You may recall that, back in the go-go days before January 2008, brokers sold a lot of auction rate securities on the theory that they yielded a bit more interest than money market funds and bank accounts but had about the same degree of safety and liquidity. When the auctions froze up in early 2008, the suckers who bought ARS couldn't get their money back. Some of them sued or arbitrated, often under section 10(b) of the Securities and Exchange Act of 1934. Few got some of their money back, and fewer did better. Others continue to wait. The Second Circuit yesterday may have sounded a death knell for fraud claims alleging that one big broker, Morgan Stanley, lied about the safety and liquidity of ARS. The court held that the ARS buyers couldn't have reasonably relied on the false statements because Morgan Stanley had posted an online notice saying that ARS auctions could fail and that the failure of auctions would hurt liquidity. Ashland Inc. v. Morgan Stanley & Co., Inc., No. 10-1549-cv (2d Cir. July 28, 2011). Interestingly, a settlement in May 2006 with the Securities Exchange Commission required the notice. The SEC thus furnished the means for Morgan Stanley to dodge liability for the ARS mess.
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