SEC v. MORGAN KEEGAN & COMPANY, INC., Northern District of Georgia (July 21, 2009) — Complaint

UNITED STATES DISTRICT COURT 
.NORTHERN DISTRICT OF GEORGIA 
FILED IN C! filPo'S Ott 
US.D C Al't
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. 
n-ICE
'. IamB 
SECURITIES AND EXCHANGE 
COMMISSION, 
Plaintiff, 
v. 
Civil Action No. 
MORGAN KEEGAN & COMPANY, INC., 
~1 :0-9-CV-196 5 
.
Defendant. 
. 
COMPLAINT 
Plaintiff Securities and Exchange Commission ("Commission") 
alleges the following against defendant Morgan Keegan 
& Company, Inc. 
("Morgan Keegan" or "Defendant"): 
NATURE OF THE ACTION 
1. Beginning in late 2007, Morgan Keegan misled thousands of its 
customers regarding the fundamental nature and increasing risks associated 
with auction rate securities ("ARS") that Morgan Keegan underwrote, 
marketed, and sold. ARS are bonds issued primarily 
by municipalities and 
student loan entities, or preferred stock issued by closed-end mutual funds, 
each 
of which provide for interest rates or dividend yields that are 

periodically reset through auctions, typically every seven, fourteen, twenty­
eight or thirty-five days. 
2. In the latter part of2007 and early 2008, Morgan Keegan 
became aware 
of mounting evidence of potential liquidity risks associated 
with auction rate securities. Investor concerns about the creditworthiness 
of 
monoline insurance companies (which insured certain ARS), higher than 
normal ARS inventory levels at Morgan Keegan, auction failures in certain 
segments 
of the ARS market, and increased clearing rates for auctions 
managed by Morgan Keegan and other broker-dealers that underwrote ARS 
collectively indicated that the risk 
of auction failures had materially 
increased. 
3. Beginning on February 12,2008, ARS auctions managed by 
other broker-dealers began 
to fail on a widespread basis as the broker­
dealers stopped supporting those auctions by placing bids for their own 
accounts. However, Morgan Keegan accelerated ARS sales to its customers 
in an attempt to prevent the auctions that it managed from failing. 
4. On February 27, 2008,Morgan Keegan determined to cap its 
own inventory 
ofARS, effectively withdrawing the firm's support for the 
auctions that it managed. As a result, ARS auctions managed by Morgan 
Keegan began to fail on a widespread basis. 
2 

5. Morgan Keegan, through its brokers and marketing materials, 
nevertheless, continued to market ARS to the firm's customers as safe, 
highly liquid investments that were equivalent to cash or money-market 
funds. As a result, numerous customers invested their savings in Morgan 
Keegan's ARS with the understanding that those funds would be available 
on a short-term basis. In fact, 
as a result ofMorgan Keegan's conduct, 
thousands 
of Morgan Keegan customers were unable to liquidate 
approximately $1.2 billion 
ofARS holdings. 
6. Morgan Keegan did not update its ARS disclosures until March 
20, 2008, when the firm enacted an "enhanced disclosure policy" requiring 
customers who purchased ARS to sign an "Auction Rate Securities 
Disclosure Letter" describing ARS auction failures and the resulting loss 
of 
liquidity for those securities. 
7. By engaging in the conduct described in this Complaint, 
Defendant violated, and unless enjoined will continue to violate, Section 
17(a) 
of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)], 
Sections 10(b) and 15(c) 
of the Securities Exchange Act of 1934 ("Exchange 
Act") [15 U.S.C. §78j(b) and 
15 U.S.C. § 780(c)] and Rule 10b-5 [17 CFR § 
240. 10b-5] thereunder. Accordingly, the Commission seeks: (a) entry 
of a 
permanent injunction prohibiting Morgan Keegan from further violations 
of 
3
 

the relevant provisions ofthe Securities Act and the Exchange Act; (b) the 
imposition 
of a civil penalty against Morgan Keegan; (c) disgorgement of 
ARS underwriting, auction management, and distributor fees; (d) an order 
requiring Morgan Keegan to repurchase from its customers all ARS that the 
firm sold prior to March 20, 2008; and (e) any other relief that this Court 
deems necessary and appropriate under the circumstances. 
JURISDICTION AND VENUE 
8. This Court has jurisdiction over this matter pursuant to Sections 
21(d)(1), 21(e), 21(f), and 27 
of the Securities Exchange Act of 1934 
("Exchange Act") 
[15 U.S.C. §§ 78u(d)(1), 78u(e), 78u(f), and 78aa]. 
9. Morgan Keegan, directly or indirectly, used the mails and 
means and instrumentalities 
of interstate commerce and the means and 
instruments 
of transportation and communication in interstate commerce, in 
connection with the acts, practices, and courses ofbusiness alleged herein. 
10. Venue is  appropriate in this District pursuant to Section 27 
of 
the Exchange Act because Morgan Keegan transacts business in this District. 
In particular, Morgan Keegan operates full-service branch offices in this 
District, and, between November 
1,2007 and March 20,2008, sold ARS to 
at least 60 customers who are residents 
ofthis District. As of August 29, 
2008, Morgan Keegan's Georgia retail customers, many 
ofwhom reside in 
4
 

this District, held approximately $122 million of ARS, more than the 
aggregate retail customer ARS holdings 
fo;r any other state. 
.DEFENDANTS 
11. Morgan Keegan is  a broker-dealer registered with the 
Commission pursuant to Section 15(b) 
of the Exchange Act, an investment 
adviser registered with the Commission pursuant to Section 203 
of the 
Investment Advisers Act 
of 1940, and a member of the Financial Industry 
Regulatory Authority. Morgan Keegan maintains its principal offices in 
Memphis, Tennessee. Morgan Keegan is  a wholly owned subsidiary 
of 
Regions Financial Corporation, a financial holding company headquartered 
in Birmingham, Alabama. With over 1,200 brokers and 300 offices in the 
Southeast, Morgan Keegan offers products and services including securities 
brokerage, asset management, financial planning, mutual funds, securities 
underwriting, sales and trading, and investment banking. 
FACTUAL ALLEGATIONS
 
Description 
of Auction Rate Securities
 
12. ARS are bonds issued primarily by municipalities and student 
loan entities, or preferred stock issued by closed-end mutual funds, each 
of 
which provide for interest rates or dividend yields that are periodically reset 
through auctions, typically every seven, fourteen, twenty-eight or thirty-five 
5 

days. ARS are usually issued with maturities of 30 years, but the maturities 
.can range from five years to perpetuity. Thus, while ARS are long-term 
obligations, they re-price frequently using short-term interest rates, which 
typically are lower than long-term rates. 
13. The issuer 
of each ARS selects one or more broker-dealers to 
underwrite the offering and manage the periodic auctions. 
If there is  more 
than one broker-dealer, then the issuer designates one 
of the broker-dealers 
as the "lead broker-dealer," which typically places bids for its own account 
as necessary in order to ensure that the auctions clear, i.e., that there is  a 
buyer for all ARS sought to be sold at each auction. The other broker 
dealers are designated as co-broker dealers. Co-broker dealers typically do 
not place bids for their own accounts. 
14. Each participating broker-dealer accepts orders from its 
customers, as well 
as from non-participating broker-dealers, and then 
submits the orders to the auction agent, which runs the auction. Customers 
bid the lowest interest rate or dividend they are willing to accept. The 
auction clears at the lowest rate bid that is  sufficient to cover all 
of the ARS 
for sale, and that rate applies to all 
of the ARS in the auction until the next 
auction. 
6
 

