A federal appellate court on Tuesday reversed a lower court and reinstated a $9.2 million arbitration award to a group that had invested in a securities firm's highly risky mutual funds.

According to the ruling by the 5th U.S. Circuit Court of Appeals in New Orleans in Morgan Keegan & Co. Inc. v. John J. Garrett et al., 18 investors charged that securities broker Morgan Keegan engaged in a fraudulent scheme that led them to invest substantially in four funds that it managed and sold.

The investors charged that Morgan Keegan, which was acquired by St. Petersburg, Fla.-based Raymond James Financial Inc. this year, used the funds' principal to pay dividends, making the funds “essentially operate as a 'Ponzi' scheme,” according to the ruling. The investors lost substantially all of their capital investments in the funds, the ruling said.

In February 2009, the investors brought claims before the Washington-based Financial Industry Regulatory Authority Inc. for statutory and common-law fraud. At the final arbitration hearing in the case, Craig McCann, a securities analyst, provided expert testimony on the investors' behalf. The arbitration panel issued a $9.2 million award in the investors' favor.

But at another arbitration hearing a week later in a related arbitration, Mr. McCann testified to different numbers, explaining that one of his staff members had made mistakes that were now corrected. The corrected numbers were provided to Morgan Keegan in conjunction with the second arbitration hearing almost two weeks before the $9.2 million award was issued.

Morgan Keegan appealed the award, and the federal district court in Houston vacated it, holding the arbitrators had exceeded their authority and, alternatively, the award was procured by fraud because of Mr. McCann's testimony.

The appellate court ruled the district court erred in holding the arbitration award was procured by fraud, stating, "there was no clear and convincing proof of fraud, Morgan Keegan should have discovered any alleged fraud on its own, and there was no basis in the record for finding that McCann's allegedly fraudulent testimony was material to the panel's award.”

The three-judge panel of the 5th Circuit said the district court also erred in ruling the arbitrators had exceeded their powers in granting the award. The “undisputed evidence proves that the parties had an agreement to arbitrate,” said the court, which remanded the case with instructions to enter judgment enforcing the arbitration award.

In June 2011, Morgan Keegan agreed to pay $200 million in restitution to customers who had invested in seven affiliated bond funds, including the Regions Morgan Keegan Select Intermediate Bond fund, in a settlement agreement reached with the Financial Industry Regulatory Authority, the U.S. Securities and Exchange Commissions and state regulators from Alabama, Kentucky, Mississippi, South Carolina and Tennessee.

FINRA said in its statement that from the beginning of January 2006 to the end of September 2007, Morgan Keegan marketed and sold the fund to investors using materials that contained exaggerated claims, and that it did not adequately disclose the impact of 2007 market conditions that caused substantial losses to the fund's value, among other problems.