Disclosure the Key: What to Learn from the Dismissal of SEC's Claims Against Morgan Keegan
A federal judge in Georgia has dismissed claims pursued by that Securities and Exchange Commission ("SEC") that Morgan Keegan committed securities fraud by misleading investors about the risks involved with auction-rate securities (or "ARS"). Over two years ago, the SEC filed a complaint against Morgan Keegan alleging that the company had failed to warn investors about the risks relating to auction-rate securities. The SEC claimed that Morgan Keegan had misrepresented to investors that the "debt carried 'zero risk' or was an equivalent of case, 'just like a money' fund." The SEC’s allegations included that the company told investors that the auction-rate securities were "were safe, liquid investments and failed to tell them they were becoming harder to sell by February 2008."
Morgan Keegan, a company owned by Regions Financial Corp., refuted the SEC by claiming that its disclosures were adequate to warn investors about the risky venture. U.S. District Court Judge William Duffey Jr. agreed with the company by holding that the total mix of information, including oral and written disclosures, that Morgan Keegan provided to its investors “clearly and repeatedly” illustrated the liquidity risks. Judge Duffey found that the SEC did not introduce “any evidence to show that Morgan Keegan instituted a company-wide policy encouraging its brokers to misrepresent ARS liquidity risks” or that the company “was aware that its brokers were issuing misleading statements.” See S.E.C. v. Morgan Keegan & Co., Inc., 2011 WL 2559362, *11 (N.D. Ga. 2011). Indeed, the evidence offered by the SEC only demonstrated that “four out of the thousands of customers who purchased ARS during the downturn were told [orally] that ARS carried little to no risk of liquidity.” Id.
Judge Duffey’s ruling reiterates the importance investors and businesses alike should place upon pre-investment disclosures. Companies and brokers should recognize that disclosure of all potential risks is a necessary practice that not only promote investor loyalty and trust but also can serve as a shield against future litigation. Investors meanwhile should recognize that disclosures are not boiler-plate terms but instead specific statements that identify unique risks related to a particular investment opportunity. Ideally, this mutual understanding will result in a higher rate of educated investments and lower rate of litigation.
Case: S.E.C. v. Morgan Keegan & Co., Inc., 1:09-cv-01965-WSD (N.D. Ga. 2011).