15. If there are not enough bids to cover the securities for sale, then 
the auction fails. 
If an auction fails, then the issuer pays a maximum rate, 
. which 
is either a flat rate or a rate set by a pre-determined formula in the 
offering documents. The maximum rate may be higher or lower than the 
prior auction rates or the rates available on similar securities 
of similar credit 
quality and duration in the marketplace. 
Morgan Keegan's Role in the Auction Rate Securities Market 
16. Prior to March 20, 2008, Morgan Keegan served as an 
underwriter, auction manager, and reseller 
of ARS. By 1998, Morgan 
Keegan began reselling ARS underwritten by other broker-dealers. By 
2002, Morgan Keegan began underwriting ARS. Morgan Keegan primarily 
underwrote and sold tax-free, AAA-rated ARS issued by municipalities. By 
March 20, 2008, Morgan Keegan had underwritten at least 60 ARS issues, 
with a total par value 
of approximately $1.1 billion. By March 20, 2008, 
Morgan Keegan had also resold 
to its customers approximately $1.1 billion 
of ARS that were underwritten by other broker-dealers. 
17. Morgan Keegan served as either a lead broker-dealer or co­
broker dealer for the ARS that the firm underwrote. Prior to February 27, 
2008, for those ARS issues for which Morgan Keegan served as the lead 
broker-dealer, Morgan Keegan managed the auction process and routinely 
7
 

placed bids for its own account to buy any ARS offered for sale that had not 
been bid on by other customers, thus causing the auctions to "clear" and 
avoiding failed auctions. 
18. Between 2002 and February 27,2008, Morgan Keegan placed 
bids for its own account in a majority 
of the auctions for which the firm 
served as the lead broker dealer. A majority 
of these auctions would have 
. failed but for Morgan Keegan's participation. Prior 
to February 27,2008, no 
auctions for which Morgan Keegan acted as the lead manager had ever 
failed. 
19. On or about February 12,2008, auctions for ARS underwritten 
by other broker-dealers began 
to fail on a widespread basis. Beginning on 
February 27,2008, Morgan Keegan declined 
to place bids in most of the 
auctions for which it served 
as lead broker dealer and in which the bids of 
other market participants were insufficient to satisfy all the sell orders. 
Consequently, the auctions began 
to fail on a widespread basis. 
20. As a result 
ofARS auction failures, as ofMarch 20,2008, 
Morgan Keegan customers were left holding approximately $1.2 billion 
of 
illiquid ARS, instead ofthe liquid, short-term investments Morgan Keegan 
had represented ARS to be. 
8
 

21. As ofJuly 15,2009, Morgan Keegan customers held 
approximately $272 million 
of illiquid ARS. Approximately $50 million of 
these ARS were underwritten by Morgan Keegan, the remaining ARS were 
. underwritten 
by other broker-dealers and resold by Morgan Keegan. 
22. Morgan Keegan earned underwriting fees, broker-dealer fees, 
and distributor fees for ARS. From June 
of2007 through February of2008, 
Morgan Keegan earned approximately $4.3 million in such fees, inclusive 
of 
certain commissions paid to its brokers. 
Morgan Keegan's Organizational Structure for ARS Sales 
23. In 2007 and 2008, Morgan Keegan's ARS auction management 
and sales operations fell within the firm's Fixed Income Capital Markets 
division, which included separate "institutional" and "retail" ARS desks. 
24. Morgan Keegan's institutional ARS desk was responsible for 
managing auctions for ARS underwritten by Morgan Keegan and selling 
ARS to institutional customers. The head 
of the institutional ARS desk 
reported to the head 
of Morgan Keegan's Short Term Products desk, which 
handled Morgan Keegan's proprietary trading in ARS and other products. 
The head 
ofthat desk reported to John Carson ("Carson"), the president of 
Morgan Keegan's Fixed Income Capital Markets division, and Carson 
reported to Morgan Keegan's Chief Executive Officer. 
9
 

25. Morgan Keegan's retail ARS desk, headed by Frank Phillips 
("Phillips"), was responsible for selling ARS to retail customers. Phillips· 
reported to Kevin Giddis ("Giddis"), the head 
of Retail Fixed Income 
Trading. Giddis reported 
to Carson. 
26. In January 2008, Giddis was promoted 
to the head of fixed-
income trading. On February 27,2008, Carson was promoted 
to CEO of 
Morgan Keegan. 
Morgan Keegan Brokers and Marketing Materials Misrepresented 
that ARS are Cash Alternatives 
27. Through its brokers, Morgan Keegan marketed ARS to its 
customers as cash alternatives that could be liquidated at the customer's 
demand on the next auction date. As a result, many customers placed money 
in these investments that they might need in the short-term. Morgan Keegan 
did not advise these customers that, under certain circumstances, the funds 
invested for short-term needs could be tied up indefinitely, and that other 
products that it marketed as cash alternatives did not carry this same risk. 
28. Morgan Keegan brokers told various customers that ARS 
carried "zero risk" or were "guaranteed" and were "fully liquid," "cash 
alternatives," 
'Just like a money market," "as liquid on a weekly basis as 
cash," a "liquid and safe investment," or a "totally liquid 
(7 day) money 
parking account." 
10
 

29. By 2005, Morgan Keegan's Fixed Income Capital Markets 
division prepared an ARS marketing brochure, which described ARS as an 
"attractive alternative" to money markets, commercial paper, and treasuries 
and appropriate for investors whose objective was liquidity. That brochure 
also mentioned potential "liquidity risks" associated with ARS. 
30. However, Morgan Keegan did not have a policy requiring 
brokers to give the ARS marketing brochure to customers who putchased 
ARS, and Morgan Keegan's brokers routinely failed to provide the brochure 
to customers who purchased ARS. 
31. Morgan Keegan never disclosed to its brokers or customers the 
level 
of the firm's participation in the auctions for which it served as lead 
broker-dealer. 
32. On March 20, 2008, approximately five weeks after ARS 
auctions began failing on a widespread basis, Morgan Keegan instituted an 
"enhanced disclosure" policy requiring customers who wished to purchase 
ARS to sign an "Auction Rate Security Disclosure Letter," which states, in 
relevant part: "I understand that my auction rate securities are currently, or 
have been recently, failing at auction. I understand that it may be a 
considerable period 
of time before liquidity returns to this investment and I 
view this with a longer term time horizon." 
11
 

Morgan Keegan Conducted Insufficient Training for its Brokers
 
Concerning ARS Liquidity Risks
 
33. Morgan Keegan did not provide sufficient training for its 
brokers concerning the potential liquidity risks associated with ARS. 
34. By 2007, only approximately 100 Morgan Keegan brokers 
received semi-annual, formal training about ARS in connection with Morgan 
Keegan's "bond school" program. Written bond school training materials 
described ARS 
as an "alternative to cash assets invested in money market 
funds." These materials also instructed brokers 
to "consider" ARS for 
customers "willing to accept the risk 
of a failed auction." 
35. Morgan Keegan did not instruct its brokers that "the risk 
of a 
failed auction" posed a long-term liquidity risk. Instead, brokers understood 
that 
if an auction failed, "the issue would typically sell off the next time it 
came up for auction." 
36. In 2007 and 2008, Morgan Keegan's "Credit Committee" was 
responsible for monitoring, and limiting, the firm's inventory 
of various 
financial products. The Credit Committee, which was not directly affiliated 
with Morgan Keegan's board 
of directors, typically met on an ad-hoc basis 
to discuss issues associated with specific inventory categories. 
12
 

37. On August 30,2007, Morgan Keegan's Credit Committee met 
to discuss the firm's sales and marketing practices for ARS. In addition to 
John Carson, the president 
of the Fixed Income Capital Markets division, 
attendees at this meeting included Morgan Keegan's Chief Financial 
Officer, General Counsel, Director 
of Fixed Income Compliance, as well as 
several "desk heads" who supervised trading in various financial products. 
38. During the August 30,2007 Credit Committee meeting, the 
committee reevaluated the firm's inventory limits for ARS and two other 
related products that comprised the Short Term Products desk. Specifically, 
the committee determined 
to reduce its holdings in another short-term 
product by $50 million in order 
to provide "flexibility" to exceed the firm's 
ARS inventory cap by that amount. 
39. At this same meeting, when discussing the mechanics 
of ARS 
auctions, Morgan Keegan's General Counsel expressed concern during the 
meeting "about how [the Fixedlncome Division] are selling [ARS]," and the 
president 
of the Fixed Income Capital Markets division, "asked how we can 
make sure people know [ARS are] not a money market." The General 
Counsel advised that Morgan Keegan was developing some additional 
literature and there was some suggestion that brokers should receive 
additional training on ARS. 
13
 

