Not Too Big To Fail

Federal regulators and 13 states move against Morgan Keegan.


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It isn't easy to get 13 people to agree about anything important. The Memphis City Council and the Shelby County Commission each have 13 members. They often split 7-6 when there is power or money at stake. Juries have 12 members, because it's serious business to convict someone. Last week, a committee of seven people studying the future of the former Mid-South Fairgrounds couldn't even agree on a new name for a small piece of it, let alone what to do with the whole thing.

But after a year-long investigation, a task force of financial watchdogs in 13 states including Tennessee agreed that Morgan Keegan should be put out of business.

"We are taking an unprecedented step against a major regional brokerage firm," said Shonita Bossier, a financial industry regulator in Kentucky.

The states were joined by the Securities and Exchange Commission and the Financial Industry Regulatory Authority. Their recommendations include "full restitution" to investors who lost $2 billion in mutual funds — now there's a stimulus plan — and revocation of Morgan Keegan's registration in 13 states. Morgan Keegan, in their eyes, is not too big to fail.

The impact of the recommended punishment has not sunk in yet for a lot of reasons. It was a one-day story in The Commercial Appeal and on local television. It's not like some basketball player bolting from the University of Memphis for the NBA or cheating on an SAT test. This is about billions, not banners, jobs, not jocks, and the survival of a company, not a coach. A letter from the mayor to Forbes magazine won't do much good.

The charges were blunted somewhat, because they were made at a press conference in Jackson, Mississippi. The top cop is Joseph Borg, director of the Securities Commission in Alabama, home of Morgan Keegan's parent company, Regions Financial. The alleged bad guy, mutual fund manager James Kelsoe Jr., is so low-profile that there wasn't even a picture of him in local stories.

A fraud based on "tranches of structured collateralized debt instruments" is a tough sell for the news media, which is the way the bond business likes it. As Michael Lewis writes in The Big Short, his new book about subprime mortgages like the ones in the Kelsoe funds: "Bond market terminology was designed less to convey meaning than to bewilder outsiders."

Morgan Keegan was founded in 1969 by Memphians Allen Morgan Jr. and James Keegan, making its mark in a city famous at that time as the home of unregulated "bond daddies." The company has been a rainmaker for municipal bond deals and investment banking deals and hires top talent. Regions Morgan Keegan sponsors the local pro tennis tournament, and its headquarters has been the centerpiece of the downtown skyline since 1985.

At the heart of the allegations are Kelsoe and some well-placed colleagues who were supposed to be supervising him. Their words and e-mails could end his brokerage career.

In July 2007, with the Dow Jones Industrial Average close to its all-time high, a Morgan Keegan vice president, Kim Escue, complained that Kelsoe had been giving her the runaround for weeks. She was responsible for reports on Morgan Keegan mutual funds for customers and brokers.

"I have been stalled and put off since the get-go on this, and it is definitely in our best interest to drop coverage if we cannot do our regular due diligence," she wrote in an e-mail.

She wasn't the first employee to learn that Kelsoe got special treatment. In 2006, Carter Anthony, who was Kelsoe's supervisor, was told by Morgan Keegan president Doug Edwards that Kelsoe was "to be left alone." The funds were removed from Anthony's oversight.

In May 2007, Gary Stringer, a senior vice president, wrote an e-mail to a colleague expressing his worries about a Kelsoe fund.

"Mr. and Mrs. Jones don't expect that kind of risk from their bond funds. The bond exposure is not supposed to be where you take risks. I'd bet that most of the people who hold that fund have no idea what it's actually invested in. I'm just as sure that most of our FAs [financial advisers] have no idea what's in that fund either."

Morgan Keegan issued a statement saying it intends to "vigorously refute these charges." But how, where, and with what? The referees made the call. Morgan Keegan may negotiate its way to survival, but any lawyer who can't win an arbitration claim against it now should be disbarred.


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