The feathers continue to fly in the brouhaha between The
Charles Schwab Corp. and New York Attorney General Andrew Cuomo.
A week after Mr. Cuomo's office filed a civil suit claiming the San Francisco-based brokerage firm misled customers about the safety of auction rate securities, Schwab is still refusing to budge from its position that it is being wrongly accused and has no plans to settle.
“We feel the real crux of the matter is that the New York attorney general is going after the wrong guy here,” said Schwab spokeswoman Sarah Bulgatz.
“We do not feel responsible for the collapse of the auction rate securities market,” she added. “The heart of the matter is the settlements that they already got from the underwriters of the securities were insufficient, and that's why [Mr. Cuomo] is now going after other firms.”
Mr. Cuomo's office did not respond to a request for comment.
Charles Schwab, founder and chairman of the 35-year-old discount brokerage firm, took his case directly to the public in an opinion piece in the Wall Street Journal last week.
“The implication at work here is that firms like ours should have known that the [auction rate securities] market would fail,” he wrote.
“The issue at stake here is whether independent investors should be allowed the freedom to choose what they are allowed to buy, sell or hold. Or should the government try to enforce a guarantee against market risk through regulation or lawsuits like the attorney general has brought against us?”
The $330 billion auction rate securities market has been essentially frozen since February 2008, preventing investors from gaining access to their capital.
Mr. Cuomo's office has already settled with a number of underwriters and some brokerage firms that sold the investments, including Omaha, Neb.-based TD Ameritrade Holding Corp.,
which agreed in July to buy back $456 million of auction rate securities from investors.
Ms. Bulgatz said Schwab has helped some clients through certain liquidity issues by making no-cost margin loans on an “as-needed” basis.
She declined to say exactly how many clients have been helped in this manner.
“We believe in helping our clients to the extent that we can and that it is appropriate,” Ms. Bulgatz said.
Regarding Schwab being on the hook for investment products that were not created by, nor recommended by, the brokerage firm, there is little doubt where the company stands.
“Schwab could not be expected to foresee or disclose market-wide risks that were concealed by the underwriters,” Ms. Bulgatz said.
Schwab's decision to dig in its heels in a lawsuit that has the potential to generate a lot of publicity is being viewed by some as a high-risk bet.
“There's probably a camp out there applauding Schwab for what they're doing, but you run a risk when you start taking on a regulator like that,” said Geoff Bobroff, president of Bobroff Consulting Inc. in East Greenwich, R.I.
“It is somewhat surprising to see a public firm like Schwab taking on the New York attorney general,” he added.
“It seems like most other organizations admitted there was a problem and set aside some money to buy out the investors.”
Negative publicity could eventually come back to bite Schwab, said Doug Dannemiller, a senior analyst with Boston research and consulting firm Aite Group LLC.
He believes that on principle, Schwab is standing on solid ground.
“Companies tend to settle these cases because they think the consequences will be worse or they don't want to spend all the money fighting it,” Mr. Dannemiller said.
“But as a discount brokerage firm it's not Schwab's job to dissuade investors from making purchases.”
If nothing else, the developing dust-up is making for some late-summer excitement, according to Clinton Struthers, owner of Struthers Financial Services in Midland, Mich.
“For the past 10 years it seems we've been in an environment where anyone accused of being guilty has just been rolling over and settling,” he said.
“I like the fact that Schwab is standing up and saying, ‘You want a fight, we'll give you a fight.'”
