Bloomberg News

Regions Explores Morgan Keegan ‘Alternatives’ After Probe

June 22, 2011

(Updates share price in the last paragraph.)

June 22 (Bloomberg) -- Regions Financial Corp. said it will consider “strategic alternatives” for its Morgan Keegan division after the unit resolved claims by federal, state and industry regulators over subprime mortgage-backed securities.

The bank, based in Birmingham, Alabama, hired Goldman Sachs Group Inc. to evaluate options for Morgan Keegan, ways to manage capital and increase shareholder value, it said today in a statement. Two Morgan Keegan units reached a package of settlements with regulators that may total $210 million in payments, the company said.

“A sale would be the main alternative at this point only because it’s a unit that’s got a considerable franchise in the Southeast,” Kevin Fitzsimmons, an analyst with Sandler O’Neill & Partners, said today in a phone interview. “It’s in a number of different businesses within capital markets and I’m sure there are some players out there who are looking to expand into that or get into that specific geography.”

The accord resolves claims brought last year by the U.S. Securities and Exchange Commission, Financial Industry Regulatory Authority and state regulators, the SEC said today in a separate statement. Regulators last year said the firm misled clients about asset values and risks of bond funds that caused investor losses during the mortgage crisis. The company settled the SEC’s complaints without admitting or denying wrongdoing.

Fund manager James Kelsoe told employees in 2007 to make “price adjustments” that were “arbitrary and did not reflect fair value,” the SEC said in an order today. Kelsoe also determined whether third-party price confirmations were to be used or ignored, the SEC said.

States Involved

Kelsoe “fraudulently prevented the Morgan Keegan fund accounting department from reducing the net asset value of the funds during the deterioration in the subprime market,” William Hicks, associate regional director for the SEC, said today on a call with reporters. Morgan Keegan’s actions may have resulted in $1.5 billion of losses, Joseph Borg, director of the Alabama Securities Commission, said on the call.

The SEC and Finra said the settlement amounts to $200 million. Regions, Alabama’s biggest bank, said it may also have to pay as much as $10 million to states that join the accord. Five states involved in the case initially included Alabama, Kentucky, Mississippi, South Carolina and Tennessee, according to the company. Regions said it already set aside funds to cover the settlement payments.

Regions acquired Morgan Keegan in 2001. The Memphis, Tennessee-based subsidiary has more than 300 offices in 20 states and provides brokerage and investment-banking services. Founded with five workers in 1969, Morgan Keegan now has more than 4,000 employees, according to its website.

TARP Funds

Regions holds $3.5 billion in government bailout funds, and investors are expecting that the bank will need to raise capital to exit the Troubled Asset Relief Program, Fitzsimmons said. A sale of Morgan Keegan would help raise that capital, he said.

“For the company as a whole, it’s not a huge earnings driver,” he said. “Any kind of unlocking of value or capital boost it can get from the sale of a unit like this might be viewed as essentially reducing what they would have to raise, reducing the dilution that would come with such a raise.”

Regions fell 9 cents, or 1.4 percent, to $6.21 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have declined 11 percent this year.

--With assistance from Lindsey Rupp in New York and Silla Brush in Washington. Editors: William Ahearn, Steve Dickson

To contact the reporter on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.


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