Morgan Keegan Fund Valuation Case: The Lower Price Had to Wait

In the Morgan Keegan fund valuation case, Morgan Keegan and Morgan Asset Management agreed to pay $200 million to settle allegations of false valuations of subprime mortgage-backed securities. The SEC alleged that lower broker prices reached the pricing process, but the funds kept higher values or moved toward the lower prices in planned steps. If you worked in fund accounting or supplied those quotes, you would recognize the difference between receiving a price and letting it reach the books.

The SEC’s June 22, 2011 announcement concerned five funds managed by the Memphis-based Morgan Asset Management and conduct from January through July 2007. This page follows the Morgan Keegan pricing decisions and settlement. Our page on fund valuation and NAV fraud explains how an asset price travels into fund accounts and investor transactions.

Lower Broker Quotes Did Not Reach the Fund Marks

The SEC alleged that the portfolio manager directed Morgan Keegan’s fund accounting department to make arbitrary changes to the fair values of portfolio securities. Those changes ignored lower prices supplied by outside broker-dealers and often lacked a reasonable basis. The person managing the investments was also directing changes to the numbers used to value them.

In the SEC’s account, outside brokers supplied price information, accounting personnel entered values, and the portfolio manager directed adjustments. A completed pricing file could therefore contain an outside quote and still carry a different value into the fund’s accounts. The quote’s presence did not settle what happened to it.

Morgan Keegan allegedly failed to calculate accurate daily net asset values, then published those values and sold fund shares at inflated prices. The disputed mark reached the investor through the share price. For someone working on the daily calculation, the useful connection runs from the bond’s value in the portfolio to the price used in an actual share purchase.

The Markdowns Came on a Schedule

According to the SEC, some substantially lower price information led to a planned series of reductions over several days. Fund accounting personnel allegedly followed the portfolio manager’s direction, bringing bond values down to, or closer to, the broker confirmations in stages. During the intervening days, the bonds remained above their current fair value.

The sequence gives a pricing employee something specific to recognize. The lower confirmation had already arrived, yet the daily values followed a schedule of reductions. An end-of-period value might look closer to the broker’s price while the earlier daily values still carried the alleged inflation. The dates on the confirmation and the entries belong in the same account of what happened.

In the SEC’s account of the deteriorating subprime securities market in 2007, we see a portfolio manager preventing the reductions in net asset values that should have followed. The lower price had to wait its turn.

The Outside Confirmation Could Be Changed Too

The alleged interference also reached the broker’s side of the pricing process. The SEC said the portfolio manager screened and influenced confirmations from at least one broker-dealer, inducing it to supply interim prices above the lower confirmations it had originally intended to provide. Those interim prices were below the funds’ existing marks, but still let the funds avoid the full reduction to current fair value.

In other instances, the SEC alleged that the manager induced the broker-dealer to withhold confirmations that would have been significantly below the funds’ values. This brings a different employee into view: the person at the broker who knew the intended price and the request to change or withhold it. The final confirmation alone would leave out the lower number the broker had been prepared to send.

For a whistleblower who knows that exchange, the original quote and the communications around its replacement can explain the apparent support for a fund’s mark. A confirmation carrying an outside firm’s name may look reassuring in the completed file. The SEC’s allegations put the decision behind that confirmation at the center of the case.

The Valuation Policy Did Not Control the Price

The funds’ boards had adopted fair-valuation policies and procedures. The SEC described the alleged misconduct as occurring amid Morgan Keegan’s nearly complete failure to use them. The policy existed, but the SEC’s account followed what the pricing operation actually did with lower values and the manager’s instructions.

For an employee familiar with the review process, that is a comparison between the promised check and the work performed. Valuation policies, committee records and pricing exceptions can help explain whether a disputed mark received the review described on paper. We examine those records alongside the original prices and the instructions that changed them, so the policy is tested against the decision it was supposed to govern.

A related problem appears in the SEC’s civil complaint about a fund manager’s pricing at Infinity Q. It alleged changes to pricing-service code, false inputs and unsuitable models, with fabricated valuation-committee minutes and forged confirmations used to disguise the process. Morgan Keegan’s alleged interference concerned broker prices and accounting adjustments. The Infinity Q allegations show how a pricing model and its review documents can be altered together. In both accounts, the useful comparison reaches behind the finished valuation file.

What the Morgan Keegan Settlement Required

The firms reached the settlement with the SEC, state regulators and the Financial Industry Regulatory Authority. The SEC coordinated its action with regulators from Alabama, Kentucky, Mississippi, Tennessee and South Carolina. Its announcement says the case originated in an SEC examination.

The settlement required Morgan Keegan to pay $75 million in penalties and a further $25 million to the SEC, for a Fair Fund benefiting harmed investors. It also required $100 million for a separate state fund to be distributed to investors.

The former portfolio manager and comptroller also agreed to separate civil penalties, and the SEC barred the portfolio manager from the securities industry. The firms also had to stop performing fair valuations for investment companies for three years.

The Pricing Records an Insider Can Explain

A fund-pricing employee can connect a published value to the information available when it was chosen. Our work on securities fraud evidence follows that connection through the original record, the change and the people involved. For conduct resembling the Morgan Keegan allegations, several comparisons carry particular weight:

• The broker’s intended quote and the confirmation actually sent. The difference can show whether a price changed before fund accounting received it, and communications can explain who sought the change.
• The date of the lower quote and the daily marks that followed. These records can distinguish the information available on a particular day from the value entered for that day, including a planned sequence of reductions.
• The valuation policy and the review of an exception. Committee records and approval histories can show what reviewers received and how a manager’s proposed adjustment passed through the process.
• The portfolio entry and the investor transaction. Fund-accounting workpapers can connect the disputed security value to the published net asset value and the price charged for shares.

Your role may place you at only one part of that process. Someone at the broker may know why a confirmation disappeared. Someone in accounting may know why a lower quote did not become that day’s mark. We work with you to connect that knowledge to the records that let investigators test it.

What a Fund-Pricing Employee Can Add

A pricing employee’s account can explain decisions that the final numbers conceal. The alleged conduct shows why the people handling quotes and adjustments have a useful view: they can identify the information available before the published value was chosen.

A broader study offers a reason to take that view seriously. The Significance of Whistleblowing as an Anti-Fraud Measure, published in the Journal of Forensic & Investigative Accounting in 2018, examined 4,943 occupational frauds with complete data. It found that whistleblowing became more likely as a detection method when more people participated in the fraud and when organizations had more anti-fraud measures.

Eligible SEC whistleblowers can receive 10% to 30% of qualifying sanctions collected when the monetary sanctions exceed $1 million. Awards come from the Investor Protection Fund, separate from the Fair Fund money for harmed investors. The False Claims Act addresses fraud against government money. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Saw the Price Before It Changed

If you saw a lower quote held back, a markdown spread across days or an exception approved without the promised review, talk with our whistleblower experts about what happened at the pricing desk. We build your securities fraud whistleblower case around the decisions you can explain and bring in securities fraud whistleblower lawyers who understand fund valuation. From the first conversation through the case, we stay on your side of the table.