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UPDATE 2-U.S. appeals court reinstates Morgan Keegan ruling

* Appeals court reinstates $9.2 million ruling

* Says district court erred in throwing out award

Oct 23 (Reuters) - A federal appeals court on Tuesday reinstated a $9.2 million securities arbitration ruling against Morgan Keegan & Co stemming from a group of bond funds that became the subject of a civil fraud action by regulators.

The U.S. Court of Appeals for the 5th Circuit ruled that a district court's decision to throw out the arbitration award was made in error, according to an opinion released on Tuesday.

U.S. District Court Lynn Hughes in Houston ruled in September, 2011, that the arbitration ruling should be thrown out because, in part, it was obtained through the alleged ``fraudulent'' testimony of Craig McCann, an expert witness and former U.S. Securities and Exchange Commission economist.

The federal appeals panel, however, noted that there was a ``total absence of any evidence'' to support that finding. The evidence ``supports nothing more than a conclusion that a member of Dr. McCann's staff made a calculation error that he did not discover until after he testified,'' the court wrote.

Investors filed more than 1,000 arbitration cases for losses stemming from the bond funds, which declined as much as 80 percent in value during 2008. Morgan Keegan agreed to a $200 million civil fine to resolve the SEC's enforcement action against the brokerage.

The $9.2 million arbitration ruling on behalf of a group of investors was the largest to date against Morgan Keegan in the bond fund cases. The brokerage has been aggressively defending the claims, including going to court in efforts to overturn certain arbitration rulings.

Arbitration rulings are typically binding, but courts can overturn them in unusual circumstances, such as when arbitrators are biased. Investors typically agree, when signing documents for opening a brokerage account, to resolve any legal disputes with the firm through arbitration.

Earlier in October, lawyers for Morgan Keegan argued in a California appeals court that an award to former NBA all star Horace Grant, who arbitrators awarded $1.46 million over the same bond funds, should be overturned because of arbitrator bias, among other things. 1/8ID nL1E8LBG4J 3/8

``We're thrilled. I'm thrilled for the clients and for Dr. McCann in particular,'' said Paul Dobrowski, a Houston-based lawyer who represented the investor. ``It's a full vindication of the lack of merit in Morgan Keegan's position,'' he said.

Dobrowski and Morgan Keegan argued the appeal last month in New Orleans.

A spokesman for Raymond James Financial Inc, which acquired Morgan Keegan from Regions Financial Corp, declined to comment. A spokesman for Regions Financial Corp, which retained financial responsibility for the bond fund cases, also declined to comment. A Morgan Keegan spokeswoman also declined comment.

EXPERT WOES

The federal appeals court opinion is a relief to economist Craig McCann, who heads Virginia-based Securities Litigation and Consulting Group Inc. McCann has said the earlier ruling by Judge Hughes hurt his business and damaged his reputation.

``The feeling that I have is that this nightmare is over,'' McCann said in an interview on Tuesday. ``Morgan Keegan and its lawyers were able to convince Judge Hughes that I testified falsely about a topic that Morgan Keegan and its lawyers know I never said a word about,'' McCann said.

Morgan Keegan, Regions, and Raymond James declined to comment on McCann's remarks. A lawyer who represented Morgan Keegan in the case, Terry Weiss of Greenberg Traurig LLP in Atlanta, directed Reuters to a Morgan Keegan spokeswoman.

McCann's testimony, for years, has helped seal huge wins for investors, including a $54 million ruling against a Citigroup unit and a $15 million ruling against three former executives of Lehman Brothers Holdings. But after Judge Hughes ruled that he gave allegedly fraudulent testimony, brokerage lawyers tried to use the opinion to damage McCann's credibility as a witness, he said.

BROADER IMPACT

The federal appeals court ruling on Tuesday could also undermine Morgan Keegan's position in other securities arbitration rulings it is trying to overturn, said Ryan Bakhtiari, president of the Public Investors Arbitration Bar Association, a group of lawyers who represent investors in securities arbitration cases.

``This sends a clear message to Morgan Keegan to stop engaging in bad behavior in appealing investor wins. It's a direct message to start playing by the rules,'' said Bakhtiari, who is also a securities arbitration lawyer in Beverly Hills, Calif.

The appeals court ruling could lead to weakening arguments by Morgan Keegan in other appeals about who may be considered a ``customer'' in securities arbitration cases, Bakhtiari said. 1/8ID nL1E8EKJ45 3/8

In the case leading to Tuesday's ruling, Morgan Keegan argued that two investors in the group of claimants were not eligible to participate in the arbitration process because they bought the bond funds from a different brokerage and were, therefore, not Morgan Keegan customers.

Morgan Keegan, nonetheless, agreed to arbitrate with those investors and was bound by that agreement, the court ruled.

The ``high standard'' for overturning an arbitration ruling ``was unmet here,'' the court wrote.