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According to Bloomberg News, an SEC lawsuit alleging Morgan Keegan & Co. brokers misled investors about the liquidity risk of auction-rate securities was reinstated by a federal appeals court.

The U.S. Court of Appeals in Atlanta said that a trial judge had incorrectly agreed with Morgan Keegan that brokers' verbal comments to four customers weren't "material" misrepresentations or omissions that would make the company liable under U.S. securities law.

The SEC sued Memphis, Tennessee-based Morgan Keegan in 2009, accusing it of securities fraud. The SEC said Morgan Keegan brokers, from late 2007 through the collapse of the market of auction-rate securities in February 2008, told customers the securities "were as good as cash" because they wanted to increase sales.

Notwithstanding these alleged misrepresentations, the market for the securities collapsed when dealers stopped participating in auctions at which interest rates were periodically reset. The investments typically were municipal and student-loan-backed bonds and preferred shares.

Raymond James Financial Inc. recently completed the acquisition of Morgan Keegan from Regions Financial Corp.

The case is SEC v. Morgan Keegan & Co. Inc., 11-13992, U.S. Court of Appeals for the Eleventh Circuit (Atlanta).

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