Charles Schwab & Co. Inc. says allegations by New York Attorney General Andrew Cuomo that its brokers improperly sold and marketed auction-rate securities (ARS) are without merit and "unfairly lay blame on our company for an illiquid market and improper behavior by the large Wall Street firms."
Cuomo's office sent a notice to Schwab on Friday warning that his office plans to sue Schwab, the country's largest online broker, for civil fraud over its marketing and sales of ARS to clients, the Wall Street Journal reported. The letter says that Schwab brokers had little idea of what they were selling and failed to tell clients when the market started collapsing, the Journal says.
In it's statement issued yesterday, Schwab says it did not create the products and had no involvement in the events that led to the collapse of the ARS market. Schwab charges the events were brought about by the Wall Street underwriters who manufactured, marketed and then simply abandoned their responsibility as lead managers for the auctions.
"The NYAG 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. Schwab had no more idea that the entire market for ARS could fail than did the NYAG, the SEC or FINRA, those very regulators charged with overseeing the ARS market and regulating the firms that manufactured them and ran the auctions," the Schwab statement says.
Cuomo's office was wrong to drop its pursuit of the real culprits who profited immensely from these products and is focusing its efforts instead on companies and their shareholders who played no role in the creation and promotion of these securities or their downfall, Schwab said. "When regulators hastily settled with many of these Wall Street firms, they let them off the hook by not requiring them to repurchase ARS that downstream investors bought. Those firms are now reporting record profits while many investors have been left in the lurch," Schwab says.