County's financial adviser accused of fraud

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By The Staff



A company that Roane County officials go to for financial advice has been accused of fraud by the  Securities and Exchange Commission.

The complaint was filed against Morgan Keegan & Co. in U.S. District Court for the Northern District of Georgia on July 21, 2009.

According to the SEC, thousands of investors were hoodwinked by Morgan Keegan about the liquidity risks associated with auction rate securities.  

“Morgan Keegan sold approximately $925 million of ARS (auction rate securities) to its customers between Nov. 1, 2007, and March 20, 2008,” the SEC said in a statement, “but failed to inform its customers about increased liquidity risks for ARS even after the firm decided to stop supporting the ARS market in February 2008.”  

Robert Khuzami, director of the SEC’s Division of Enforcement, said in the statement that Morgan Keegan was clearly aware that the ARS market was deteriorating.

“But it went so far as to actually accelerate its ARS sales even after other firms’ ARS auctions began to fail,” Khuzami said.    

Morgan Keegan spokeswoman Kathy Ridley said her company has made significant strides in restoring liquidity for clients who owned ARS by instituting a voluntary repurchase program.   

“This program was initiated in February 2009, prior to the SEC action, and has been ongoing since that time,” Ridley said in an e-mail. “Through this program, we have been able to reduce our clients’ exposure to ARS from $2.2 billion in early 2007 to $235 million today. Before year end, we had completed the repurchase of ARS securities underwritten by Morgan Keegan and held by individual investors.”

Despite that, Bill Hicks, regional trial counsel for the SEC’s Atlanta Office, said last week that the federal complaint against Morgan Keegan is still pending.

Morgan Keegan is headquartered in Memphis. The company has offices in cities throughout the Southeast, including Knoxville.

Roane County budget director Alva Moore said the company is who the county calls on when it needs financial advice.

“They’ve done good work for us,” Moore said.  

Last year Roane County Executive Mike Farmer wanted to use $32 million that’s been earmarked for school construction as “leverage” on a $45 million loan.

Morgan Keegan first vice president Scott Gibson tried to help Farmer sell the complex plan to the county’s budget committee. The committee members didn’t buy into it.

Roane County is not alone in its dependence on Morgan Keegan. Counties across the state, including Cocke, Cumberland, Sevier and Blount, have relied on the company’s financial advice.   

“Morgan Keegan is a major player in the capital markets in Tennessee,” Tennessee Comptroller Justin Wilson said.

Moore said Roane County does not have a contract with Morgan Keegan.

“We could at any time use someone else,” he said.

Counties are not the only ones dealing with Morgan Keegan. Wilson said the state associates with Morgan Keegan and Cumberland Securities. Cumberland Securities is a division of Morgan Keegan.  

“Of course we talk with them, but that’s it,” Wilson said. “We do not have a contract with them.”

Morgan Keegan’s influence in Tennessee was brought to light by the New York Times in April 2009.

The Times reported that Morgan Keegan steered county and city governments into complex financial transactions known as interest-rate swaps.

Numerous risks come with swaps.

Wilson, who was elected comptroller by the General Assembly in January 2009, said the Times story was one of the reasons he sought tougher interest rate swap guidelines after taking office.

“I think it certainly was a factor,” Wilson said.

The State Funding Board approved the new guidelines last fall.   

“The only swaps we have now are among the very sophisticated issuers who know exactly what they’re doing,” Wilson said.