Bloomberg News

New York Attorney General Appeals Schwab Lawsuit Dismissal

November 30, 2011

(Adds background on case starting in second paragraph.)

Nov. 30 (Bloomberg) -- New York Attorney General Eric Schneiderman appealed last month’s dismissal of a lawsuit accusing Charles Schwab Corp. of failing to disclose the risks involved in auction-rate securities.

The independent San Francisco-based brokerage was sued by then-Attorney General Andrew Cuomo in August 2009. New York state Justice O. Peter Sherwood in Manhattan granted Schwab’s request to dismiss the case on Oct. 24.

The attorney general’s office, which filed a notice of appeal today, sued on behalf of investors who bought auction- rate securities through Schwab. Cuomo accused Schwab of “fraudulent and deceptive conduct” and claimed the company failed to disclose the risks involved in the investments, according to Sherwood’s ruling.

Schwab argued that the complaint doesn’t point to any specific false statements or identify who might have made them, Sherwood said in the order.

Auction-rate securities are municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically reset through auctions.

At least 19 underwriters and broker-dealers were sued in class-action, or group, suits after the $330 billion market for auction-rate securities collapsed in February 2008. At least eight financial firms, including Citigroup Inc. and Deutsche Bank AG, won dismissal of complaints against them for failing to state a proper claim. In some cases, the investors were allowed to refile complaints with more detail.

In the lawsuits, investors accused financial institutions of steering them to instruments, promoted as being as safe as cash, that turned out to be illiquid and unredeemable. They also said the banks didn’t sufficiently disclose that they took part in the auctions to keep them from failing. The market froze when the financial firms ended that participation.

The case is the New York v. Charles Schwab & Co. Inc., 453388/2009, New York State Supreme Court (Manhattan).

--Editors: Fred Strasser, Michael Hytha

To contact the reporter on this story: Chris Dolmetsch in New York at cdolmetsch@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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