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Morgan Keegan Loses Ruling in Auction-Rate Appeals Case

May 2 (Bloomberg) -- A U.S. Securities and Exchange Commission lawsuit alleging Morgan Keegan & Co. brokers misled investors about the liquidity risk of auction-rate securities was reinstated by a federal appeals court.

The U.S. Court of Appeals in Atlanta said today that a trial judge had incorrectly agreed with Morgan Keegan that brokers’ verbal comments to four customers weren’t “material” misrepresentations or omissions that would make the company liable under U.S. securities law.

“Morgan Keegan argues that the materiality of a misrepresentation in an SEC enforcement action is evaluated in the context of only disclosures to the public as a whole and without any consideration of a broker’s communications to a particular investor,” the appellate panel said.

“This argument fails because the Supreme Court’s materiality standard analyzes the total mix of information available to a hypothetical reasonable investor, not just to the public at large,” the panel said in the ruling.

The SEC sued Memphis, Tennessee-based Morgan Keegan in 2009, accusing it of securities fraud. The SEC said Morgan Keegan brokers, from late 2007 through the collapse of the market of auction-rate securities in February 2008, told customers the securities “were as good as cash” because they wanted to increase sales.

Market Collapse

The market for the securities collapsed when dealers stopped participating in auctions at which interest rates were periodically reset. The investments typically were municipal and student-loan-backed bonds and preferred shares.

U.S. District Judge William Duffey in Atlanta last year threw out the SEC claim that the firm didn’t provide heightened disclosure that auction-rate securities were regularly failing. Morgan Keegan’s “failure to predict the market does not constitute securities fraud,” the judge said.

Raymond James Financial Inc. last month completed a $1.2 billion acquisition of Morgan Keegan from Regions Financial Corp. Representatives of St. Petersburg, Florida-based Raymond James didn’t immediately return a call after regular business hours seeking comment on the ruling.

The case is SEC v. Morgan Keegan & Co. Inc., 11-13992, U.S. Court of Appeals for the Eleventh Circuit (Atlanta).

To contact the reporters on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net; Andrew Harris in Chicago at aharris16@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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