40. However, Morgan Keegan never revised its disclosures or 
required brokers to take any additional training. 
Morgan Keegan Knew of Significant and Increasing Risks Associated 
withARS 
41. Morgan Keegan was aware of emerging liquidity risks 
concerning ARS 
in late 2007 and 2008. 
42. In August 2007, "monoline" insurance companies (which 
insured certainARS and guaranteed timely repayment
ofbondprincipal 
when an issuer defaults) began to experience credit problems: Many 
monoline insurers had insured subprime mortgage related bonds and with 
the subprime crisis, concerns grew that the insurers lacked sufficient capital 
to cover issuer defaults. 
43. On November 13,2007, a fixed income analyst at Morgan 
Keegan who covered ARS issues, prepared a research report that discussed 
the increased credit problems 
ofinsurers that backed ARS. 
44. Also 
in November 2007, Morgan Keegan became aware ofa 
small number of failed auctions related to ARS backed by collateralized debt 
obligations, securities that were not underwritten 
or generally resold by 
Morgan Keegan. 
14
 

45. On November 27, 2007, the head of Morgan Keegan's retail 
ARS desk, observed in an e-mail that "inventories in ARS paper on the 
street have rose [sic] significantly during the past few weeks" and "in [the] 
midst 
of a fearful market and a rush to safety," the yields for ARS were 
rIsmg. 
46. 
On January 18,2008, the worsening credit environment caused 
the downgrade ofa monoline insurance companythatbacked a substantial 
amount 
of ARS underwritten by Morgan Keegan. That day, the head of 
Morgan Keegan's retail ARS desk e-mailed the head of Fixed Income 
Trading about the downgrade. The e-mail warned that the downgrade 
"could create a sell 
off in some ARS paper that Morgan Keegan 
underwrites" and "could potentially cause a failed auction." 
47. Beginning in late January 2008, Morgan Keegan saw its own 
ARS inventory (mostly tax-exempt municipal ARS) increase dramatically. 
That inventory, which had historically been capped by the credit committee 
at $70 million, averaged approximately $20 million in late 2007 and early 
2008. Between January 22 and February 13,2008, however, Morgan 
Keegan's ARS inventory increased from approximately $20 million to $75 
million, surpassing the $70 million inventory limit previously set 
by the 
Credit Committee. 
15 

48. By February 21,2008, Morgan Keegan's inventory had 
increased to approximately $180 million. On February 27, 2008, Morgan 
Keegan's Credit Committee definitively capped the firm's ARS inventory at 
$185 million, effectively withdrawing the firm's support for future auctions. 
Morgan Keegan-managed auctions then began to fail on a widespread basis. 
49. Senior management at Morgan Keegan closely monitored the 
firm's growing ARS inventory level during this period. For example, on 
February 1,2008, the head 
ofMorgan Keegan's Municipal Trading desk 
sent an e-mail to Carson, the president 
of the Fixed Income Capital Markets 
division stating, "
...We are under 375 [million dollars in short term 
products] with 42 [million dollars 
of that amount] in ARS. The ARS 
inventory is  growing slowly 
as a result of maximum rates." 
50. In addition, Morgan Keegan was aware that, beginning in 
February 2008, auctions for all categories 
of ARS, including tax-exempt 
municipal ARS, began to fail on a widespread basis. In a February 14, 2008 
e-mail, Kevin Giddis, the head 
ofRetail Fixed Income Trading recognized 
that "nearly every other primary dealer has allowed some proportion 
of their 
auctions to fail." This included auctions for ARS co-managed and resold by 
Morgan Keegan. 
16
 

51. Morgan Keegan recognized that widespread auction failures 
would impact Morgan Keegan's continued support 
of its own auctions. For 
example, on February 12, 2008, the head 
of the municipal trading desk 
Nordstrom sent an e-mail 
to John Carson stating, "The failed auctions of 
others will impact us here." 
Morgan Keegan Accelerated Sales of ARS in Late 2007 and 2008 
52. Between November 1, 2007, and March 20, 2008, Morgan 
Keegan sold approximately $925 million 
of ARS to its customers. 
53. Morgan Keegan sold approximately $352 million 
of ARS to its 
customers between January 22, 2008, shortly after the downgrade 
of one of 
the primary insurers of the ARS and the increase in the firm's own ARS 
inventory, and March 20, 2008, when the firm instituted an enhanced 
disclosure policy for ARS sales. 
Of this $352 million, approximately $230 
million (65 percent) was underwritten by Morgan Keegan. 
54. Nevertheless, Morgan Keegan did not impose any requirement 
that the firm's brokers begin providing the ARS marketing brochure or other 
written ARS materials to the firm's customers. In fact, Morgan Keegan did 
not change any 
of its ARS sales practices until March 20, 2008, almost a 
month after it withdrew its support for auctions, when the firm instituted a 
policy 
of "enhanced disclosures" for ARS sales. 
17 

55. Rather than revising its ARS disclosures, Morgan Keegan made 
a concerted effort to accelerate ARS sales in an attemptto avoid any failed 
auctions for the ARS that the firm underwrote. 
56. Notes from a meeting 
of the Credit Committee held on 
February 19, 2008, several days after other firms' ARS auctions started 
failing on a widespread basis, state, 
"John Carson [the president 
of the Fixed Income Capital 
Markets division] and Tim Herberger [head 
ofthe institutional 
ARS desk] are introducing STP's [short-term products, 
including ARS and variable rate demand notes] to the general 
sales force in the Continuing Education meeting today to 
broaden the demand for the products. We are trying not to 
fail on the auctions. . .. The more this gets out to the media, the 
more sellers they will have." (Emphasis supplied.) 
Morgan Keegan Downplayed Liquidity Risks to Its Brokers and
 
Customers
 
57. From late 2007 through February 2008, Morgan Keegan 
continued to push its brokers to sell ARS, and downplayed the emerging 
liquidity risks. For example, the head 
ofMorgan Keegan's retail ARS desk 
sent e-mails to brokers in November and December 2007 ("Check out 
Santa's ARS Specials
...I've got gifts for all tax brackets") and January 2008 
("Many 
ofyou might be cautious about why yields from ARS are so 
attractive relative to other sectors right now. The reason: seasonality"), 
noting that Morgan Keegan had plenty 
of ARS inventory with attractive 
18
 

yields. At least one of these e-mails (the November 2007 e-mail) was 
reviewed and approved 
by the head of Retail Fixed Income Trading, Morgan 
Keegan's ARS analyst, and the head 
ofMorgan Keegan's institutional ARS 
desk. 
58. A December 10,2007 research report sent to Morgan Keegan's 
retail brokerage force advised that increased ARS yields presented "an 
opportunity to generate attractive risk-adjusted yields for investors seeking 
alternatives to money market products." That report, which was circulated 
to John Carson, also advised that, while there was no guarantee, broker­
dealers managing the auctions would likely step in to prevent auction 
failures 
if customer demand slacked, given the firms interest in retaining 
their underwriting business. Given these incentives, the report opined that 
"the risk 
of failed auctions of any meaningful magnitude ... appears quite 
low." 
59. Even after the downgrade 
of certain ARS insurers and the 
increase in clearing rates for tax-exempt municipal ARS signaled the onset 
of liquidity problems, Morgan Keegan attempted to discourage its brokers 
from selling their customers' ARS holdings. 
60. In a January 
23,2008 e-mail sent to its retail brokerage force, 
dealing with the downgrades 
ofbond insurers, Morgan Keegan advised, 
19
 

