The brokerage firm, based in Memphis, agreed to pay $200 million to settle claims that it misled customers about the dangers of mortgage securities. It was too little, too late for many of the investors, who together lost more than $1 billion.

The Financial Industry Regulatory Authority and state securities regulators contended that Morgan Keegan failed to disclose the risks associated with the investments of one fund.

But the Securities and Exchange Commission went further, saying that James C. Kelsoe Jr., the manager of that fund and six others, defrauded clients. The S.E.C. contended that he inflated the values of mortgage securities that the funds owned by “mis-marking” positions from at least January 2007 to July 2007, as the mortgage market tumbled. In other words, the S.E.C. says, he basically made up the prices.

In its settlement, Morgan Keegan neither admitted nor denied wrongdoing — standard procedure in such agreements. But the details in this matter tell a troubling tale.

According to regulators, Mr. Kelsoe instructed his accounting department to mark the prices of securities above their fair values. When he got a valuation he didn’t like from an outside firm, regulators said, he persuaded that firm to raise the price, too. This way, the funds could avoid taking markdowns.

Regulators said Mr. Kelsoe signed letters to investors reporting on the funds’ performance “based on net asset value.” But the S.E.C. said the performance was materially misstated.

As part of his settlement, Mr. Kelsoe, 49, agreed to pay $500,000 in penalties and to accept a lifetime ban from the securities industry. Peter J. Anderson, a lawyer for Morgan Keegan and Mr. Kelsoe, said the firm and Mr. Kelsoe would not comment. Both agreed to settle to put the matter behind them, he said.

Some aspects of this story might be familiar. On Dec. 30, 2007, an article here described how the Indiana Children’s Wish Fund, a charity that grants wishes to terminally ill youngsters, was sandbagged by a Morgan Keegan fund. In mid-2007, a Morgan Keegan broker pushed the charity’s officials to invest in a fund stuffed with toxic mortgage securities. The charity promptly lost $48,000 on its $223,000 investment.

Morgan Keegan settled with the charity in late 2007, after this reporter inquired about the investment. Terms of that deal were confidential, but it is perhaps no coincidence that the disastrous investment was made during the period when regulators say Mr. Kelsoe was improperly marking his funds.

Other investors have not fared as well in cases against Morgan Keegan, according to their lawyers.

Since the S.E.C. sued Morgan Keegan and Mr. Kelsoe in April 2010 (making identical accusations to the details laid out in last week’s settlement), the firm has maintained that it did nothing improper and that regulators’ claims were baseless.

Andrew Stoltmann, a lawyer at Stoltmann Law Offices in Chicago who has represented 14 Morgan Keegan clients in arbitration cases, said the brokerage firm’s arguments had been persuasive among some arbitrators. This has resulted in reduced recoveries for some investors, he said.

Last week’s settlement was certainly no exoneration for Morgan Keegan. And given the details cited by regulators, you may think investors with arbitrations pending would benefit by their airing.

But Mr. Stoltmann fears otherwise. Finra arbitration rules do not require that regulatory findings, like those made public last week, be introduced as evidence. As such, he said, he expects that some arbitrators won’t allow these details to be considered. “For the cases where arbitrators allow the regulatory findings to be introduced, this is an unequivocal game changer and the investor wins,” he said. “But Morgan Keegan’s lawyers have told me they are going to fight to keep these findings away from the eyes of arbitrators.”

Mr. Anderson, the lawyer for Morgan Keegan, confirmed that the firm probably would argue against letting the S.E.C. and Finra findings be introduced in arbitration cases. “I wouldn’t expect that they would be relevant,” he said.

Investors who lost money in the funds would disagree.

Broadly speaking, this highlights a downside of arbitration, Mr. Stoltmann said. While courts have ruled that regulatory findings can be introduced into evidence and should not be considered hearsay, some arbitrators will disagree, he said.

The $200 million that Morgan Keegan agreed to pay will be placed in several restitution funds. A Finra spokeswoman said that until the funds’ administrator is appointed, it isn’t clear how the money will be distributed or if investors who had already recovered some losses can tap those funds.

Given that investors lost more than $1 billion, they are clearly not going to be made whole with $200 million.

“I wish this settlement had taken place a year or two years earlier because now probably 90 percent of the arbitration claims are concluded,” Mr. Stoltmann said. “Will it be helpful? Yes, if arbitrators let the findings in.”

That’s one disturbing paradox. Finra found that Morgan Keegan sold shares in a large fund from January 2006 to September 2007, “using sales materials that contained exaggerated claims, failed to provide a sound basis for evaluating the facts regarding the fund, were not fair and balanced and did not adequately disclose the impact of market conditions in 2007 that caused substantial losses” to the fund’s value.

But Finra arbitrators can refuse to let that finding be introduced by investors bringing cases against Morgan Keegan.

Just another glimpse of the upside-down world we live in.

Article source: http://feeds.nytimes.com/click.phdo?i=35d1e1c795868994d2a53780dbf68102