On June 11, 2009, Ashland Inc., the maker of Valvoline Motor Oil, filed a complaint against Morgan Stanley in the U.S. District Court for the Southern District of New York, based upon Morgan Stanley's alleged sale of Auction Rate Securities ("ARS") to Ashland. Ashland Inc., et al. v. Morgan Stanley & Co., Inc., 09-CV-5415 (S.D.N.Y.).

According to Ashland's complaint, in or around August 2007, Ashland expressed concerns to Morgan Stanley about the global financial crisis. Morgan Stanley allegedly responded to these concerns by encouraging Ashland to shift the majority of its investments into Morgan Stanley-brokered ARS backed by student loans ("SLARS").

Like plaintiffs in other ARS-related complaints, Ashland alleges that Morgan Stanley represented SLARS as "safe, liquid instruments." Also, like other complaints, the Ashland complaint alleges that Morgan Stanley misrepresented its involvement in the ARS market, creating the illusion of liquidity despite its knowledge that the market was likely to collapse without its active intervention to keep the auctions from failing. Further, the complaint alleges that Morgan Stanley represented to Ashland that Morgan Stanley-brokered SLARS were comprised of the highest quality assets because of their high credit ratings, the student loans were backed by the Federal Government, and the loans were not dischargeable in bankruptcy.

Unlike plaintiffs in other ARS cases, Ashland alleges that Morgan Stanley specifically represented to Ashland that Ashland would never be left holding illiquid SLARS because of the high quality of these securities. This representation was allegedly key to Ashland, who had allegedly "earmarked" the funds invested in SLARS for future acquisitions.

When the market for ARS crashed in February 2008, Ashland was left holding $66 million of illiquid Morgan Stanley-brokered SLARS. As a result of its inability to liquidate the SLARS, Ashland alleges it was forced to borrow funds to complete its acquisition of Hercules (a specialty chemical company) in November 2008 and therefore incurred substantial fees and interest.

The complaint alleges violations of Section 10(b) of the Securities and Exchange Act of 1934 (and Rule 10b-5, promulgated thereunder), as well as common law fraud and promissory estoppel. For these alleged violations, Ashland seeks compensatory damages, consequential damages, punitive damages and attorneys' fees and costs.

This suit represents one more ARS complaint by a purchaser who was not able to take advantage of the regulatory settlements (click here for details of other such suits), and shows that although the regulatory settlements may have reduced claims by individuals, claims by corporate investors remain unaffected.

For a copy of the complaint, please click here.