Schwab in Discussion to Settle Auction-Rate Securities Suit
The Charles Schwab Corporation (SCHW) is in discussion with the New York attorney general to resolve charges of misleading customers about the safety of auction-rate securities, per a Bloomberg report.
In 2009, then-Attorney General Andrew Cuomo filed a suit on behalf of investors who purchased the securities through Schwab. The suit claimed that the company was indulged in "fraudulent and deceptive conduct" while marketing and selling the securities. Allegedly, the company had falsely claimed that the auction-rate securities were safe and that they were liquid investments. The company was also accused of not disclosing the associated risks.
Justice O. Peter Sherwood, trial judge in Manhattan, dismissed the suit in 2011. However, in Aug 2013 the New York state appeals court revived two of the four charges in the suit. While reviving the case, New York's Appellate Division commented that the state had given adequate proof to warrant a trial on two claims that were under the purview of the Martin Act. Further, the charges related to the company’s conduct prior to Sep 2007 (the first failure of auction-rate securities sold by Schwab) were revived as well.
In Feb 2008, the $330 billion auction rate securities market collapsed, leaving investors with huge losses as these securities which were supposed to be liquid securities, could not be sold. This triggered regulatory investigations and group and class action lawsuits brought against brokers, dealers and underwriters, accusing them of falsely promoting the securities as sound investments.
We believe any probable settlement will relieve Schwab of its legacy issues to some extent. Other financial institutions that faced similar charges include UBS AG (UBS), JPMorgan Chase & Co. (JPM), Morgan Stanley and Citigroup Inc. (C). These companies previously reached settlements with regulators.
Currently Schwab carries a Zacks Rank #3 (Hold).
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