"The decision to buy/selVhold [ARS] ultimately depends on the 
client's particular circumstances, but we believe it is  likely that 
this situation will be resolved in short order
.. Selling into an 
uncertain market is rarely a prudent or successful 
investment strategy." (Emphasis supplied.) 
61. On February 15,2008, after Morgan Keegan's inventory had 
risen to approximately $130 million and other firms' auctions had begun 
to 
fail on a widespread basis, Morgan Keegan distributed an internal "talking 
point~" memo to brokers emphasizing that the credit quality of ARS was not 
impacted by other firms' auction failures and that "those investors who 
aren't seeking to liquidate their position actually benefit by virtue 
of the 
higher yields they are receiving." The memo, which was reviewed by Kevin 
Giddis, and cc'd to John Carson, stressed that "Morgan Keegan has not 
experienced any failed auctions among the deals in which it acts 
as lead 
underwriter," and stated, "we maintain our commitment to supporting the 
ARS market 
to the extent possible, but this is only possible with your 
cooperation." The memo speculated that ARS liquidity issues would likely 
"sort themselves out" due to issuer redemptions and the emergence 
of "non­
traditional" buyers such as hedge funds. The memo concluded, 
"We stress the importance 
of ignoring the impulse to 'test' the 
process by selling your clients' ARS holdings in a wholesale 
manner simply because you or your clients might be worried 
you will not be able to sell them." 
20 

62. On February 27,2008, Morgan Keegan stopped supporting 
ARS auctions, in part, because the widening imbalance between supply and 
demand made it increasingly difficult to continue supporting the auctions. 
However, Morgan Keegan never alerted its customers, or instructed its 
brokers to advise customers about the firm's decision to withdraw support 
for ARS auctions. Nor did Morgan Keegan take any steps 
to alert customers 
ofthe ARS auction failures until March 20,2008, when the firm instituted 
its "enhanced disclosure" policy for ARS sales. 
63. In fact, on February 28, 2008, the head 
ofMorgan Keegan's 
retail ARS desk, sent an e-mail to the firm's brokers providing a "quick 
reminder" on the mechanics 
ofplacing online ARS orders. That e-mail, 
which attached a copy 
of the firm's unrevised ARS brochure, made no 
reference to ARS auction failures or the associated liquidity risks. 
CLAIMS 
FOR RELIEF
 
COUNT I
 
Securities 
Fraud
 
Violations of Section 17(a)(l) of the Securities Act 
64. Paragraphs 1 through 
63 above are incorporated herein by 
reference. 
65. Defendant, in the offer or sale 
of the securities described above, 
bythe use 
ofmeans orinstruments oftransportation orcommunication in 
21
 

interstate commerce, or by the use ofthe mails, directly or indirectly, 
employed devices, schemes or artifices to defraud. 
66. In connection with the above-described acts and omissions, 
Defendant, through its officers or members 
of its senior management, acted 
knowingly or recklessly. 
67. By reason 
ofthe foregoing, Defendant violated Section 17(a)(1) 
of the Securities Act [15 U.S.C. § 77q(a)]. 
COUNT II 
Securities Fraud
 
Violations of Sections 17(a)(2) and (3) of the Securities Act
 
-
68. Paragraphs 1 through 63 above ani incorporated herein by 
reference. 
69. Defendant, in the offer or sale 
of the securities described above, 
by the use 
of means or instruments of transportation or communication in 
interstate commerce, or by the use 
of the mails, directly or indirectly: (a) 
obtained money or property by means 
of untrue statements of material facts 
or omissions to state material facts necessary in order 
to make the statements 
made, in the light 
ofthe circumstances under which they were made, not 
misleading; or (b) engaged in transactions, practices or courses 
of business 
which operated or would operate 
as a fraud or deceit upon purchasers ofthe 
securities. 
22 

70. In connection with the above-described acts and omissions, 
Defendant, through its officers or members 
of its senior management, acted 
at least negligently. 
71. 
By reason of the foregoing, Defendant violated Sections 
17(a)(2) and (3) 
ofthe Securities Act [15 U.S.C. § 77q(a)]. 
COUNT III 
Securities Fraud
 
Violations of Section 1O(b) of the Exchange Act and Rule 10b-S
 
72. Paragraphs 1 through 
63 above are incorporated herein by 
reference. 
73. Defendant, in connection with the purchase or sale 
of the 
securities described above, by the use 
of means or instruments of 
transportation or communication in interstate commerce, or by the use ofthe 
mails, directly or indirectly: (a) employed devices, schemes or artifices to 
defraud; (b) made untrue statements 
of material fact and omitted facts 
necessary in order to make the statements made, in the light 
of the 
circumstances under which they were made, not misleading; or (c) engaged 
in acts, practices 
or courses of business which operated or would operate as 
a .fraud or deceit upon any person. 
23
 

74. In connection with the above-described acts and omissions, 
Defendant, through its officers or members 
of its senior management, acted 
knowingly or recklessly. 
75. By engaging in the foregoing conduct, the Defendant violated 
will continue to violate, Section 10(b) 
ofthe Exchange Act [15 U.S.C. 
§78j(b)] and Rule 10b-5 [17 CFR § 240. 10b-5] thereunder. 
COUNT IV
 
Securities Fraud
 
Violation of Section 15(c) of the Exchange Act
 
76. Paragraphs 1 through 63 are realleged and incorporated by 
reference as if set forth fully herein. 
77. As described above, the Defendant made use 
ofthe mails or 
means or instrumentalities of interstate commerce to effect transactions in, 
or to induce or attempt to induce the purchase or sale of, securities: (a) by 
means 
of a manipulative, deceptive, or other fraudulent device or 
contrivance, and (b) in connection with which Defendant engaged in a 
fraudulent, deceptive, or manipulative act or practice. 
78. 
By engaging in the foregoing conduct, the Defendant violated 
Section 15(c) 
ofthe Exchange Act [15 U,S.C. § 780(c)]. 
24
 

PRAYER FOR RELIEF
 
WHEREFORE, Plaintiff Commission respectfully prays that the Court: 
I. 
MakeFindings ofFactandConclusions ofLawpursuantto Rule52 
of the Federal Rules of Civil Procedure, finding that the Defendant 
committed the violations alleged herein. 
II. 
Issue an order permanently enjoining the Defendant and its respective 
agents, servants, employees, attorneys, assigns and all those persons in 
active concert or participation with Defendant who receive actual notice 
of 
the injunction by personal service or otherwise, from directly or indirectly 
engaging in violations 
of Section 17(a) of the Securities Act [IS U.S.C. § 
77q(a)], Sections 10(b) and 15(c) 
of the Exchange Act [IS U.S.C. §78j(b) 
and IS U.S.C. § 780(c)] and Rule IOb-5 [17 CFR § 240. IOb-5] thereunder. 
III. 
Issue an order requiring the Defendant to repurchase all ARS that the 
Defendant sold prior to March 20, 2008. 
IV. 
Issue an order requiring disgorgement ofall ill-gotten gains or unjust 
enrichment 
by the Defendant. 
25 

V.
 
