A federal appeals court has revived a U.S. Securities and Exchange Commission lawsuit accusing Morgan Keegan & Co of fraudulently misleading investors about the safety of auction-rate securities it sold. The U.S. Circuit Court of Appeals for the Eleventh Circuit reversed a federal district judge in Atlanta, saying the court erred in finding that the alleged misrepresentations made by Morgan Keegan brokers about the debt were not material. The Appeals Court sent the case back to the district court for more proceedings.
Morgan Keegan is a unit of Raymond James Financial Inc, which on April 2 bought the brokerage from Regions Financial Corp for $1.2 billion. The Morgan Keegan case is one of the rare large-scale auction-rate cases to be addressed in court. The SEC accused Morgan Keegan in its 2009 lawsuit of hiding the debt’s risks, including by telling customers that the debt carried “zero risk” or was “just like a money market” fund.
Last June, U.S. District Judge William Duffey found that Morgan Keegan had adequately disclosed the risks. He also said the SEC must show more than “a few isolated instances of alleged broker misconduct” to hold Morgan Keegan legally responsible. But a three-judge 11th Circuit panel concluded that “the brokers’ misleading statements and failure to disclose the known liquidity risk of auction-rate securities could have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” The appellate panel also said Morgan Keegan, having known that more auctions were failing in late 2007 and early 2008, was not excused by having given customers “general cautionary language” about the debt on the back of its trade confirmations.
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