The brokerage firm, based in Memphis, agreed to pay $200 million to settle claims that it misled customers about the dangers of mortgage securities. It was too little, too late for many of the investors, who together lost more than $1 billion.
The Financial Industry Regulatory Authority and state securities regulators contended that Morgan Keegan failed to disclose the risks associated with the investments of one fund.
But the Securities and Exchange Commission went further, saying that James C. Kelsoe Jr., the manager of that fund and six others, defrauded clients. The S.E.C. contended that he inflated the values of mortgage securities that the funds owned by “mis-marking” positions from at least January 2007 to July 2007, as the mortgage market tumbled. In other words, the S.E.C. says, he basically made up the prices.
In its settlement, Morgan Keegan neither admitted nor denied wrongdoing — standard procedure in such agreements. But the details in this matter tell a troubling tale.
According to regulators, Mr. Kelsoe instructed his accounting department to mark the prices of securities above their fair values. When he got a valuation he didn’t like from an outside firm, regulators said, he persuaded that firm to raise the price, too. This way, the funds could avoid taking markdowns.
Regulators said Mr. Kelsoe signed letters to investors reporting on the funds’ performance “based on net asset value.” But the S.E.C. said the performance was materially misstated.