CHICAGO — Missouri Secretary of State Jason Kander issued a cease-and-desist order Thursday against the former Morgan Keegan & Co. for alleged securities fraud in its role as underwriter of $39 million of defaulted bonds issued by the city of Moberly that is seeking restitution for in-state investors.
The proposed order, if it becomes final, calls for full restitution for 33 Missouri investors who purchased $6.5 million of the bonds. Kander’s Securities Division issued the order against the firm, which merged with Raymond James Financial in April 2012 and now operates as Raymond James. The firm responded to the action, denying it was responsible for investor losses and vowed to fight the allegations.
It lays out a stinging assessment of the former Morgan Keegan’s performance as underwriter of the bonds issued with an appropriation backing from the city of Moberly for the sucralose plant being developed by Mamtek US Inc. — a subsidiary of a Chinese firm.
The company, along with several key staff members, failed to adequately investigate the
feasibility of Mamtek’s business plan, failed to adequately disclose investor risks, and made fraudulent statements to investors, the order said.
“The petition my office filed alleges that, without Morgan Keegan’s involvement, this failed investment would not have cost Missouri investors more than $6.5 million,” Kander said in a statement.
“Companies have a duty to disclose the risks of stocks and bonds before their clients invest, and our Securities Division will continue to make sure that these companies do business in a responsible, ethical way in Missouri,” he added.
Raymond James issued a statement, saying: "In response to the action taken by the Missouri Secretary of State's Office today, Morgan Keegan denies that it and its employees are responsible for the losses suffered by Missouri investors that were caused by the default of Moberly, Missouri on its bonds. The bonds in question were A-rated by Standard & Poors based upon the City of Moberly's pledge to appropriate funds to pay the bonds. We will not litigate the case in the media and look forward to defending the matter."
The cease-and-desist order prohibits Morgan Keegan from omitting material facts when selling bonds and from failing to adequately investigate bond offerings. The petition also seeks full restitution, civil penalties, fees and costs. That includes making good on $6.5 million of bonds purchased by Missouri investors. Morgan Keegan made approximately $2.5 million for its role on the transaction.
Morgan Keegan and the other parties named have 30 days to request a hearing and show cause why penalties should not be assessed or the order becomes final. In addition to the firm, the order also names William Kevin Thompson, who was a managing director in Morgan’s public finance department at the time and is now with Raymond James; Richard Temple Murray, registered with the state as a managing director in Morgan Keegan’s public finance office through April 2012; and Kevin Lee Edwards, who was registered as an investment adviser with Morgan Keegan and is now with Raymond James.
The order marks the latest major development in a case that has raised the ire of bondholders; local, state and federal regulators or prosecutors, and state lawmakers all angry over the lack of due diligence done ahead of the bond issue or before state financial incentives were awarded.
The Moberly Industrial Development Authority sold bonds backed by a city appropriation pledge to help finance the sucralose plant in 2010. The firm in August 2011 defaulted on a payment to Moberly needed for debt service and the city informed trustee UMB Bank that it wouldn’t honor its pledge to repay the debt. Mamtek then abandoned the factory.
Moberly lost its investment-grade rating from Standard & Poor’s after it declined to make good on its pledge. The sucralose plant bonds are rated D. The trustee has withheld reserves to cover recent debt service payments due to rising legal costs and after failing to find a new owner for the plant and auctioning off its assets for about $2 million last fall.
Local and state prosecutors and federal regulators have filed a mix of civil and criminal complaints alleging theft, fraud and securities violations against Mamtek’s former head, Bruce Cole.
The trustee and other creditors forced the company into involuntary bankruptcy and various lawsuits and other legal claims have been lodged against Cole, Morgan Keegan, and bond counsel Armstrong Teasdale LLP. The bankruptcy trustee is also analyzing possible claims against ex-Mamtek officers and Strauss has already sued Cole for breach of fiduciary duty. State lawmakers held hearings on the project last year that had been in line to receive $17.6 million in state subsidies.
Kander’s petition paints a picture of a firm that purposely overlooked risks associated with the project and the city’s ability to cover bond payments on its own in order to find buyers for the bonds.
The firm allegedly misrepresented that Mamtek had an operating facility in China producing sucralose. It relied solely on Mamtek to provide information on its financial condition without independently assessing the information and it withheld negative information in a consultant’s report from investors, the petition further alleges.
The company misled investors suggesting that their payments would be secured by Mamtek’s patents, which did not exist, and falsely told some investors that Moberly had promised to pay back the bonds if Mamtek failed, the petition alleges.
The underwriter promoted the city’s backup pledge and Mamtek’s pledge to pump millions of its own cash into debt repayment to investors. But it did not make clear the difficulty the city would have in covering the payments on its own or its failure to independently confirm Mamtek’s financial information.
In addition to allegedly violating securities laws, the company violated its own internal due diligence policies in failing to provide adequate financial information in the offering statement about the company material to assessing the investment.
The petition also claims that Morgan Keegan failed to follow up on claims regarding sales contracts and letters of interest Mamtek had obtained regarding its sucralose production. “During the underwriting period, respondents Morgan Keegan, Thompson, and Murray did not obtain, review, or independently verify any of Mamtek’s financial and operating information,” the petition reads.
The underwriter also removed the requirement that potential retail investors sign a so-called suitability letter warning them of risks after institutional investors declined to purchase the bonds because they had concerns about the company and the city’s appropriation pledge.
“Many problems existed with the offering, and if Morgan Keegan had done its due diligence and investigated the feasibility of Mamtek’s business plan, we would not be in this situation,” Kander said. “An appropriate investigation by the firm would have raised enough questions about the Mamtek offering to, at the very least, prevent investor losses.”
In addition to the Missouri buyers, another 102 investors outside of the state purchased the bonds. Kander said other states are looking into Morgan Keegan’s sales of Moberly’s debt.