* Rare action sought to hold directors more accountable
* No admission of wrongdoing
By Jonathan Stempel
June 13 (Reuters) - The U.S. Securities and Exchange
Commission has settled civil charges accusing eight former
directors of Morgan Keegan bond mutual funds of failing to
police the portfolio managers they oversaw, allowing toxic
mortgage assets to be overvalued prior to the financial crisis.
While the SEC imposed no fines and required only that the
directors cease and desist from future violations, co-director
of enforcement George Canellos said the settlement sends a
"clear warning" that fund directors and trustees uphold their
duty to ensure that funds properly price securities they own.
The case had marked a rare SEC effort to hold a mutual fund
board, which is supposed to represent the interests of fund
shareholders, accountable for a portfolio manager's activities.
It followed a related $200 million settlement in June 2011
with Morgan Keegan, now part of Raymond James Financial Inc
, and a securities industry ban against former portfolio
manager James Kelsoe. Morgan Keegan has also faced more than
1,000 customer arbitration cases over its bond mutual funds.
LACK OF OVERSIGHT
In December, the SEC accused directors including Allen
Morgan Jr., who was a founder of Morgan Keegan, of violating
laws that required them to help fund managers determine the fair
value of securities that were hard to value in the marketplace.
Several Morgan Keegan funds, including some marketed as
conservative investments for older investors, lost more than
half their value in 2007 and 2008 because they were stuffed with
securities linked to subprime mortgages and other risky debt.
According to the SEC, a committee to which the directors
delegated responsibility to value investments in five funds did
not do its job, and often allowed the portfolio manager to
inflate the value of securities. The SEC said this exacerbated
losses after the securities were later valued properly.
The SEC said the other settling directors are J. Kenneth
Alderman, Jack Blair, Albert Johnson, James Stillman R.
McFadden, W. Randall Pittman, Mary Stone and Archie Willis. None
of the eight former directors admitted or denied wrongdoing.
Despite the lack of fines, the sanctions are "a significant
step by the SEC in that the action targets the top of the food
chain - the board of directors," Thomas Sporkin, a partner at
BuckleySandler and former SEC lawyer, said in an email.
"It's reasonable to expect that in future SEC cases against
board members for failing to exercise care in carrying out their
legal obligations, the SEC will extract monetary sanctions and
will point to this action as the one that put them on notice,"
Donald Langevoort, a professor at Georgetown Law School,
said in an email that a cease-and-desist order is the "lowest of
the sanctions" that the SEC pursues, but it can still have
"It does, supposedly, 'shame" the subjects (and does create
a continuing order that cannot safely be ignored), and probably,
more importantly, causes lawyers to send alerts to other fund
directors that they should be more sensitive," he said.
Peter Anderson, a lawyer for Alderman and Morgan, was not
immediately available for comment. Jeffrey Maletta, a lawyer for
the remaining directors, declined to comment. The SEC was not
available after business hours for further comment.
Less than two weeks after being charged by the SEC, Stone
stepped down as a trustee of the Financial Accounting
Foundation, which oversees the Financial Accounting Standards
Board that is the steward of accounting principles used by U.S.
Regions Financial Corp, the former owner of Morgan
Keegan, retained responsibility for the fund litigation.