Today, New York Attorney General Andrew Cuomo filed a securities fraud lawsuit against San Francisco-based Charles Schwab & Co. charging the firm with making false representations in the sale of auction rate securities (ARS). According to the complaint filed by the Attorney General, Schwab misrepresented auction rate securities as suitable for customers seeking a safe and liquid investment. The Attorney General has obtained telephone recordings of conversation between Schwab brokers and customers, including one instance where a broker made misrepresentations to their customer stating that auction rate securities are “great alternatives to cash.” Schwab sold hundreds of millions of dollars worth of auction rate securities to its customers who were undoubtedly mislead about inherent risks associated with these complex investments.
Yesterday, San Francisco-based Charles Schwab Corporation publicly denied recent allegations that it engaged in fraudulent marketing practices in the selling of Auction Rate Securities (ARS). These latest securities fraud allegations come from New York Attorney General Andrew Cuomo who has purportedly uncovered emails and testimony establishing that Charles Schwab brokers had little knowledge about these ARS investments when they recommended them to their unsuspecting customers. Cuomo’s office is also alleging that Schwab misrepresented these securities as a safe investment and failed to warn its customers about the impending collapse of the ARS market. So far, Charles Schwab has denied the attorney general’s allegations.
Schwab is already facing a slew of customer arbitration claims that allege similar misconduct in connection with the sale of its YieldPlus funds that were marketed to conservative investors as low-risk investments. I have been monitoring these cases and Schwab has been aggressively defending these cases with mixed results according to the results in cases that have already gone to hearing.