Issue an order requiring the Defendant to pay civil monetary penalties 
pursuant to Section 20(d) 
of the Securities Act [15. U.S.C. § 77t] and 
Section 21(d)(3) 
of the Exchange Act [15 U.S.C. §78u(d)(3)]. 
VI. 
Issue an Order retaining jurisdiction over this action III order to 
implement and carry out the terms 
of all orders and decrees that may have 
been entered 
or to entertain any suitable application or motion by the 
Commission for additional relief within 
the jurisdiction ofthis Court. 
VII. 
Grant such other and further relief as 
may be necessary and 
appropriate. 
Dated: 
July 21, 2009. 
Respectfully
SUb7: 
~f~ 
William P. Hicks 
Regional Trial Counsel 
Georgia 
Bar No. 351649 
~~d' 
Alana R. Black 
Senior Trial Counsel 
Georgia 
Bar No. 785045 
26 

Counsel for Plaintiff 
U.S. SECURITIES AND EXCHANGE COMMISSION
 
3475 Lenox Road, N.E., Suite 1000
 
Atlanta, Georgia 30326-1232
 
Telephone: (404) 842-7675
 
Fax: (404) 842-7679
 
[email protected]
 
[email protected]
 
27
 

UNITED STATES DISTRICT COURT 
.NORTHERN DISTRICT OF GEORGIA FILED IN C! filPo'S Ott 

US.D C Al'tl. n-ICE'. IamB 

SECURITIES AND EXCHANGE 
COMMISSION, 

Plaintiff, 

v. Civil Action No. 

MORGAN KEEGAN & COMPANY, INC., 
~1 :0-9- CV-196 5 .Defendant. . 

COMPLAINT 

Plaintiff Securities and Exchange Commission ("Commission") 

alleges the following against defendant Morgan Keegan & Company, Inc. 

("Morgan Keegan" or "Defendant"): 

NATURE OF THE ACTION 

1. Beginning in late 2007, Morgan Keegan misled thousands of its 

customers regarding the fundamental nature and increasing risks associated 

with auction rate securities ("ARS") that Morgan Keegan underwrote, 

marketed, and sold. ARS are bonds issued primarily by municipalities and 

student loan entities, or preferred stock issued by closed-end mutual funds, 

each of which provide for interest rates or dividend yields that are 



periodically reset through auctions, typically every seven, fourteen, twenty­

eight or thirty-five days. 

2. In the latter part of2007 and early 2008, Morgan Keegan 

became aware of mounting evidence of potential liquidity risks associated 

with auction rate securities. Investor concerns about the creditworthiness of 

monoline insurance companies (which insured certain ARS), higher than 

normal ARS inventory levels at Morgan Keegan, auction failures in certain 

segments of the ARS market, and increased clearing rates for auctions 

managed by Morgan Keegan and other broker-dealers that underwrote ARS 

collectively indicated that the risk of auction failures had materially 

increased. 

3. Beginning on February 12,2008, ARS auctions managed by 

other broker-dealers began to fail on a widespread basis as the broker­

dealers stopped supporting those auctions by placing bids for their own 

accounts. However, Morgan Keegan accelerated ARS sales to its customers 

in an attempt to prevent the auctions that it managed from failing. 

4. On February 27, 2008,Morgan Keegan determined to cap its 

own inventory ofARS, effectively withdrawing the firm's support for the 

auctions that it managed. As a result, ARS auctions managed by Morgan 

Keegan began to fail on a widespread basis. 

2 



5. Morgan Keegan, through its brokers and marketing materials, 

nevertheless, continued to market ARS to the firm's customers as safe, 

highly liquid investments that were equivalent to cash or money-market 

funds. As a result, numerous customers invested their savings in Morgan 

Keegan's ARS with the understanding that those funds would be available 

on a short-term basis. In fact, as a result ofMorgan Keegan's conduct, 

thousands of Morgan Keegan customers were unable to liquidate 

approximately $1.2 billion ofARS holdings. 

6. Morgan Keegan did not update its ARS disclosures until March 

20, 2008, when the firm enacted an "enhanced disclosure policy" requiring 

customers who purchased ARS to sign an "Auction Rate Securities 

Disclosure Letter" describing ARS auction failures and the resulting loss of 

liquidity for those securities. 

7. By engaging in the conduct described in this Complaint, 

Defendant violated, and unless enjoined will continue to violate, Section 

17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)], 

Sections 10(b) and 15(c) of the Securities Exchange Act of 1934 ("Exchange 

Act") [15 U.S.C. §78j(b) and 15 U.S.C. § 780(c)] and Rule 10b-5 [17 CFR § 

240. 10b-5] thereunder. Accordingly, the Commission seeks: (a) entry of a 

permanent injunction prohibiting Morgan Keegan from further violations of 

3
 



the relevant provisions of the Securities Act and the Exchange Act; (b) the 

imposition of a civil penalty against Morgan Keegan; (c) disgorgement of 

ARS underwriting, auction management, and distributor fees; (d) an order 

requiring Morgan Keegan to repurchase from its customers all ARS that the 

firm sold prior to March 20, 2008; and (e) any other relief that this Court 

deems necessary and appropriate under the circumstances. 

JURISDICTION AND VENUE 

8. This Court has jurisdiction over this matter pursuant to Sections 

21(d)(1), 21(e), 21(f), and 27 of the Securities Exchange Act of 1934 

("Exchange Act") [15 U.S.C. §§ 78u(d)(1), 78u(e), 78u(f), and 78aa]. 

9. Morgan Keegan, directly or indirectly, used the mails and 

means and instrumentalities of interstate commerce and the means and 

instruments of transportation and communication in interstate commerce, in 

connection with the acts, practices, and courses ofbusiness alleged herein. 

10. Venue is appropriate in this District pursuant to Section 27 of 

the Exchange Act because Morgan Keegan transacts business in this District. 

In particular, Morgan Keegan operates full-service branch offices in this 

District, and, between November 1,2007 and March 20,2008, sold ARS to 

at least 60 customers who are residents of this District. As of August 29, 

2008, Morgan Keegan's Georgia retail customers, many ofwhom reside in 

4
 



this District, held approximately $122 million of ARS, more than the 

aggregate retail customer ARS holdings fo;r any other state. 

.DEFENDANTS 

11. Morgan Keegan is a broker-dealer registered with the 

Commission pursuant to Section 15(b) of the Exchange Act, an investment 

adviser registered with the Commission pursuant to Section 203 of the 

Investment Advisers Act of 1940, and a member of the Financial Industry 

Regulatory Authority. Morgan Keegan maintains its principal offices in 

Memphis, Tennessee. Morgan Keegan is a wholly owned subsidiary of 

Regions Financial Corporation, a financial holding company headquartered 

in Birmingham, Alabama. With over 1,200 brokers and 300 offices in the 

Southeast, Morgan Keegan offers products and services including securities 

brokerage, asset management, financial planning, mutual funds, securities 

underwriting, sales and trading, and investment banking. 

FACTUAL ALLEGATIONS
 

Description of Auction Rate Securities
 

12. ARS are bonds issued primarily by municipalities and student 

loan entities, or preferred stock issued by closed-end mutual funds, each of 

which provide for interest rates or dividend yields that are periodically reset 

through auctions, typically every seven, fourteen, twenty-eight or thirty-five 

5 



days. ARS are usually issued with maturities of 30 years, but the maturities 

.can range from five years to perpetuity. Thus, while ARS are long-term 

obligations, they re-price frequently using short-term interest rates, which 

typically are lower than long-term rates. 

13. The issuer of each ARS selects one or more broker-dealers to 

underwrite the offering and manage the periodic auctions. If there is more 

than one broker-dealer, then the issuer designates one of the broker-dealers 

as the "lead broker-dealer," which typically places bids for its own account 

as necessary in order to ensure that the auctions clear, i.e., that there is a 

buyer for all ARS sought to be sold at each auction. The other broker 

dealers are designated as co-broker dealers. Co-broker dealers typically do 

not place bids for their own accounts. 

14. Each participating broker-dealer accepts orders from its 

customers, as well as from non-participating broker-dealers, and then 

submits the orders to the auction agent, which runs the auction. Customers 

bid the lowest interest rate or dividend they are willing to accept. The 

auction clears at the lowest rate bid that is sufficient to cover all of the ARS 

for sale, and that rate applies to all of the ARS in the auction until the next 

auction. 

