SEC issues revealed with 2 investment banks

Published 10:42 pm Wednesday, July 22, 2009

SELMA — Two of the five investment banking firms under consideration by the City Council to handle the proposed bond issue have had some issues in the recent past.

Members of the council heard presentations Monday from the five banking firms: Frazer Lanier Co., Montgomery; Gardnyr Michael Capital Inc., Mobile; Merchant Capital LLC, Montgomery; Morgan Keegan & Co., Birmingham; and Sterne Agee and Leach Inc., Birmingham.

Council members are expected to decide on an investment banking firm soon. Council President Dr. Geraldine Allen said the council would take all the information available to them, and later make a decision.

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A check of complaints filed by the Securities and Exchange Commission showed two of the firms, Merchant Capital and Morgan Keegan & Co., had been recent targets. The Securities and Exchange Commission is an independent federal agency that oversees the exchange of securities to protect investors.

On June 4, the SEC censured Merchant Capital and fined the investment banking firm $55,000 for paying for travel and entertainment expenses of family members, friends or associates of senior officials of two public finance clients. Merchant Capital received reimbursement for the expenses from the clients directly from the proceeds of the bond offerings, SEC documents show.

The clients and representatives from Merchant Capital took trips to New York to discussed planned bond issues with bond insurers and credit rating agencies from 2003-05. Merchant Capital provided car service, tickets to shows on Broadway, motel room expenses, tickets to the New York Yankees game, meals at the Gotham Bar & Grill, Smith & Wollensky and the Manhattan Ocean Club.

SEC documents show one trip in September 2003 cost $4,549 in travel and entertainment expenses for “unnecessary participants on the trip.”

When Councilwoman Susan Keith asked if the firm had faced SEC censure, Ken Funderburk, who made the presentation, said, “Yes we have … I don’t know how to address it. We’re still trying to figure out how it happened. It has to do with the college system with whom we did some work.”

Neither the SEC nor Funderburk identified any individuals. Funderburk said representatives from his firm took a ratings trip and “some non-official folks took the trip.” The banker called the fine levied by the SEC “an administrative fine.”

An investigation into Morgan Keegan & Co. of Birmingham by the SEC began Tuesday when the regulatory body said it wanted a court order to require Morgan Keegan repurchase illiquid aution-rate securities after allegedly failing to warn its customers about the liquidity risks associated with the ARS market.

Morgan Keegan is owned by Birmingham-based Regions Financial Corp. The SEC has claimed Morgan Kegan sold about $925 million of ARS to its customers between Nov. 1, 2007, and March 20, 2008. As a result thousands of Morgan Keegan customers were unable to liquidate about $1.2 billion of ARS holdings, the SEC said.

The SEC complaint was filed in federal court in Georgia.

Morgan Keegan spokesman Eric Bran told The Associated Press, “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.”

Matt Adams, who made a presentation to the council, declined to answer any questions about the SEC. He said he has never been involved with investigations.

“Nobody in the Birmingham office is involved with that,” Adams said. “I’m sure a firm the size of Morgan Keegan has something, but not me or the people I work with.”

While not under investigation of the SEC, Gardnyr Michael Capital Inc. was involved in a complicated series of transactions in Jefferson County known as swaps.

The interest-rate swaps were an effort to lower the amount of money it had to pay out in debt service. Issues in the credit market over the nation hit Jefferson County’s swap agreements and sent the county spiraling into a financial crisis.

A financial, tax and swap advisers, bond counsel, legal counsel and two investment banks received a total of $11.7 million, according to the 2005-06 audit published by the Alabama Department of Examiners of Public Accounts. Gardnyr Michael Capital made about $2.9 million through third-party payments from the underwriting banks in connection with the swaps.

The same audit shows Morgan Keegan made $1.9 million was Commissioner Gary White’s financial adviser on 13 swaps.

Larry Jackson, an equity partner with Gardnyr, told the council swaps are not a problem in and of themselves.

“The swap was not the thing that created the problem, but the underlying debt did,” Jackson said.