NY sues Schwab over auction-rate securities sales

NEW YORK -- New York Attorney General Andrew Cuomo filed a lawsuit Monday against the brokerage unit of Charles Schwab Corp., saying the firm misled customers about the safety of auction-rate securities.

Cuomo's office has been at the forefront of pushing brokers and underwriters of auction-rate securities to repurchase them from investors who were left with steep losses after the market for the investments collapsed in early 2008.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt whose interest rates were reset at regular auctions, some as frequently as once a week. They were sold as being as safe as cash, but the market for them fell apart last year amid the downturn in the credit markets.

Last month, Cuomo's office notified Schwab that it was planning to file the suit against the retail brokerage firm for saying the securities were safe investments while selling them to customers.

In a statement Monday, Cuomo said: "Charles Schwab owed its customers a duty to properly understand and make accurate representations concerning auction-rate securities. Today we commenced a lawsuit to remedy Schwab's repeated breach of that duty."

A spokeswoman from Schwab was not immediately available to comment on the lawsuit.

Earlier Monday, Schwab released the letter it sent to Cuomo's office in response to the warning about the impending lawsuit. In the letter, Schwab's outside counsel said the brokerage firm itself, like its customers, was misled by the underwriters of the securities.

The attorney general's office is wrongly placing blame for the collapse of the market by going after companies like Schwab instead of underwriters that withdrew support and stopped bidding at the auctions, Schwab's counsel wrote.

In a statement after the lawsuit was filed, Schwab spokeswoman Sarah Bulgatz affirmed those comments.