Cuomo ticks off Schwab, announces $456M settlement with TD Ameritrade

John O'Brien Jul. 20, 2009, 2:21pm


NEW YORK (Legal Newsline) - Charles Schwab & Co. expressed its discontent with New York Attorney General Andrew Cuomo's investigation into the fall of the auction-rate securities market Monday.

Cuomo announced he would be pursuing litigation against Schwab for allegedly selling illiquid auction-rate securities, whichare investments that have their interest rates reset periodically by auction. He did so while publicizing a $456 million agreement with TD Ameritrade, Inc., which will buy back that amount of auction-rate securities from investors nationwide.

The ARS market crashed in Feb. 2008, and Cuomo took the lead in pressing those that sold them. His office wrote Schwab to warn it it has five days to sort the matter out.

"The Attorney General's allegations are without merit," the company said.

"They unfairly lay blame on our company for an illiquid market and improper behavior by the large Wall Street firms that created and then, despite their obligations, stopped supporting Auction Rate Securities."

David Markowitz, the chief of Cuomo's Investor Protection Bureau, wrote the letter to Schwab.

"The Office of the Attorney General remains open to resolving our investigation in a settled fashion, but stresses that any settlement must provide retail investors with the liquidity they were promised by Schwab," he wrote.

"Schwab is hereby afforded the opportunity to show in writing, within five business days after receipt of this notice, why legal proceedings should not be instituted. Thousands of consumers have been damaged due to Schwab's fraud."

Several companies have settled with Cuomo over the fall of the ARS market, with more than $60 billion in buy-backs having taken place.

Schwab feels it is unfair to blame the investment firms.

"(Cuomo) presumes that Schwab somehow knew of a risk that the entire ARS market could seize up at any time, and failed to disclose that risk to its clients, which is preposterous," the company said.

"Schwab had no more idea that the entire market for ARS could fail than did the NYAG, the (Securities and Exchange Commission) or FINRA (a self-regulatory agency in the brokerage business), those very regulators charged with overseeing the ARS market and regulating the firms that manufactured them and ran the auctions.

"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, or that were intentionally veiled by the underwriters."

Cuomo, though, said he has audio recordings of Schwab brokers misleading investors about the risks of the ARS market. He said one Schwab broker described preferred auction-rate securities to a customer as a "short-term institutional holding instrument" that was particularly suitable for managing the customer's cash balances.

"If you need to have that access to them at any time, that's a good place for those to be," the broker said, according to Cuomo. "You know if you think you might need to get into that money, that's probably as good a place if not better than anywhere to leave them."

Schwab said it would prefer Cuomo try cases in the courts system instead of using press releases to force settlements. Unlike other firms, it seems opposed to a settlement.

"Schwab believes that it acted properly and was itself misled by the underwriters of these securities, and we intend to vigorously defend the company and are confident, based on the facts, we will win," the company said.

"Contesting this is in the best interest of our shareholders and the company's reputation."

TD Ameritrade is the 12th underwriting firm to settle with Cuomo. It must fully reimburse all eligible investors who sold their auction-rate securities at a discount after the market failed and consent to a special artibtration procedure to resolve claims of damages suffered by eligible investors who could not access their funds.

From Legal Newsline: Reach John O'Brien by e-mail at

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