Nov. 6 (Bloomberg) -- Dow Corning Corp., the world’s biggest silicone supplier, sued BB&T Corp. for falsely representing the safety and liquidity of $667 million in auction-rate securities that the company can’t sell.

Dow Corning bought the bonds from 2005 to February 2008 after BB&T touted them as a “highly liquid, highly rated and secure investments that were equivalent to cash,” according to a fraud lawsuit in federal court in Newark, New Jersey.

“Defendants knew and should have known that the ARS markets were in fact deteriorating and that ARS were not safe, liquid investments,” according to the complaint. “Between the fall of 2007 and February 2008, defendants were aware of the increasing risk of a widespread failure of the ARS market.”

Auction-rate securities were issued by municipalities, student-loan agencies, closed-end funds and other companies, with interest rates periodically reset through a weekly or monthly bidding process. Brokerages abandoned their voluntary support for the $330 billion market in February 2008, stranding investors who could no longer trade the bonds at auction.

The complaint, filed Nov. 4, accuses BB&T and its Scott & Stringfellow broker-dealer unit of fraud, breach of fiduciary duty and negligent misrepresentation and omissions as well as violations of the Michigan Uniform Securities Act. Dow Corning, based in Midland, Michigan, seeks unspecified compensatory and punitive damages.

Cynthia Williams, a BB&T spokeswoman, declined to immediately comment.

BB&T, based in Winston-Salem, North Carolina, is the 11th largest U.S. bank by assets. BB&T, which received $3.5 billion in rescue funds from the U.S., in June became one of the first banks to repay the government.

The case is Dow Corning Corp. v. BB&T Corp., 09-cv-05637, U.S. District Court, District of New Jersey (Newark).

To contact the reporter on this story: David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.

Last Updated: November 6, 2009 14:15 EST