Legal News

High Noon Approaching for Cuomo, Charles Schwab

By Ashby Jones

The two sides are starin’, but nobody’s blinkin.’ The perfect recipe for, yes, a high-stakes lawsuit.

Andrew Cuomo, the AG of New York, told Charles Schwab Corp. last month to agree to a settlement in which the brokerage firm would buy back auction-rate securities from investors who wound up stuck with them when the market froze.

Schwab said no. Schwab says it did nothing wrong, and that it couldn’t have forseen the collapse in the auction-rate market. Your move, Mr. Cuomo.

According to this WSJ story out Monday morning, Cuomo is ready to drop the hammer, in the form of a suit, against Schwab, alleging civil fraud related to Schwab’s marketing and sales of auction-rate securities. (We’ll link to the lawsuit if and when it arrives.)

A Schwab spokesman said the company hasn’t received the suit, which is likely to be filed in New York state court, and couldn’t comment on the specific allegations in a copy of the complaint. But the company has blamed its clients’ losses on large Wall Street underwriters of the auction-rate securities, claiming that Schwab was merely a distributor and was deceived by underwriters about the market’s health.

Cuomo is expected to file as part of the lawsuit transcripts of recordings between Schwab brokers and customers that he alleges show how the brokers misrepresented of auction-rate securities as easy-to-sell alternatives to cash. Click here for some outtakes, courtesy of the WSJ.

In one exchange between a Schwab broker and client that was reviewed by the Journal, a customer says: “You know, I’m not trying to make a ton of money. I just want to play it safe.” The broker responds: “The hardest part of this auction is getting into it. That is the tough part. Getting out is easy as just selling.” But when the market collapsed, Schwab clients were stuck with $787.8 million in auction-rate securities.

Auction-rate securities are long-term debt instruments with attributes of short-term securities because they are resold with new interest rates in periodic auctions. The $330 billion market’s collapse, which came to a head when market makers stopped stepping in as buyers in early 2008, caused investors billions of dollars of losses.

Several large Wall Street firms that had underwriting operations, including Merrill Lynch & Co., Citigroup Inc., J.P. Morgan Chase & Co., UBS AG and Goldman Sachs Group Inc., have settled with regulators, agreeing to buy back more than $60 billion in auction-rate securities from customers.

Full post as published by Law Blog - WSJ.com on August 17, 2009 (boomark / email).