6
 



15. If there are not enough bids to cover the securities for sale, then 

the auction fails. If an auction fails, then the issuer pays a maximum rate, 

. which is either a flat rate or a rate set by a pre-determined formula in the 

offering documents. The maximum rate may be higher or lower than the 

prior auction rates or the rates available on similar securities of similar credit 

quality and duration in the marketplace. 

Morgan Keegan's Role in the Auction Rate Securities Market 

16. Prior to March 20, 2008, Morgan Keegan served as an 

underwriter, auction manager, and reseller of ARS. By 1998, Morgan 

Keegan began reselling ARS underwritten by other broker-dealers. By 

2002, Morgan Keegan began underwriting ARS. Morgan Keegan primarily 

underwrote and sold tax-free, AAA-rated ARS issued by municipalities. By 

March 20, 2008, Morgan Keegan had underwritten at least 60 ARS issues, 

with a total par value of approximately $1.1 billion. By March 20, 2008, 

Morgan Keegan had also resold to its customers approximately $1.1 billion 

of ARS that were underwritten by other broker-dealers. 

17. Morgan Keegan served as either a lead broker-dealer or co­

broker dealer for the ARS that the firm underwrote. Prior to February 27, 

2008, for those ARS issues for which Morgan Keegan served as the lead 

broker-dealer, Morgan Keegan managed the auction process and routinely 

7
 



placed bids for its own account to buy any ARS offered for sale that had not 

been bid on by other customers, thus causing the auctions to "clear" and 

avoiding failed auctions. 

18. Between 2002 and February 27,2008, Morgan Keegan placed 

bids for its own account in a majority of the auctions for which the firm 

served as the lead broker dealer. A majority of these auctions would have 

. failed but for Morgan Keegan's participation. Prior to February 27,2008, no 

auctions for which Morgan Keegan acted as the lead manager had ever 

failed. 

19. On or about February 12,2008, auctions for ARS underwritten 

by other broker-dealers began to fail on a widespread basis. Beginning on 

February 27,2008, Morgan Keegan declined to place bids in most of the 

auctions for which it served as lead broker dealer and in which the bids of 

other market participants were insufficient to satisfy all the sell orders. 

Consequently, the auctions began to fail on a widespread basis. 

20. As a result of ARS auction failures, as ofMarch 20,2008, 

Morgan Keegan customers were left holding approximately $1.2 billion of 

illiquid ARS, instead of the liquid, short-term investments Morgan Keegan 

had represented ARS to be. 

8
 



21. As of July 15,2009, Morgan Keegan customers held 

approximately $272 million of illiquid ARS. Approximately $50 million of 

these ARS were underwritten by Morgan Keegan, the remaining ARS were 

. underwritten by other broker-dealers and resold by Morgan Keegan. 

22. Morgan Keegan earned underwriting fees, broker-dealer fees, 

and distributor fees for ARS. From June of2007 through February of2008, 

Morgan Keegan earned approximately $4.3 million in such fees, inclusive of 

certain commissions paid to its brokers. 

Morgan Keegan's Organizational Structure for ARS Sales 

23. In 2007 and 2008, Morgan Keegan's ARS auction management 

and sales operations fell within the firm's Fixed Income Capital Markets 

division, which included separate "institutional" and "retail" ARS desks. 

24. Morgan Keegan's institutional ARS desk was responsible for 

managing auctions for ARS underwritten by Morgan Keegan and selling 

ARS to institutional customers. The head of the institutional ARS desk 

reported to the head of Morgan Keegan's Short Term Products desk, which 

handled Morgan Keegan's proprietary trading in ARS and other products. 

The head of that desk reported to John Carson ("Carson"), the president of 

Morgan Keegan's Fixed Income Capital Markets division, and Carson 

reported to Morgan Keegan's Chief Executive Officer. 

9
 



25. Morgan Keegan's retail ARS desk, headed by Frank Phillips 

("Phillips"), was responsible for selling ARS to retail customers. Phillips· 

reported to Kevin Giddis ("Giddis"), the head of Retail Fixed Income 

Trading. Giddis reported to Carson. 

26. In January 2008, Giddis was promoted to the head of fixed-

income trading. On February 27,2008, Carson was promoted to CEO of 

Morgan Keegan. 

Morgan Keegan Brokers and Marketing Materials Misrepresented 
that ARS are Cash Alternatives 

27. Through its brokers, Morgan Keegan marketed ARS to its 

customers as cash alternatives that could be liquidated at the customer's 

demand on the next auction date. As a result, many customers placed money 

in these investments that they might need in the short-term. Morgan Keegan 

did not advise these customers that, under certain circumstances, the funds 

invested for short-term needs could be tied up indefinitely, and that other 

products that it marketed as cash alternatives did not carry this same risk. 

28. Morgan Keegan brokers told various customers that ARS 

carried "zero risk" or were "guaranteed" and were "fully liquid," "cash 

alternatives," 'Just like a money market," "as liquid on a weekly basis as 

cash," a "liquid and safe investment," or a "totally liquid (7 day) money 

parking account." 

10
 



29. By 2005, Morgan Keegan's Fixed Income Capital Markets 

division prepared an ARS marketing brochure, which described ARS as an 

"attractive alternative" to money markets, commercial paper, and treasuries 

and appropriate for investors whose objective was liquidity. That brochure 

also mentioned potential "liquidity risks" associated with ARS. 

30. However, Morgan Keegan did not have a policy requiring 

brokers to give the ARS marketing brochure to customers who putchased 

ARS, and Morgan Keegan's brokers routinely failed to provide the brochure 

to customers who purchased ARS. 

31. Morgan Keegan never disclosed to its brokers or customers the 

level of the firm's participation in the auctions for which it served as lead 

broker-dealer. 

32. On March 20, 2008, approximately five weeks after ARS 

auctions began failing on a widespread basis, Morgan Keegan instituted an 

"enhanced disclosure" policy requiring customers who wished to purchase 

ARS to sign an "Auction Rate Security Disclosure Letter," which states, in 

relevant part: "I understand that my auction rate securities are currently, or 

have been recently, failing at auction. I understand that it may be a 

considerable period of time before liquidity returns to this investment and I 

view this with a longer term time horizon." 

11
 



Morgan Keegan Conducted Insufficient Training for its Brokers
 
Concerning ARS Liquidity Risks
 

33. Morgan Keegan did not provide sufficient training for its 

brokers concerning the potential liquidity risks associated with ARS. 

34. By 2007, only approximately 100 Morgan Keegan brokers 

received semi-annual, formal training about ARS in connection with Morgan 

Keegan's "bond school" program. Written bond school training materials 

described ARS as an "alternative to cash assets invested in money market 

funds." These materials also instructed brokers to "consider" ARS for 

customers "willing to accept the risk of a failed auction." 

35. Morgan Keegan did not instruct its brokers that "the risk of a 

failed auction" posed a long-term liquidity risk. Instead, brokers understood 

that if an auction failed, "the issue would typically sell off the next time it 

came up for auction." 

36. In 2007 and 2008, Morgan Keegan's "Credit Committee" was 

responsible for monitoring, and limiting, the firm's inventory of various 

financial products. The Credit Committee, which was not directly affiliated 

with Morgan Keegan's board of directors, typically met on an ad-hoc basis 

to discuss issues associated with specific inventory categories. 

12
 



37. On August 30,2007, Morgan Keegan's Credit Committee met 

to discuss the firm's sales and marketing practices for ARS. In addition to 

John Carson, the president of the Fixed Income Capital Markets division, 

attendees at this meeting included Morgan Keegan's Chief Financial 

Officer, General Counsel, Director of Fixed Income Compliance, as well as 

several "desk heads" who supervised trading in various financial products. 

38. During the August 30,2007 Credit Committee meeting, the 

committee reevaluated the firm's inventory limits for ARS and two other 

related products that comprised the Short Term Products desk. Specifically, 

the committee determined to reduce its holdings in another short-term 

product by $50 million in order to provide "flexibility" to exceed the firm's 

ARS inventory cap by that amount. 

