In a letter to Schwab, Cuomo said that he planned to file civil fraud charges against the company over its marketing and sales of auction-rate securities (ARS). ARS is a type of security that was once treated as highly liquid short term investments, but was hit hard by the credit crunch last year and many investors were stuck with assets that couldn’t be sold.
Many corporations, municipal governments, and student-loan companies issued ARS as long term debt notes with short-term interest rates reset monthly at auctions.
Cuomo contends that Schwab engaged in “fraudulent, deceptive and illegal business practices” in peddling ARS products to clients, knowing that the market for ARS had collapsed.
In the past several months, large Wall Street players such as Bank of America Corp., Citigroup Inc., and UBS AG have settled with authorities and agreed to purchase back ARS securities at face value from their clients.
Schwab, in a statement, called Cuomo’s charges unfair, saying that “Schwab brokers, while trained to levels beyond industry standards, could not be expected to foresee and disclose market risks that even regulators and market experts did not foresee.”
The company says that it should not be blamed for market conditions outside of its control, and that the large Wall Street firms should be held accountable instead.
Analysts believe that Schwab will eventually settle with the attorney general and agreed to buy back the securities. Schwab has a good reputation among online brokers and its advertising theme “Talk to Chuck” suggests that the company’s brokers are experienced and knowledgeable—something that Schwab wouldn’t want to risk in a lawsuit over ARS sold a year ago.
TD Ameritrade Settles
Schwab rival TD Ameritrade on Monday settled with the U.S. Securities and Exchange Commission (SEC) over its own ARS issue. The SEC previously blamed the company in making inaccurate statements to clients regarding the investments.
“I commend TD Ameritrade for working with regulators to restore investor confidence, and for joining what has become the single largest consumer recovery in history,” Cuomo said in a statement. “But given a record replete with misrepresentations, it is disturbing that Charles Schwab, who had been holding itself out as an industry expert, has stonewalled its customers. Today’s notice should send a signal that if Charles Schwab will not stand by its customers, this office will.”
TD agreed to repurchase $456 million worth of ARS from clients in a settlement with Cuomo’s office. Working with the SEC and state authorities, 11 financial services firms so far have agreed to buy back ARS from clients who lost money.
