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SEC Charges Morgan Keegan With Fraud

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

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Yesterday, 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, as we noted in a July 2008 article, 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.

Courtney Goethals Dobrow does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.