New York State Attorney General Andrew Cuomo Monday filed fraud charges against Charles Schwab & Co., alleging it misled investors about the risks of auction-rate securities.
The brokerage firm said it will fight the charges and posted a July 24 response to Cuomo on its website in which it said it was deceived by investment banks and that Cuomo did not have jurisdiction over out-of-state ARS transactions.
“Charles Schwab owed its customers a duty to properly understand and make accurate representations concerning auction-rate securities,” Cuomo said in a press release. “Today we commenced a lawsuit to remedy Schwab’s repeated breach of that duty. This filing should send a signal that anyone in the industry who misrepresented the risks of investing in auction-rate securities will be held accountable.”
The attorney general’s complaint, filed in the state Supreme Court in Manhattan under the state’s Martin Act, which covers financial fraud, alleges that the brokerage firm falsely represented ARS as liquid investments without disclosing the risks, comparing them to money market funds or certificates of deposit. Citing transcripts of audio recordings between brokers and clients, the suit also alleges that Schwab failed to adequately train its brokers about the risks of ARS.
The auction-rate securities market seized up in February 2008 when investment banks stopped propping up auctions and allowed them to fail, leaving investors with illiquid securities.
Cuomo, the Securities and Exchange Commission, and other states have reached settlements with investment banks as well as the “downstream” broker TD Ameritrade Inc. to buy back more than $60 billion of illiquid ARS from investors and pay multimillion-dollar penalties. Cuomo is seeking a buyback settlement with Schwab as well.
“We’re looking forward to our day in court and we’re confident that we’ll prevail when we have the chance to expose the workings of this market completely,” said Schwab spokeswoman Sarah Bulgatz. “The lawsuit casts blame entirely in the wrong direction. Companies like Schwab that filled client orders were totally misled by the major Wall Street underwriters.”