39. At this same meeting, when discussing the mechanics of ARS 

auctions, Morgan Keegan's General Counsel expressed concern during the 

meeting "about how [the Fixedlncome Division] are selling [ARS]," and the 

president of the Fixed Income Capital Markets division, "asked how we can 

make sure people know [ARS are] not a money market." The General 

Counsel advised that Morgan Keegan was developing some additional 

literature and there was some suggestion that brokers should receive 

additional training on ARS. 

13
 



40. However, Morgan Keegan never revised its disclosures or 

required brokers to take any additional training. 

Morgan Keegan Knew of Significant and Increasing Risks Associated 
withARS 

41. Morgan Keegan was aware of emerging liquidity risks 

concerning ARS in late 2007 and 2008. 

42. In August 2007, "monoline" insurance companies (which 

insured certain ARS and guaranteed timely repaymentofbond principal 

when an issuer defaults) began to experience credit problems: Many 

monoline insurers had insured subprime mortgage related bonds and with 

the subprime crisis, concerns grew that the insurers lacked sufficient capital 

to cover issuer defaults. 

43. On November 13,2007, a fixed income analyst at Morgan 

Keegan who covered ARS issues, prepared a research report that discussed 

the increased credit problems of insurers that backed ARS. 

44. Also in November 2007, Morgan Keegan became aware ofa 

small number of failed auctions related to ARS backed by collateralized debt 

obligations, securities that were not underwritten or generally resold by 

Morgan Keegan. 

14
 



45. On November 27, 2007, the head of Morgan Keegan's retail 

ARS desk, observed in an e-mail that "inventories in ARS paper on the 

street have rose [sic] significantly during the past few weeks" and "in [the] 

midst of a fearful market and a rush to safety," the yields for ARS were 

rIsmg. 

46. On January 18,2008, the worsening credit environment caused 

the downgrade of a monoline insurance company that backed a substantial 

amount of ARS underwritten by Morgan Keegan. That day, the head of 

Morgan Keegan's retail ARS desk e-mailed the head of Fixed Income 

Trading about the downgrade. The e-mail warned that the downgrade 

"could create a sell off in some ARS paper that Morgan Keegan 

underwrites" and "could potentially cause a failed auction." 

47. Beginning in late January 2008, Morgan Keegan saw its own 

ARS inventory (mostly tax-exempt municipal ARS) increase dramatically. 

That inventory, which had historically been capped by the credit committee 

at $70 million, averaged approximately $20 million in late 2007 and early 

2008. Between January 22 and February 13,2008, however, Morgan 

Keegan's ARS inventory increased from approximately $20 million to $75 

million, surpassing the $70 million inventory limit previously set by the 

Credit Committee. 

15 



48. By February 21,2008, Morgan Keegan's inventory had 

increased to approximately $180 million. On February 27, 2008, Morgan 

Keegan's Credit Committee definitively capped the firm's ARS inventory at 

$185 million, effectively withdrawing the firm's support for future auctions. 

Morgan Keegan-managed auctions then began to fail on a widespread basis. 

49. Senior management at Morgan Keegan closely monitored the 

firm's growing ARS inventory level during this period. For example, on 

February 1,2008, the head ofMorgan Keegan's Municipal Trading desk 

sent an e-mail to Carson, the president of the Fixed Income Capital Markets 

division stating, " ...We are under 375 [million dollars in short term 

products] with 42 [million dollars of that amount] in ARS. The ARS 

inventory is growing slowly as a result of maximum rates." 

50. In addition, Morgan Keegan was aware that, beginning in 

February 2008, auctions for all categories of ARS, including tax-exempt 

municipal ARS, began to fail on a widespread basis. In a February 14, 2008 

e-mail, Kevin Giddis, the head ofRetail Fixed Income Trading recognized 

that "nearly every other primary dealer has allowed some proportion of their 

auctions to fail." This included auctions for ARS co-managed and resold by 

Morgan Keegan. 

16
 



51. Morgan Keegan recognized that widespread auction failures 

would impact Morgan Keegan's continued support of its own auctions. For 

example, on February 12, 2008, the head of the municipal trading desk 

Nordstrom sent an e-mail to John Carson stating, "The failed auctions of 

others will impact us here." 

Morgan Keegan Accelerated Sales of ARS in Late 2007 and 2008 

52. Between November 1, 2007, and March 20, 2008, Morgan 

Keegan sold approximately $925 million of ARS to its customers. 

53. Morgan Keegan sold approximately $352 million of ARS to its 

customers between January 22, 2008, shortly after the downgrade of one of 

the primary insurers of the ARS and the increase in the firm's own ARS 

inventory, and March 20, 2008, when the firm instituted an enhanced 

disclosure policy for ARS sales. Of this $352 million, approximately $230 

million (65 percent) was underwritten by Morgan Keegan. 

54. Nevertheless, Morgan Keegan did not impose any requirement 

that the firm's brokers begin providing the ARS marketing brochure or other 

written ARS materials to the firm's customers. In fact, Morgan Keegan did 

not change any of its ARS sales practices until March 20, 2008, almost a 

month after it withdrew its support for auctions, when the firm instituted a 

policy of "enhanced disclosures" for ARS sales. 

17 



55. Rather than revising its ARS disclosures, Morgan Keegan made 

a concerted effort to accelerate ARS sales in an attemptto avoid any failed 

auctions for the ARS that the firm underwrote. 

56. Notes from a meeting of the Credit Committee held on 

February 19, 2008, several days after other firms' ARS auctions started 

failing on a widespread basis, state, 

"John Carson [the president of the Fixed Income Capital 
Markets division] and Tim Herberger [head of the institutional 
ARS desk] are introducing STP's [short-term products, 
including ARS and variable rate demand notes] to the general 
sales force in the Continuing Education meeting today to 
broaden the demand for the products. We are trying not to 
fail on the auctions. . .. The more this gets out to the media, the 
more sellers they will have." (Emphasis supplied.) 

Morgan Keegan Downplayed Liquidity Risks to Its Brokers and
 
Customers
 

57. From late 2007 through February 2008, Morgan Keegan 

continued to push its brokers to sell ARS, and downplayed the emerging 

liquidity risks. For example, the head ofMorgan Keegan's retail ARS desk 

sent e-mails to brokers in November and December 2007 ("Check out 

Santa's ARS Specials ... I've got gifts for all tax brackets") and January 2008 

("Many ofyou might be cautious about why yields from ARS are so 

attractive relative to other sectors right now. The reason: seasonality"), 

noting that Morgan Keegan had plenty of ARS inventory with attractive 

18
 



yields. At least one of these e-mails (the November 2007 e-mail) was 

reviewed and approved by the head of Retail Fixed Income Trading, Morgan 

Keegan's ARS analyst, and the head ofMorgan Keegan's institutional ARS 

desk. 

58. A December 10,2007 research report sent to Morgan Keegan's 

retail brokerage force advised that increased ARS yields presented "an 

opportunity to generate attractive risk-adjusted yields for investors seeking 

alternatives to money market products." That report, which was circulated 

to John Carson, also advised that, while there was no guarantee, broker­

dealers managing the auctions would likely step in to prevent auction 

failures if customer demand slacked, given the firms interest in retaining 

their underwriting business. Given these incentives, the report opined that 

"the risk of failed auctions of any meaningful magnitude ... appears quite 

low." 

59. Even after the downgrade of certain ARS insurers and the 

increase in clearing rates for tax-exempt municipal ARS signaled the onset 

of liquidity problems, Morgan Keegan attempted to discourage its brokers 

from selling their customers' ARS holdings. 

