Morgan Keegan Denies Fraud in Offering Defaulted Moberly Bonds

Morgan Keegan & Co. is seeking to dismiss a petition that claims the underwriter made fraudulent statements when offering $39 million of now-defaulted municipal bonds for an artificial-sweetener plant in Moberly, Missouri.

Missouri Secretary of State Jason Kander last month issued a cease-and-desist order against Memphis-based Morgan Keegan for “fraud and dishonest and unethical practices” in selling debt for Mamtek U.S. to build the factory. Morgan Keegan denied those claims in a May 3 filing with Kander’s office.

Kander seeks “excessive, punitive, non-remedial, cumulative, objectively unreasonable, arbitrary, capricious, disproportionate, unwarranted, unsupported and unsupportable sanctions, penalties and relief that fair-minded, objective and unbiased jurists operating a fair and unbiased tribunal would never impose,” Morgan Keegan said in the filing.

The battle between Kander and Morgan Keegan is the latest in Moberly, a city of 14,000 that became one of the cautionary tales of localities issuing debt for economic-development projects in the $3.7 trillion municipal market. The Moberly Industrial Development Authority, which sold the bonds in July 2010, was downgraded 13 levels by Standard & Poor’s to CC, or junk, from A- in September 2011. S&P cut the agency two more steps to D, its lowest, after a payment default in March 2012.

“Without Morgan Keegan’s involvement, this failed investment would not have cost Missouri investors more than $6.5 million,” Kander said in an April 4 statement. “Companies have a duty to disclose the risks of stocks and bonds before their clients invest.”

Three Weeks

Morgan Keegan was a unit of Regions Financial Corp. (RF) when it served as underwriter for the Moberly bonds. It was since sold to Raymond James Financial Inc. Jana Strange, a spokeswoman for St. Petersburg, Florida-based Raymond James, declined to comment on Kander’s order.

The U.S. Securities and Exchange Commission and Texas are also investigating Morgan Keegan for violating securities laws, according to a May 8 filing from Regions Financial.

Moberly officials gave Mamtek Chairman and Chief Executive Officer Bruce Cole initial approval for the $39 million of munis within three weeks of his arrival in town. In September, the SEC charged Cole with fraud and he was arrested.

Morgan Keegan misrepresented that Mamtek had a facility in China that was producing sucralose when the bonds were offered in 2010, according to Kander’s petition. He also said the company misled investors when stating bond payments were backed by Mamtek’s patents, when the company had none.

“Many problems existed with the offering, and if Morgan Keegan had done its due diligence and investigated the feasibility of Mamtek’s business plan, we would not be in this situation,” Kander said.

The Moberly agency’s defaulted debt maturing in 2024 traded on Feb. 14 at an average yield of 62 percent, or 8.56 cents on the dollar, data compiled by Bloomberg show. That’s up from an average yield of 33 percent when the securities last traded on Dec. 11.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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