[ By Howard Haykin ] A federal appeals court on Wednesday reversed the dismissal of an SEC lawsuit against Morgan Keegan & Co. by a federal district court judge, and so, the case is going back to the district court for more proceedings.  The SEC charges the firm with fraudulently misleading investors about the safety of auction-rate securities (ARS's) it had sold. District Court Ruling. In its 2009 lawsuit, the SEC accused Morgan Keegan of hiding the debt's risks - e.g., by telling customers that the debt carried "zero risk" or was "just like a money market" fund.  Last June, U.S. District Judge William Duffey in Atlanta found that Morgan Keegan had adequately disclosed the risks.  He further said that the alleged misrepresentations made by Morgan Keegan brokers about the debt were not material.  The judge concluded that the SEC must show more than "a few isolated instances of alleged broker misconduct" to hold Morgan Keegan responsible. Appeals Court Ruling. But the 11th U.S. Circuit Court of Appeals in Montgomery, Alabama, reversed that decision, saying the district judge in Atlanta erred in finding that the alleged misrepresentations made by Morgan Keegan brokers about the debt were not material.  The three-judge 11th Circuit panel concluded that "the brokers' misleading statements and failure to disclose the known liquidity risk of auction-rate securities could have been viewed by the reasonable investor as having significantly altered the total mix of information made available." The panel added that Morgan Keegan, having known that more auctions were failing in late 2007 and early 2008, was not excused by having given customers "general cautionary language" about the debt on the back of its trade confirmations. Once $330 billion in size, the auction-rate securities market froze in February 2008 when dealers stopped supporting it, leaving many investors with losses on largely illiquid debt.  The Morgan Keegan case is one of the rare large-scale auction-rate cases to be addressed in court. Former New York Attorney General Andrew Cuomo, now the state's governor, convinced more than a dozen banks and brokerages to buy back more than $61 billion of auction-rate debt. Charles Schwab Corp refused to settle and in October won the dismissal of a lawsuit by Cuomo. None of the parties provided any comment on the decision.  Morgan Keegan, is currently owned by Raymond James, based in St. Petersburg, FL, that purchased the company for $1.2bn from Regions Financial in Birmingham, Alabama. The case is SEC v. Morgan Keegan & Co, 11th U.S. Circuit Court of Appeals, No. 11-13992.  Amy Rudolph of Sutherland, Asbill & Brennan is representing Morgan Keegan. [Reuters, 5/2/12]