CHICAGO — Morgan Keegan & Co. Inc. will pay $850,000 to settle securities fraud charges brought by Missouri Secretary of State Jason Kander over the firm's underwriting of $39 million of municipal bonds for a failed artificial sweetener plant.
The office's Securities Division filed a consent order Monday in state court resolving the civil enforcement case first filed in 2013, which accused the firm of omitting material facts about the project being constructed by the now defunct Mamtek US Inc., in violation of state securities laws.
In the agreement, the firm does not deny or admit to any wrongdoing in connection with the bonds that were sold by the Moberly Industrial Development Authority.
Morgan Keegan will pay $850,000 as part of the agreement, including $750,000 that will go to the state's general fund. The remainder will reimburse the Securities Division for the cost of its probe. Missouri investors, who would have stood to benefit from the state case, have recouped their investment primarily through the settlement of various lawsuits brought against Morgan Keegan and other financial firms.
Kander's office said its settlement is focused on averting a recurrence in a future bond issue. As part of the order, Morgan Keegan, whose underwriting business became a part of Raymond James Financial Group in 2012, must hire a consultant to review its municipal bond underwriting procedures and will implement any suggested changes by Kander's office.
The changes would apply to Raymond James & Associates Inc.'s municipal bond department, according to the order.
"I'm pleased Morgan Keegan has taken responsibility for its role in this debacle by not only agreeing to a settlement with my office, but by previously returning money to investors that had lost their savings in the Mamtek scheme," Kander said in a statement.
With the resolution of the lawsuits and the Missouri enforcement action, only bankruptcy trustee action remains ongoing.
The authority sold the bonds, backed by the city's appropriation pledge, in 2010. The project also qualified for state tax credits, although the credits were never received.
Mamtek, which billed itself as a subsidiary of a Chinese firm that makes sucralose, defaulted in August 2011 on a payment to Moberly needed for debt service. Moberly refused to honor its pledge and the city lost its investment grade rating.
Mamtek US then abandoned the half-built factory. Creditors forced the company into bankruptcy and the plant's assets were sold off to benefit creditors. Kander in 2013 filed a civil enforcement action against Morgan Keegan accusing the firm of defrauding clients by misrepresenting material facts about the offering.
The complaint charged that the firm failed to adequately investigate the feasibility of Mamtek's business plan, misled investors about investigation findings, and failed to inform them of significant risks of the bonds. The lawsuit alleged that Morgan Keegan misrepresented to investors that their bonds were secured by valid Mamtek patents, when in reality, Mamtek did not have any patents.
Securities Commissioner Andrew Hartnett sought full restitution for Missouri bondholders and a $15 million civil penalty from the firm. The original action also asked that civil penalties be imposed on 10 individually named defendants who were charged with various counts of state securities violations tied to their work on the bond sale.
Morgan Keegan initially denied any wrongdoing or responsibility for investor losses, citing the city's backing of the bonds, which carried an investment grade rating from Standard & Poor's, and it filed a complaint in the state courts seeking to dismiss Kander's administrative action.
A Raymond James representative said Monday it was indemnified against losses as part of the acquisition of Morgan Keegan bond business from Regions Financial Corp., although the order makes clear that recommended changes apply to Raymond James.
The resolution of the state securities case marks the latest settlement as the Mamtek saga winds down.
Investors holding about $27 million of the bonds reached settlements last year with the financial firms they sued for negligence and fraud. The terms were not disclosed. The cases named Morgan Keegan and Raymond James as defendants.
They followed the resolution of a separate federal class action brought by other investors with an $8.25 million settlement. Terms of that settlement were disclosed because of its status as a class action.
Missouri attorney general Chris Koster in 2012 filed charges alleging securities fraud and stealing against former Mamtek executive Bruce Cole, and the Securities and Exchange Commission filed a civil complaint accusing Cole of scheming to defraud potential investors. As part of a settlement with Koster's office, Cole is serving a seven-year prison sentence.
The bonds carried an A rating from Standard & Poor's based upon the city's pledge. Moberly lost its investment-grade rating after it declined to make good on its pledge. The sucralose plant bonds are rated D.
