A federal judge in Georgia rejected claims this week by federal regulators who said investment firm Morgan Keegan & Co. fraudulently sold auction-rate securities to investors, leaving them to hold the bag on $2.2 billion of the debt when the market collapsed in 2008.
U.S. District Judge William Duffey Jr. said in an order Tuesday that the Securities and Exchange Commission didn't introduce evidence that the firm backed a company-wide policy that encouraged brokers to mislead investors. He said in his 31-page ruling that "failure to predict the market does not amount to securities fraud."
The company, owned by Regions Financial Corp., argued that its failure to give customers more strident warning about the risks of investing in the instruments doesn't amount to security fraud. The SEC countered that the company's "stubborn refusal" to require brokers to describe the risks was evidence of misconduct.
SEC spokesman John Nester in Washington said late Thursday, "We are considering whether to appeal the court's decision."
Duffey's ruling comes two years after the SEC said in a lawsuit that Morgan Keegan misled thousands of investors about the risks associated with auction-rate securities. The complaint said Morgan Keegan told investors the securities were safe, liquid investments and failed to tell them they were becoming harder to sell by February 2008.
A host of big investment banks, including Wall Street's biggest names, have reached similar settlements with the SEC and state regulators in recent years over auction-rate securities. The regulators accused the banks of misleading customers into believing that the risky securities were safe, cash-like investments.
Tens of thousands of the banks' customers bought the auction-rate securities before the $330 billion market for them froze in February 2008.
Under the settlements, the banks agreed to buy back a total of tens of billions of the securities.
The auction-rate securities market involves investors buying and selling instruments that resemble corporate debt, except the interest rates are reset at regular auctions, some as often as once a week. A number of companies invested in the securities because they could treat their holdings almost like cash.
Tens of thousands of investors nationwide _ including cities and towns, charities and small businesses _ were left holding damaged securities that couldn't be readily sold for cash once the market collapsed.
In a separate case, Morgan Keegan agreed last week to pay $200 million to settle civil fraud charges that it overstated the value of mortgage investments just as the housing market was collapsing in 2007 and lured buyers of its funds with false sales materials.
Regions Financial Corp. also announced last week that it hired investment bank Goldman Sachs & Co. to explore "potential strategic alternatives" for Morgan Keegan. The alternatives could include a sale of the firm or divisions of it.
In a settlement announced Wednesday with the SEC and state regulators, Florida-based investment firm Raymond James Financial Inc. agreed to buy back at least $280 million in auction-rate securities from investors.
Associated Press writer Marcy Gordon in Washington contributed to this report.