Arkansas Settles With Morgan Keegan on Risky Bond Funds

Arkansas will receive $434,215 as part of a multi-state settlement with Morgan Keegan & Co., which sold high-risk mortgage-backed bond funds to nearly 2,000 Arkansas investors who were led to believe they were low-risk, the Arkansas Securities Department announced Wednesday afternoon.

Arkansas' share is part of a $10 million civil penalty negotiated by a 13-state task force that was made public in June.

Morgan Keegan will also pay a total of $200 million to federal and state regulators, who will then divide it among investors who lost money in the seven bond funds managed by James C. Kelsoe Jr.

ASD attorney Scott Freydl said the department expects to notify 1,921 Arkansas households of the procedure for making claims on the settlement funds. It may be several months before a system is in place for paying victims, he said on Wednesday.

Morgan Keegan & Co. is a subsidiary of Regions Financial Corp. of Birmingham, Ala. The bond funds in question were peddled to investors in 2007, and investors were not informed that the funds were invested in riskier "tranches" of mortgage-backed securities.

In fact, according to the consent order with the ASD, some brokers with Morgan Keegan and its Morgan Asset Management division characterized the funds declining prices as "a buying opportunity" and actively discouraged investors from selling.

Morgan Keegan's own stock analysts were unable to complete a due diligence report on the funds because Kelsoe wouldn't provide information or meet with the analyst, according to the consent agreement.

Kelsoe has been banned from working in the securities industry, Freydl said.


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