Charles Schwab Sued for Fraud

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Yesterday evening, New York Attorney General Andrew Cuomo sued Charles Schwab for “misrepresentations to clients about the liquidity and risks of auction-rate securities.” The Wall Street Journal reports:

In a statement, Mr. Cuomo said brokers at Charles Schwab & Co. repeatedly represented the securities as liquid, short-term investments without disclosing the risks, comparing them with money-market funds or certificates of deposit.

“Charles Schwab owed its customers a duty to properly understand and make accurate representations concerning auction rate securities,” Mr. Cuomo said in a statement. “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.”

Schwab received daily reports from major underwriters, which showed that the inventories of those underwriter broker-dealers were increasing dramatically starting in the final months of 2007, Mr. Cuomo said. According to the lawsuit, Schwab failed to adequately educate its brokers about the securities or train them in their sale.

TD Ameritrade Inc., a so-called “downstream” broker that didn’t underwrite the securities or run the auctions, but instead acted as a distributor, agreed to buy back $456 million in auction-rate securities as part of a settlement with Mr. Cuomo’s office last month.

Cuomo probably wants a settlement. According to Reuters,

Two brokerages that, like San Francisco-based Schwab, only sold the securities, Fidelity Investments and TD Ameritrade Holding Corp, have settled with Cuomo’s office.

Underwriters that settled with Cuomo include Bank of America Corp, Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co and Royal Bank of Canada, among others.

WSJ commenter John Sheehan has an interesting remark on why Cuomo’s office has to settle:

Cuomo (and Spitzer) filed a lot of suits, but rarely do they take anyone to trial. Truth is, if Schwab or anyone else actually went to litigation, Cuomo would fold like a house of cards. His entire office budget could barely support one medium-sized court battle, much less one mounted by legions of very expensive and highly-trained defendents’ lawyers. Cuomo doesn’t want justice — he wants to get paid. He knows that his staff of civil service lawyers would be crushed like bugs in an actual courtroom. Cuomo ia banking on the hope that Schwab will pay a nuisance fee to get out of the headlines. Just like his dad, Andrew knows he can say whatever he wants and the press will cover it uncritically. Take a look at some of the legal scholarship that makes up his “investigations.” It’s embarrassing. But actions like this make great campaign fodder.

Andrew remembers the lessons of his old Queens neighborhood well. “Nice business you have here. be a shame if something happened to it.”

  • Wow, interesting. My sister works for chuck in SF. I wonder if it is cooler talk. Of course I’ll wait to talk to her about it instead of emailing her at work. I do however have to say I love the recession-related ad the ran at the beginning of the year. That seemed honest and truthful.