(Reuters) - Charles Schwab Corp, the largest U.S. online brokerage, denied allegations by New York Attorney General Andrew Cuomo of civil fraud in its marketing and sale of Auction Rate Securities (ARS).
The Wall Street Journal earlier reported that Cuomo, as part of his investigation into the sales of ARS, told a Charles Schwab affiliate that his office is planning to sue it for civil fraud, citing an official notice sent on Friday.
His letter cites emails and testimony that allegedly show Charles Schwab & Co’s brokers had little idea of what they were selling to clients and later failed to tell them the market for ARS was collapsing, according to the paper.
“The Attorney General’s allegations are without merit,” Schwab said in a statement on its website.
“They unfairly lay blame on our company for an illiquid market and improper behavior by the large Wall Street firms that created and then, despite their obligations, stopped supporting Auction Rate Securities.”
ARS are long-term debts whose rates are set at periodic auctions. The credit crisis of 2007 put increasing pressure on the ARS market and by February 2008 the market froze after brokerages stopped supporting the auctions.
Cuomo says in the letter his office would be open to a settlement with Schwab but added that the brokerage must buy back the securities from investors still stuck with them, the paper said.
The paper said that in February 2008, almost 900 Charles Schwab customers had ARS worth $789 million but only a small fraction of that amount was outstanding now.
Schwab said it did not create the products and had no involvement in the events that led to the collapse of the ARS market.
“Schwab brokers, while trained to levels beyond industry standards, could not be expected to foresee and disclose market risks that even regulators and market experts did not foresee, or that were intentionally veiled by the underwriters,” the company said.
Cuomo’s office could not be immediately reached for comment by Reuters.
Reporting by Ajay Kamalakaran in Bangalore; editing by John Stonestreet and David Cowell