Nov. 20 (Bloomberg) -- Dow Corning Corp., the world’s biggest silicone supplier, and two affiliated companies sued Bank of America Corp.’s Merrill Lynch & Co. for falsely representing the safety and liquidity of $166 million in auction-rate securities that the companies can’t sell.

The complaint was filed today in federal court in Manhattan, two weeks after Midland, Michigan-based Dow Corning filed a similar lawsuit in New Jersey against Winston-Salem, North Carolina-based BB&T Corp. over the sale of $667 million in auction-rate securities.

Merrill Lynch marketed the securities “as highly liquid, highly rated and secure investments that were equivalent to cash,” according to the fraud and breach-of-duty complaint. The “representations of ARS liquidity and risk were untrue.”

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

Banks have been forced to buy back $61 billion in auction- rate securities since February 2008.

Devonshire, Hemlock

The plaintiffs in today’s complaint include Dow Corning’s Devonshire Underwriters unit and Hemlock Semiconductor Corp., a joint venture based in Hemlock, Michigan, that makes polysilicon.

Bill Halldin, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment.

Dow Corning and the other plaintiffs say Merrill Lynch never disclosed the increasing risks of owning auction-rate securities during daily conversations throughout 2007 and into February 2008.

The case is Dow Corning Corp. v. Merrill Lynch, 09-cv-09697, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin in New York federal court at dglovin@bloomberg.net.

Last Updated: November 20, 2009 18:00 EST