Montana Makes Morgan Stanley Pay Back $42 Million

December 16, 2009

Montana Commissioner of Securities and Insurance, Monica Lindeen, finalized a settlement with Morgan Stanley & Co., Inc. regarding allegations the company misled investors.

In the agreement, Morgan Stanley has agreed to provide liquidity to Montana investors who invested in auction-rate securities before the market for the 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 to the state’s general fund.

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 the 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.

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, and until recently were treated by many investors as cash investments. However, the auction-rate security market collapsed, bringing auctions to a halt and leaving investors with investments that could not easily be converted to cash.

Lindeen said that today’s settlement agreement finalizes the actions taken against Morgan Stanley as a result of the investigation.

She also urged investors to learn as much as they can before investing their hard-earned money. “Education is the best tool investors have against bad investments,” she said.

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