Andrew Cuomo prosecutes Schwab for ARS fraud, the brokerage says it is innocent

The Wall Street Journal reported that New York Attorney General Andrew Cuomo is filing a lawsuit against Charles Schwab Corp for civil fraud as a part of investigation into probing illegal marketing and sales of auction rate securities (ARS). Citing people with the knowledge of the case the Journal reports that Cuomo will likely present transcripts of recordings between Schwab brokers and customers that allegedly show how the ARS were misrepresented by brokers as easy-to-sell alternatives to cash.

In addition, Cuomo also claims that Schwab failed to train its brokers about the risks that the ARS market could stop functioning, leading to money being locked for a long time. In response to Cuomo’s action the brokerage firm said in a statement that the allegations are "without merit” and that the filing of any charges against the company is "totally unwarranted."

In 2007 the global financial crisis impacted heavily the ARS market, and by February 2008 the market froze after brokerages stopped supporting the auctions. A number of brokerages targeted by authorities have agreed to buy back ARS from investors. As for Schwab it denied its implication saying that it did not create the products and had no involvement in the events that led to the collapse of the ARS market.

"The Attorney General's demand that Schwab act as an insurer against an unprecedented market collapse that it did not cause and could not predict is legally unsound," the company said in a letter to Cuomo, which it posted on its website.