Ashland Inc., a large chemical company, made investments in auction-rate securities (ARSs) on the advice of Byrne, its long-time investment adviser at Morgan Stanley (MS). Ashland alleged that it had made repeated enquiries about the liquidity risk associated with ARSs and received Byrne’s assurances that all was fine with these investments, even in the light of failures of other auctions. Information about ARSs was not publicly available. In February 2008, Ashland placed sell orders but found that the market for ARSs was illiquid because MS was ‘no longer stepping in to ensure auction success’. Ashland alleged that MS had known as early as the previous August that the ARS market was collapsing.

Caveat emptor, said both the New York District Court and, on appeal, the 2d Circuit. A sophisticated investor like Ashland could not plead reasonable reliance on alleged misrepresentations by the adviser, especially in light of MS’s disclosure in SEC filings of the liquidity risks associated with ARSs.

Ashland Inc v Morgan Stanley & Co Inc (2d Cir. 28 July 2011).