Securities & Exchange Commission v. Morgan Keegan & Co.
2012 U.S. App. LEXIS 8966
11th Cir.2012Background
- Morgan Keegan underwrote and sold approximately $1.1 billion of AAA-rated ARS and also sold ARS underwritten by others.
- ARS are long-term or no maturity instruments marketed as liquid, with liquidity relying on regular auctions.
- Auction failures began in late 2007 leading to widespread illiquidity and investor losses.
- Morgan Keegan internally discussed liquidity concerns and took actions to support auctions, including buying ARS for its own account.
- The 2006 SEC cease-and-desist ordered certain improper ARS auction practices by broker-dealers, including disclosure duties and auction participation rules.
- Morgan Keegan distributed written disclosures (ARS Manual, ARS Web Page, ARS Brochure) but not consistently to ARS purchasers, and trade confirmations largely referred to general procedures without liquidity-risk details.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Materiality standard for SEC action in this case | SEC argues materiality includes broker oral statements in total mix | Morgan Keegan contends only public disclosures matter | Materiality includes broker oral statements in total mix |
| Whether broker oral misrepresentations can be material despite written disclosures | Four brokers misrepresented liquidity risk to investors | Written disclosures could render statements immaterial as a matter of law | Oral misrepresentations to investors can be material under the total mix approach |
| Role of written disclosures versus oral misrepresentations | Disclosures were inadequately distributed; oral statements influenced decisions | Disclosures could negate reliance or materiality if properly provided | Written disclosures in this case did not preclude materiality of oral statements |
| Whether SEC may rely on private-litigation-like materiality analysis in SEC enforcement | Total mix standard applies to SEC actions | Materiality should be limited to public disclosures | Total mix standard applies; broker communications included in analysis |
Key Cases Cited
- Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (U.S. 2011) (materiality depends on total mix, not statistical significance alone)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (materiality requires substantial likelihood disclosure would alter total mix)
- TSC Industries v. Northway, 426 U.S. 438 (U.S. 1976) (materiality involves delicate inferences for reasonable investor)
- Merch. Capital, LLC, 483 F.3d 747 (11th Cir. 2007) (elements of 10b-5 action; materiality and scienter in SEC cases)
- Bruschi v. Brown, 876 F.2d 1526 (11th Cir. 1989) (disclosures and oral misrepresentations; factors for reasonable reliance in private actions)