Lawsuit Threatened Against Financial Firm

Albany, NYNew York Attorney General Andrew Cuomo has threatened to file a lawsuit against Charles Schwab Corp. in an attempt to force the financial firm to pay off clients who were stuck with auction rate securities (ARS) after the ARS market failed, according to an article at latimes.com (July 20, 2009). For people who have filed stockbroker arbitration claims following the collapse of the ARS market, the move might be seen as further proof that they were misled into purchasing the securities. Those investors say they were victims of stock fraud and were given false information regarding the securities.

In making his announcement, Cuomo also reported that TD Ameritrade has settled its ARS cases and will repurchase $456 million of the securities. Furthermore, as part of its settlement with the Securities and Exchange Commission, TD Ameritrade will not pay any fines for its role in the ARS market.

In his letter of warning (oag.state.ny.us, July 17, 2009) to Charles Schwab Cuomo notes, "The Attorney General's investigation has revealed that Schwab engaged in repeated and persistent fraudulent, deceptive and illegal business practices by making material misrepresentations and omissions in connection with its sale of auction rate securities."

The warning letter goes on to note that brokers interviewed by Cuomo's office admitted to misrepresenting the safety and liquidity of the auction rate securities. Furthermore, brokers allegedly admitted that they sold auction rate securities as being equivalent to money market funds and said customers were not warned that they might not be able to sell the securities.

Finally, Cuomo argues that Charles Schwab knew about the potential for the ARS market to fail and did not warn customers about that risk.

However, Charles Schwab has responded to Cuomo by saying that the Attorney General's allegations are without merit and noting that its brokers, "could not be expected to foresee and disclose market risks that even regulators and market experts did not foresee."

Auction Rate Securities were sold as short-term securities even though they were long-term debt instruments. They were marketed as being as safe and liquid as cash. However, when the demand for ARS waned, investors were left with hundreds of billions of dollars in securities that they were unable to sell.

Charles Schwab and TD Ameritrade were not the only financial firms involved in the ARS market. However, approximately 20 other firms have already agreed to buy back the securities from their investors.