MORGAN STANLEY INDIA INVESTMENT FUND, INC. 
By By Joseph A. Giannone
Morgan Stanley said it would offer to buy back at face value some $4.5 billion in auction-rate securities held by individuals, charities and small to medium-sized businesses and provide liquidity to institutional investors in the securities.
State and federal regulators have been investigating whether brokerages and banks falsely told clients that auction-rate securities -- a $330 billion market of long-term debt instruments that pay yields reset through weekly or monthly auctions -- were as safe and liquid as cash.
Instead, auction-rate securities have been impossible to sell since late January, when investment banks stopped propping up auctions that were being abandoned by investors.
New York Attorney General Andrew Cuomo, one of the most aggressive regulators pursuing the issue, on Monday told JPMorgan Chase & Co
JPMorgan was the third-largest auction-rate municipal bond underwriter since 2000 after Citigroup Inc
New York, the Securities and Exchange Commission and other states announced settlements last week with Citi and UBS. Combined, the banks agreed to pay $250 million in fines and repurchase about $27 billion of the debt from their clients.
'CASH-LIKE' SECURITIES
The office of Missouri Secretary of State Robin Carnahan said on Monday talks on auction-rate securities were continuing with Wachovia Securities, a St Louis-based venture jointly owned by Wachovia and Prudential Financial Inc
Cuomo's letters to the three banks and the Missouri talks indicate that Wall Street has only begun to pay for its actions that left tens of thousands of investors stuck with "cash-like" securities that were impossible to cash out.
"It would be unfair to consumers with accounts at other firms, as well as to the firms that settled, if our investigation were to slow down or stop," David Markowitz, Cuomo's top investor protection lawyer, wrote in letters first obtained by Reuters.
JPMorgan disclosed separately that in addition to Cuomo's office, the SEC and the states of Florida and Massachusetts had sought information on its auction-rate securities activities.
Customers of JPMorgan, which said it was cooperating with the inquiries, hold about $5 billion of auction-rate securities bought before February, the No. 3 U.S. bank said in a regulatory filing.
Cuomo's office sent subpoenas to 18 banks and brokerages in April. At least seven other states are also investigating Wall Street's actions in this matter.
FULL REFUNDS
Cuomo's office, which has invoked the state's powerful Martin Act, has said it wants all banks and brokers to make tens of thousands of U.S. investors whole by repurchasing all of the debt at face value.
Missouri's Carnahan said Wachovia customers hold about $9.5 billion of auction rates. Retail customers of Morgan Stanley and JPMorgan are each estimated to have more than $3 billion of the securities.
Last week, Merrill Lynch & Co Inc
Last month, securities industry watchdogs from six states went into Wachovia Securities' headquarters seeking information about its auction-rate sales practices.
"We are meeting with regulators in (Missouri) and look forward to the discussions," a Wachovia spokeswoman said.
Morgan Stanley said it would buy back retail auction-rate notes beginning no later than September 30. The bank also said it would make whole any clients who sustained losses from selling the securities between February 12 and now.
Cuomo's office could not immediately be reached for comment on the Morgan Stanley offer.
The SEC had no comment on New York's probe. An SEC spokesman said: "Getting investors their money back will continue to be a focus of the enforcement division's investigative efforts."
(Additional reporting by Jon Stempel, Elinor Comlay, Christian Plumb and Rachelle Younglai; editing by Braden Reddall)
