks,” he said.