60. In a January 23,2008 e-mail sent to its retail brokerage force, 

dealing with the downgrades ofbond insurers, Morgan Keegan advised, 

19
 



"The decision to buy/selVhold [ARS] ultimately depends on the 
client's particular circumstances, but we believe it is likely that 
this situation will be resolved in short order.. Selling into an 
uncertain market is rarely a prudent or successful 
investment strategy." (Emphasis supplied.) 

61. On February 15,2008, after Morgan Keegan's inventory had 

risen to approximately $130 million and other firms' auctions had begun to 

fail on a widespread basis, Morgan Keegan distributed an internal "talking 

point~" memo to brokers emphasizing that the credit quality of ARS was not 

impacted by other firms' auction failures and that "those investors who 

aren't seeking to liquidate their position actually benefit by virtue of the 

higher yields they are receiving." The memo, which was reviewed by Kevin 

Giddis, and cc'd to John Carson, stressed that "Morgan Keegan has not 

experienced any failed auctions among the deals in which it acts as lead 

underwriter," and stated, "we maintain our commitment to supporting the 

ARS market to the extent possible, but this is only possible with your 

cooperation." The memo speculated that ARS liquidity issues would likely 

"sort themselves out" due to issuer redemptions and the emergence of "non­

traditional" buyers such as hedge funds. The memo concluded, 

"We stress the importance of ignoring the impulse to 'test' the 
process by selling your clients' ARS holdings in a wholesale 
manner simply because you or your clients might be worried 
you will not be able to sell them." 

2062. On February 27,2008, Morgan Keegan stopped supporting 

ARS auctions, in part, because the widening imbalance between supply and 

demand made it increasingly difficult to continue supporting the auctions. 

However, Morgan Keegan never alerted its customers, or instructed its 

brokers to advise customers about the firm's decision to withdraw support 

for ARS auctions. Nor did Morgan Keegan take any steps to alert customers 

of the ARS auction failures until March 20,2008, when the firm instituted 

its "enhanced disclosure" policy for ARS sales. 

63. In fact, on February 28, 2008, the head ofMorgan Keegan's 

retail ARS desk, sent an e-mail to the firm's brokers providing a "quick 

reminder" on the mechanics ofplacing online ARS orders. That e-mail, 

which attached a copy of the firm's unrevised ARS brochure, made no 

reference to ARS auction failures or the associated liquidity risks. 

CLAIMS FOR RELIEF
 

COUNT I
 

Securities Fraud
 
Violations of Section 17(a)(l) of the Securities Act 

64. Paragraphs 1 through 63 above are incorporated herein by 

reference. 

65. Defendant, in the offer or sale of the securities described above, 

by the use of means or instruments of transportation or communication in 

21
 



interstate commerce, or by the use of the mails, directly or indirectly, 

employed devices, schemes or artifices to defraud. 

66. In connection with the above-described acts and omissions, 

Defendant, through its officers or members of its senior management, acted 

knowingly or recklessly. 

67. By reason of the foregoing, Defendant violated Section 17(a)(1) 

of the Securities Act [15 U.S.C. § 77q(a)]. 

COUNT II 

Securities Fraud
 
Violations of Sections 17(a)(2) and (3) of the Securities Act
 

-

68. Paragraphs 1 through 63 above ani incorporated herein by 

reference. 

69. Defendant, in the offer or sale of the securities described above, 

by the use of means or instruments of transportation or communication in 

interstate commerce, or by the use of the mails, directly or indirectly: (a) 

obtained money or property by means of untrue statements of material facts 

or omissions to state material facts necessary in order to make the statements 

made, in the light of the circumstances under which they were made, not 

misleading; or (b) engaged in transactions, practices or courses of business 

which operated or would operate as a fraud or deceit upon purchasers of the 

securities. 

22 



70. In connection with the above-described acts and omissions, 

Defendant, through its officers or members of its senior management, acted 

at least negligently. 

71. By reason of the foregoing, Defendant violated Sections 

17(a)(2) and (3) of the Securities Act [15 U.S.C. § 77q(a)]. 

COUNT III 

Securities Fraud
 
Violations of Section 1O(b) of the Exchange Act and Rule 10b-S
 

72. Paragraphs 1 through 63 above are incorporated herein by 

reference. 

73. Defendant, in connection with the purchase or sale of the 

securities described above, by the use of means or instruments of 

transportation or communication in interstate commerce, or by the use of the 

mails, directly or indirectly: (a) employed devices, schemes or artifices to 

defraud; (b) made untrue statements of material fact and omitted facts 

necessary in order to make the statements made, in the light of the 

circumstances under which they were made, not misleading; or (c) engaged 

in acts, practices or courses of business which operated or would operate as 

a.fraud or deceit upon any person. 

23
 



74. In connection with the above-described acts and omissions, 

Defendant, through its officers or members of its senior management, acted 

knowingly or recklessly. 

75. By engaging in the foregoing conduct, the Defendant violated 

will continue to violate, Section 10(b) of the Exchange Act [15 U.S.C. 

§78j(b)] and Rule 10b-5 [17 CFR § 240. 10b-5] thereunder. 

COUNT IV
 

Securities Fraud
 
Violation of Section 15(c) of the Exchange Act
 

76. Paragraphs 1 through 63 are realleged and incorporated by 

reference as if set forth fully herein. 

77. As described above, the Defendant made use of the mails or 

means or instrumentalities of interstate commerce to effect transactions in, 

or to induce or attempt to induce the purchase or sale of, securities: (a) by 

means of a manipulative, deceptive, or other fraudulent device or 

contrivance, and (b) in connection with which Defendant engaged in a 

fraudulent, deceptive, or manipulative act or practice. 

78. By engaging in the foregoing conduct, the Defendant violated 

Section 15(c) of the Exchange Act [15 U,S.C. § 780(c)]. 

24
 



PRAYER FOR RELIEF
 

WHEREFORE, Plaintiff Commission respectfully prays that the Court: 

I. 

Make Findings of Fact and Conclusions ofLaw pursuant to Rule 52 

of the Federal Rules of Civil Procedure, finding that the Defendant 

committed the violations alleged herein. 

II. 

Issue an order permanently enjoining the Defendant and its respective 

agents, servants, employees, attorneys, assigns and all those persons in 

active concert or participation with Defendant who receive actual notice of 

the injunction by personal service or otherwise, from directly or indirectly 

engaging in violations of Section 17(a) of the Securities Act [IS U.S.C. § 

77q(a)], Sections 10(b) and 15(c) of the Exchange Act [IS U.S.C. §78j(b) 

and IS U.S.C. § 780(c)] and Rule IOb-5 [17 CFR § 240. IOb-5] thereunder. 

III. 

Issue an order requiring the Defendant to repurchase all ARS that the 

Defendant sold prior to March 20, 2008. 

IV. 

Issue an order requiring disgorgement of all ill-gotten gains or unjust 

enrichment by the Defendant. 

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V.
 

Issue an order requiring the Defendant to pay civil monetary penalties 

pursuant to Section 20(d) of the Securities Act [15. U.S.C. § 77t] and 

Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)]. 

VI. 

Issue an Order retaining jurisdiction over this action III order to 

implement and carry out the terms of all orders and decrees that may have 

been entered or to entertain any suitable application or motion by the 

Commission for additional relief within the jurisdiction of this Court. 

VII. 

Grant such other and further relief as may be necessary and 

appropriate. 

Dated: July 21, 2009. 

Respectfully SUb7: 
~f~ 
William P. Hicks 
Regional Trial Counsel 
Georgia Bar No. 351649 

~~d' 
Alana R. Black 
Senior Trial Counsel 
Georgia Bar No. 785045 

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Counsel for Plaintiff 
U.S. SECURITIES AND EXCHANGE COMMISSION
 
3475 Lenox Road, N.E., Suite 1000
 
Atlanta, Georgia 30326-1232
 
Telephone: (404) 842-7675
 
Fax: (404) 842-7679
 
[email protected]
 
[email protected]
 

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