Charles Schwab May Be Sued For Fraud Over Auction-Rate Securities

New York Attorney General Andrew Cuomo warned that he plans to sue the largest online brokerage firm, Charles Schwab & Co. (SCHW), for civil fraud over its marketing and sales of auction-rate securities [ARS] to clients, the WSJ reported Monday, citing a letter from Cuomo’s office.

More than a dozen Wall Street firms and small brokerages have agreed to refund billions of dollars (approx. $60 bln) to clients over investments into the $330 billion market for ARS, which collapsed in early 2008. Wachovia and Citigroup Inc. (C) settled a couple of months ago with the state of Michigan for nearly $900 million over ARS fraud. Bank of America (BAC) settled last October and agreed to buy back $4.5 billion in securities from its clients. And Swiss bank UBS AG (UBS) reached a $19.4 billion settlement.

Millions of investors saw their losses increase in February of last year after they found themselves with ARS, (long-term, variable rate bonds, tied to short-term interest rates), they could not sell. Nearly 900 Charles Schwab customers got stuck during that period with $789 million of securities.

The Journal cites Cuomo as saying in the letter, issued Friday, that his office would be open to a settlement with the brokerage, if it agrees to buy back the securities from investors still stuck with them.

“The Attorney General’s allegations are without merit,” Schwab said in a statement. “They unfairly lay blame on our company for an illiquid market and improper behavior by the large Wall Street firms that created” and then stopped supporting the market. [WSJ]

The attorney general’s investigation of Schwab found that some traders and execs knew the ARS market was collapsing as early as the autumn of 2007 and took steps to protect the company, but didn’t disclose those problems to customers, according to Mr. Cuomo’s letter.

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