New York Attorney General Andrew Cuomo sued Charles Schwab Corp. on Monday, claiming that the California discount brokerage falsely represented auction-rate securities as liquid investments without disclosing their risks.
Schwab, anticipating the filing of the suit, said the attorney general is ignoring the "real culprits," banks that underwrote the products. In a July 24 letter to Cuomo's office released Monday, Schwab said the state let the underwriters off the hook last year when he agreed to settle claims against them related to the securities. The underwriters include Citigroup Inc., UBS AG and Goldman Sachs Group Inc.
"Schwab submits that, having released the real culprits from responsibility for their acts," Cuomo is seeking to "shift that responsibility to Schwab," its attorney Faith Gay wrote to David Markowitz, chief of Cuomo's investor protection bureau.
Schwab said it is unfair for Cuomo's office to try to force the brokerage to repurchase remaining securities held by its customers after dropping claims against the banks when they agreed to buy back more than $50 billion of debt from their retail customers.
Cuomo "permitted the major Wall Street securities firms that controlled the ARS market to buy back ARS only from investors who held the securities at those firms rather than from all investors who owned ARS that those firms underwrote," Gay wrote.
Cuomo's office said in a statement that "Schwab brokers repeatedly and persistently misrepresented the liquidity risks in auction-rate securities, comparing them to money market funds or certificates of deposit, selling auction rates as suitable for cash management purposes, or otherwise telling customers they would always be able to retrieve their cash.
