You may recall that, back in the go-go days, brokers sold a lot of auction rate securities to people who wanted a bit more interest than money market funds and bank accounts yielded but desired about the same degree of safety and liquidity.

When the auctions froze up in early 2008, the chumps who bought ARS couldn't get their money back. Some of them sued or arbitrated, often under section 10(b) of the Securities and Exchange Act of 1934. Few got some of their money back, and fewer did better. Others wait still.

The Second Circuit yesterday may have sounded a death knell for fraud claims against one big broker, Morgan Stanley. The court held that the ARS buyers couldn't have reasonably relied on false statements about the safety and liquidity of ARS because Morgan Stanley had posted an online notice saying that ARS auctions could fail and that the failure of auctions would hurt liquidity. Ashland Inc. v. Morgan Stanley & Co., Inc., No. 10-1549-cv (2d Cir. July 28, 2011).

Interestingly, a settlement in May 2006 with the Securities Exchange Commission required the notice. The SEC thus furnished the chump defense that allowed Morgan Stanley to dodge liability for the ARS mess.