Funds News

Morgan Stanley sued over auction rate securities

The Morgan Stanley headquarters is seen in New York January 30, 2008. REUTERS/Shannon Stapleton

NEW YORK (Reuters) - A Morgan Stanley MS.N client sued the firm on Tuesday, accusing it of deceptively marketing auction rate securities, according to the lawsuit filed in a U.S. federal court.

The suit, which seeks class-action status, said Morgan Stanley and other broker dealers had artificially supported the auction rate securities market and recklessly misrepresented the risks of such investments.

Auction rate securities are a type of long-term floating rate debt whose interest rates reset in short-term periodic auctions. But the securities have become harder to sell in recent months as auctions have failed to attract bidders.

“Morgan Stanley deceptively marketed (auction rate securities) as cash alternatives to money market funds for investors needing liquidity and utterly failed to disclose material information,” investor Gary Miller said in the lawsuit, which was filed in U.S. District Court in Manhattan.

In the suit, Miller said the value of auction rate securities had been artificially inflated and that he and other investors were now stuck with investments they could not sell.

He is seeking an injunction that would compel Morgan Stanley to rescind millions of dollars it executed in auction rate transactions from March 2003 through February 2008, and compensatory damages for himself and other investors in those securities.

A Morgan Stanley representative had no immediate comment on the suit.

Reporting by Emily Chasan; Editing by Lisa Von Ahn