NY AG files civil suit against Charles Schwab over sale of auction-rate securities

NY AG sues Charles Schwab over securities sales

NEW YORK — New York Attorney General Andrew Cuomo filed a lawsuit Monday against the brokerage unit of Charles Schwab Corp., claiming the firm misled customers about the safety of auction-rate securities.

Cuomo’s office has been at the forefront of pushing brokers and underwriters of auction-rate securities to repurchase them from investors who were left with steep losses after the market for the investments collapsed in early 2008.

The suit against Schwab is aimed at forcing the retail brokerage firm to repurchase the securities at face value from investors.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt whose interest rates were reset at regular auctions, some as frequently as once a week. They were sold as being as safe as cash, but the market for them fell apart last year amid the downturn in the credit markets.

Last month, Cuomo’s office notified San Francisco-based Charles Schwab that it was planning to file the suit against the retail brokerage firm for claiming the securities were safe investments while selling them to customers.

In a statement Monday, Cuomo said: “Charles Schwab owed its customers a duty to properly understand and make accurate representations concerning auction-rate securities. Today we commenced a lawsuit to remedy Schwab’s repeated breach of that duty.”

Earlier Monday, Schwab released the letter it sent to Cuomo’s office in response to the warning about the impending lawsuit. In the letter, Schwab’s outside counsel said the brokerage firm itself, like its customers, was misled by the underwriters of the securities.

The attorney general’s office is wrongly placing blame for the collapse of the market by going after companies like Schwab instead of underwriters that withdrew support and stopped bidding at the auctions, Schwab’s counsel wrote.

In a statement after the lawsuit was filed, Schwab spokeswoman Sarah Bulgatz affirmed those comments.

“We’re confident that we will prevail when we have the chance to expose the workings of this market completely,” Bulgatz said. “We believe the NYAG ought to focus its efforts on the firms that underwrote these products, failed to disclose the key risks and then abandoned the products, rather than damaging the reputation and harming the shareholders of other companies that acted in good faith.”

Over the past year, Cuomo’s office has brokered more than a dozen settlements with other firms that wrote or sold the securities. Counting those settlements and others elsewhere around the country, more than 20 firms have agreed to repurchase $61 billion in the investments, according to the attorney general’s office.

Both TD Ameritrade and Fidelity Investments, which like Schwab only sold the securities, agreed to settlements with the attorney general’s office. Eleven underwriters of auction-rate securities, who also sold them to customers, have also reached settlements with the attorney general’s office.

Shares of Schwab fell 82 cents, or 4.5 percent, to $17.44 in afternoon trading as the broader market tumbled.


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