Shelby County’s pension fund does business with two Memphis companies that over the past few weeks have come under fire from the U.S. Securities and Exchange Commission.

The SEC has filed a federal complaint against one of the companies for misleading investors. The SEC has put the other company on notice it intends to begin enforcement action in the near future.

The companies are Morgan Asset Management, an arm of Memphis-based Morgan Keegan & Co. Inc., and Consulting Services Group, a major player in the pension consulting business. The federal complaint is against Morgan Keegan. The notice is for Consulting Services Group.

Cutting ties

Morgan Asset Management has been one of several fixed-income investment advisers for the county fund since January 2000. MAM oversees an account comprised of intermediate bond funds for the county, and securities in that account are currently valued at $3.6 million.

The account was opened nine years ago with $20 million. David Pontius, manager of pension investments for the county, said the fund has lost 4.3 percent in value since its inception. At the pension board’s request, MAM recently began disposing of securities in the fund, and the $3.6 million in securities is what remains.

“We gave them instructions to sell the portfolio to bring it to a total cash balance,” Pontius said. “As they raised cash, we pulled the cash out of the account and brought it back into our operating cash account. We have done that with all the money with the exception of the $3.6 million that is currently there. And they have instructions to sell that $3.6 million (in securities) at the best price they can, when they can.”

The fund should be completely liquidated within the next three to six months. Pontius said the slumping credit market was the reason the decision was made to unwind the MAM fund.

“These securities were particularly subject to that credit crisis, so we wanted to get out of them, and that’s what we’re doing,” Pontius said. “And once that gets down to zero, we will not have a relationship with Morgan Asset Management any longer.”

Crying foul

As one of the county’s pension fund investment managers, MAM bought and sold securities for the account it managed. But Morgan Asset Management and Morgan Keegan are now in the crosshairs of the SEC for other types of securities and financial products MAM managed and which the SEC believes Morgan Keegan misrepresented to investors.

Earlier this month, Regions Financial Corp. – the Alabama-based banking company and parent of Morgan Keegan – disclosed in a regulatory filing the SEC has sent word it likely will take legal action against Morgan Keegan and Morgan Asset Management.

The SEC sent Morgan Keegan, Morgan Asset Management and three unidentified employees a so-called Wells notice. The notice is a formal alert that SEC representatives likely will recommend the agency bring civil charges against the recipient of the notice. It is not an allegation or finding of wrongdoing.

The notice sent to Morgan Keegan came out of the SEC’s Atlanta regional office. Regions’ disclosure says the SEC’s likely action stems from “the staff’s investigation of certain mutual funds formerly managed by Morgan Asset Management Inc.”

Several Morgan Keegan mutual funds saw their values plummet starting in 2007 at a pace that surpassed their peers, and investors quickly began crying foul. In scores of arbitration claims and lawsuits, investors claimed the funds had loaded up on risky, highly speculative securities while the funds were marketed as stable investments.

For more than a year, a group of state securities regulators also has been studying whether state regulatory agencies should take action over the same issue.

This week, the SEC filed a federal complaint against Morgan Keegan over an unrelated issue. The federal agency claims Morgan Keegan misrepresented the nature of auction-rate securities the Memphis company marketed and sold.

Auction-rate debt includes an interest rate regularly reset at auctions. Brokers of the debt fell under scrutiny last year after regulators began to explore whether investors had been given an accurate picture of its safety and volatility.

The SEC’s complaint says Morgan Keegan sold almost $1 billion worth of auction-rate securities to investors between late 2007 and early 2008, at a time when the market for those investments was falling apart.

“What we allege in the complaint is that in mid-2007 into 2008, as the market was changing and as Morgan Keegan was getting information that the auction-rate market was problematic, they were continuing to offer the securities as comparable to money market products and as safe investments without disclosing the risks and the fact that some auctions were failing,” said Katherine Addleman, director of the SEC’s Atlanta regional office.

“Morgan Keegan had direct knowledge of that because of its participation in the auction-rate securities market. They ended up having to take more and more of the product into their own inventory, and in fact, as the market was moving adversely, they accelerated their efforts to market the (auction-rate) products.”

The Alabama Securities Commission, a state regulatory body, also took action over the same issue.

The ASC issued an “order to show cause” to Morgan Keegan. That order requires the company within 28 days to show why its registration as a broker-dealer in the state should not be suspended or revoked.

In response

Morgan Keegan issued a statement this week about the SEC’s auction-rate securities action.

“Frankly, we are both surprised and disappointed by the SEC’s actions,” the statement reads. “In the wake of a market collapse that occurred virtually overnight, we have made restoring liquidity for investors holding auction-rate securities a high priority. Contrary to assertions made by the SEC, Morgan Keegan has been continuously repurchasing ARS held by our clients since early 2009, while also cooperating extensively with the SEC throughout its investigative process.”

At the county pension board’s monthly meeting a few weeks ago, members rallied around CSG and said they didn’t support any changes to that firm’s arrangement with the county. One thing that wasn’t disclosed at the meeting was that about a month earlier, CSG got a Wells notice from the SEC.

Shelby County Mayor A C Wharton Jr. and county Chief Administrative Officer Jim Huntzicker knew about the notice, but neither they nor the CSG representatives at the meeting mentioned the SEC’s warning.

When asked by one pension board member to elaborate in general on any pending legal action against the firm, CSG co-founder Fred Hodges was blunt.

“We haven’t been charged with anything,” he said.

Hodges added that the company has “never paid as much as a pack of gum to buy an account” and that the company has had three problems with regulators. He did not include the Wells notice in that list.