UPDATE 2-Evergreen settles state, US charges for $40 mln

* Evergreen to pay $40 mln to settle with regulators

* Settlement could hint at outcome for other lawsuits (Explains that SEC penalties and disgorgement of ill-gotten gains payments will also go to fund investors)

BOSTON, June 8 (Reuters) - Wells Fargo & Co's (WFC.N) money management unit agreed on Monday to pay more than $40 million to settle state and federal regulators' charges that it overstated the value of one of its mutual funds, which invested heavily in mortgage-backed securities.

The settlement came after the U.S. Securities and Exchange Commission and the Massachusetts Securities Division accused Evergreen Investment Management Company LLC and an affiliate of improperly valuing its Ultra Short Opportunities Fund and inflating the fund's worth by as much as 17 percent.

The Evergreen settlement could implicate the future for other companies that issued short-term bond funds that suffered steep losses because of investments in risky debt, or debt that became largely illiquid.

Evergreen did not admit to or deny the findings in the SEC order. It will pay $33 million to compensate fund shareholders, $4 million in penalties to the SEC and $3 million to the disgorgement of ill-gotten gains.

The SEC penalties and disgorgement of ill-gotten gains will also go back to those who invested in the fund, leaving them with a total of $40 million from the settlement, the SEC said.

Evergreen will also pay a $1 million fine to the state of Massachusetts.

The exaggerated value of the fund gave it consistently high rankings among peer funds in 2007 and 2008, according to the SEC. Ultra Short Opportunities Fund would have ranked near the bottom of its class if Evergreen had properly disclosed its value, the SEC said. Evergreen, a subsidiary of Wachovia Corporation at the time of the violations, is now a unit of Wells Fargo after Wells bought Wachovia.

As the housing crisis worsened, Evergreen failed to use information available on certain mortgage-backed securities in the valuation process, the SEC said.

Evergreen began to address the fund value by adjusting prices on certain holdings, but only released information on the reason for the re-pricings and the possibility of future adjustments to select investors.

Investors who received the preferential information were able to leave the fund before the value of their fund shares decreased any further. Other shareholders were at a disadvantage, the state and federal regulators found.

Evergreen closed the Ultra Short fund in June 2008 when it had $403 million in assets.

Charles Schwab Corp (SCHW.O), Fidelity Investments and Regions Financial Corp's (RF.N) Morgan Keegan unit are among fund providers that face lawsuits and arbitration claims because of unexpected claims in short bond funds.

(Reporting by Erin Kutz and Jon Stempel; Editing by Richard Chang and Bernard Orr)