New York AG’s Securities Fraud Lawsuit Against Charles Schwab Tossed

By | November 1, 2011

A lawsuit against Charles Schwab Corp. over auction-rate securities that was filed by former New York Attorney General Andrew Cuomo was thrown out by a state court judge.

The 2009 lawsuit accused the San Francisco-based discount brokerage of fraud in the marketing and sale of the securities and claimed the company’s brokers falsely represented the securities as safe, liquid investments.

In a decision released Monday, Manhattan state Supreme Court Justice O. Peter Sherwood granted Schwab’s motion to dismiss. He said the alleged misrepresentations were true when they were made.

Auction-rate securities are long-term debt similar to bonds whose interest rates reset periodically through auctions. The banks that handled the auctions abandoned the $330 billion market in February 2008 and the market collapsed, leaving thousands of investors without the ability to sell the supposedly liquid securities.

Citigroup Inc., UBS AG , Bank of America Corp.’s Merrill Lynch & Co. and other banks and brokerages agreed to repurchase more than $60 billion in debt to settle claims that they marketed auction-rate securities as safe cash alternatives.

Schwab said Cuomo was trying to blame the company for the collapse of the market and said that the brokerage and its customers were misled by the underwriters, who it said were the real culprits who got off easy. Other brokerages that, like Schwab, only sold the securities, including Fidelity Investments and TD Ameritade Holding Corp., settled with Cuomo’s office.

As of 2007, the auction-rate securities market had been operational for two decades and conducted hundreds of auctions every seven, 28 and 35 days, the judge said in his decision. There were no failures before Aug. 13, 2007.

“The complaint is devoid of any allegation of representations made that were untrue when made,” the judge said in his decision dismissing the securities fraud and other claims.

The judge pointed out that this was despite an investigation by the New York attorney general’s office that went on for more than a year. During that time, the attorney general demanded and got more than 450,000 documents, audio and call recordings for more than 200 of the transactions and deposed 11 witnesses, the judge said.

Thousands of customers of Schwab held about $787.9 million of auction-rate securities as of Feb. 13, 2008, Cuomo’s office estimated. The lawsuit sought to have Schwab buy back securities from customers and pay restitution and civil penalties.

“We are very pleased with the result,” Greg Gable, a spokesman for Schwab, said in an email.

“We are currently reviewing the decision,” said Lauren Passalacqua, a spokeswoman for current New York Attorney General Eric Schneiderman, who inherited the lawsuit. Cuomo is now the state’s governor.

The case is The People of the State of New York by Andrew M. Cuomo, Attorney General v. Charles Schwab & Co. Inc., 453388/2009, New York state Supreme Court, Manhattan.

(Reporting by Karen Freifeld, editing by Gerald E. McCormick, Gary Hill)

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