NEW YORK - New York Attorney General Andrew Cuomo has sued Charles Schwab Corp., claiming the California-based discount brokerage falsely described auction-rate securities as liquid investments without disclosing their risks.
“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,’’ Cuomo’s office said yesterday.
Auction-rate securities are long-term debt, primarily issued by municipalities, with interest rates reset periodically through auctions. The $330 billion market collapsed last year as dealers stopped bidding to keep auctions from failing, leaving clients unable to sell their supposedly liquid investments.
Schwab knew or should have known of “a steep decline in demand’’ in late 2007, the state said. It asked that a court order it to repurchase the securities from investors and pay penalties and costs.
Anticipating the Cuomo filing, Schwab had issued a statement saying the attorney general is ignoring the “real culprits,’’ banks that underwrote the products.
In a July 24 letter to Cuomo, released yesterday, the firm said the state last year let underwriters including Citigroup Inc., UBS AG, and Goldman Sachs Group off the hook by settling claims related to the securities.
“Schwab submits that, having released the real culprits from responsibility for their acts,’’ the attorney general is seeking to “shift that responsibility to Schwab,’’ the company’s attorney, Faith Gay, wrote.
Gay also said Cuomo lacks jurisdiction over its customers outside New York state.
Richard Bamberger, a spokesman for Cuomo, did not return calls or an e-mail message seeking comment.
In February 2008, Schwab customers were left holding $789 million worth of the securities. That amount “has come down considerably’’ since then, Schwab spokesman Greg Gable said last month.
Schwab’s efforts to avoid a settlement and charges related to the securities come after retail brokers Fidelity Investments and TD Ameritrade Inc. settled with regulators, agreeing to buy back $756 million in the securities from clients.
Schwab blamed the Wall Street firms for creating, marketing, and then abandoning the market for auction-rate securities.
Schwab said Cuomo’s office contacted its clients to urge them to complain, and took “one-sided testimony’’ at sessions where Schwab’s lawyers weren’t allowed to ask questions or get a transcript.
