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SEC Charges Morgan Keegan With Fraud

Plus, Harbor tees up a new fund, and more.

Morningstar Analysts, 04/12/2010

On April 7, the SEC charged Morgan Keegan & Company, Morgan Asset Management, and two employees, James C. Kelsoe Jr. and Joseph Thompson Weller, with fraud in connection with mispricing funds' subprime-mortgage securities in the first half of 2007. The agency alleges Morgan Keegan didn't use reasonable pricing procedures to value the securities and as a result calculated inflated net asset values. The SEC alleges Kelsoe, the funds' portfolio manager, told the fund accounting department to increase some securities' prices above their fair values and altered external price quotes, preventing NAVs from being reduced as the subprime-mortgage securities market worsened. The SEC says Weller, who was controller, head of the fund accounting department, and a member of the valuation committee, didn't fix Morgan Keegan's valuation procedures or ensure that NAVs were calculated correctly.

Kelsoe's risky home-equity and mortgage-related bets went off the rails in the subprime meltdown. From market peak to trough (Oct. 10, 2007, to March 9, 2009), the funds' cumulative losses were huge: Regions Morgan Select High Income lost 84.2%, Intermediate Bond lost 92.8%, and Short Term Bond lost 80.0%. These losses prompted massive waves of redemptions. For example, Select High Income experienced outflows of $340 million in 2007. By June 30, 2008, the fund had dwindled to $52 million in assets, down from $1.2 billion in late 2006.

Hyperion Brookfield Asset Management acquired the Regions fixed-income lineup in 2008 and rebranded the funds with the Helios name. Then, the former Regions funds--which became Helios Select High Income, Helios Select Intermediate Bond, and Helios Select Short Term Bond--were liquidated. By that time, High Income had dropped to just $16 million in assets, Intermediate Bond had only $9 million, and Short Term Bond limped along with $1 million in assets.

PIMCO to Manage Another Harbor Fund
Harbor Funds has hired PIMCO to run its new Harbor Unconstrained Bond as a subadvisor. Chris Dialynas, a managing director who has been with PIMCO since 1980 and is a senior member of the firm's investment strategy group, will run the fund that will hold both high-yield and investment-grade securities and won't be tied to any particular benchmark, according to filings. The expense ratio for the institutional class will be 1.05% with an investment minimum of $1,000. The administrative class' levy will be 1.30% with a $50,000 investment minimum.

On the heels of last week's Supreme Court decision in the Jones v. Harris fund fee case comes word that, in light of that decision, the Court sent the somewhat-similar Ameriprise Financial fee case back down to the Eighth Circuit Court for further consideration.

Jeffrey Gundlach's DoubleLine has launched two new mutual funds: DoubleLine Total Return Bond and Emerging Markets Fixed Income Fund. A third planned fund, Core Fixed Income, is not yet available.

Portfolio manager Richard M. Rokus resigned last week from M&I Investment Management Corp. The firm named Vincent S. Russo to replace Rokus as portfolio manager of Marshall Short-Term Income MSINX. John Boritzke will take the reins of two money market funds, Marshall Government Money Market and Marshall Prime Money Market.

The 11-member portfolio-management team of Fidelity Series Broad Market Opportunities FBMAX has shrunk to two, with Christopher Sharpe and Geoff Stein remaining as comanagers of the fund.

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