A settlement has been reached between the State of Montana and Morgan Stanley & Co., Inc. regarding allegations that the company misled investors. In the settlement, Morgan Stanley has agreed to provide liquidity to Montana investors who invested in auction-rate securities before the market for those securities was frozen in February 2008. The settlement includes rescission to Montana victims totaling more than $43 million and a $120,000 fine to be deposited in the state’s general fund. Montana Commissioner of Securities and Insurance, Monica Lindeen announced the settlement on December 16th.
According to complaints received from investors throughout the country, Morgan Stanley misrepresented auction-rate securities (ARS) by telling customers they were safe, highly liquid investments comparable to money markets. A multi-state investigation was conducted responding to allegations regarding the liquidity of auction-rate securities that Morgan Stanley underwrote, marketed and sold. Investors further alleged Morgan Stanley knew that in 2007 and 2008 the ARS market was deteriorating and began purchasing additional inventory to prevent failed auctions.
As you may know, auction-rate securities are preferred shares or debt instruments such as corporate or municipal bonds. They have a long-term maturity and are sold at monthly or weekly auctions. Until recently the ARSs were treated by many investors as cash investments. But when the auction-rate security market collapsed, auctions came to a halt, leaving investors with investments that could not easily be converted to cash. The settlement agreement finalizes the actions taken against Morgan Stanley as a result of the investigation.
Source: Insurance Journal
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