MIAMI, Fla. — ASTAR Air Cargo has filed an arbitration claim against Merrill Lynch, Pierce, Fenner & Smith seeking compensatory damages of $9.125 million and punitive damages of at least $27.375 million.

ASTAR’s counsel, Dimond Kaplan & Rothstein of Miami, filed the claim with the Financial Industry Regulatory Authority to gain access to ASTAR’s funds that currently are frozen in illiquid Auction Rate Securities (ARS) in the company’s Merrill Lynch account.

ASTAR alleges it instructed Merrill Lynch to place its cash reserves in products that would provide complete safety of principal and complete liquidity. In response, Merrill Lynch reportedly recommended the company purchase various ARS.

Merrill Lynch allegedly told ASTAR that ARS were completely safe and extremely liquid, with auctions occurring no less frequently than every 35 days. ASTAR agreed to invest significant amounts of cash in ARS sold by Merrill Lynch.

In early 2008, ASTAR’s investments became locked up and entirely illiquid. Accordingly, ASTAR alleges that as a direct result of Merrill Lynch’s fraudulent misconduct, ASTAR is now unable to access substantial assets critical to its business operations.

“Merrill Lynch decided to saddle ASTAR with an illiquid investment rather than risk more of its own capital in the ARS market,” said Scott Dimond, ASTAR’s lead litigation counsel. “When Merrill Lynch concluded that ARS were a ‘hot potato,’ they decided that ASTAR would be the one to get its hands burned. ASTAR never would have invested any of its money in ARS if Merrill Lynch had informed the company of the true liquidity risks of the securities and of the apparent liquidity problems at Merrill,” Dimond said.

According to an ASTAR media release, between October 2004 and December 2007, ASTAR maintained on average between $20 million and $25 million in ARS in its Merrill Lynch accounts.

Beginning in fall 2007, ARS auctions began to fail nationwide, causing certain ARS to become illiquid. At that time, Merrill Lynch allegedly assured ASTAR that it would continue to support the ARS auctions that it oversaw, including the auctions for the ARS that it had sold to ASTAR.

Merrill Lynch allegedly continued to hawk ARS to ASTAR without providing any additional warnings.

In February 2008, however, Merrill Lynch announced it no longer would support the ARS market it had helped to create, the ASTAR media release said.

ASTAR alleges that as a result of Merrill Lynch’s conduct, $9.125 million of ASTAR’s assets are now tied up in illiquid ARS securities, and ASTAR has no confidence it will be able to access its money in the near — or even distant — future, according to the ASTAR media release.

ARS are either bonds with long-term maturity (corporate or municipal bonds), or preferred shares of closed-end bond funds (also known as “auction rate preferred stock”), for which the interest rate or dividend is reset on a periodic basis through what is known as a “dutch auction,” according to the ASTAR release.

In the auction, a broker-dealer submits bids for securities to an auction agent on behalf of current and prospective investors. Brokerage firms, including Merrill Lynch, routinely marketed and sold ARS as safe, highly liquid, cash-equivalent investments, alleges ASTAR.

ASTAR Air Cargo is a licensed U.S. air carrier operating a fleet of 43 aircraft from its operational hub in Wilmington.