Schwab wins dismissal of lawsuit over auction-rate securities

A lawsuit against Charles Schwab Corp. over auction-rate securities that was filed by former New York Atty. Gen. Andrew Cuomo was thrown out by a state court judge.

The 2009 lawsuit accused the San Francisco discount brokerage of fraud in the marketing and sale of the securities and alleged that the company’s brokers falsely represented the securities as safe, liquid investments.

In a decision released Monday, Manhattan state Supreme Court Justice O. Peter Sherwood granted Schwab’s motion to dismiss. He said the alleged misrepresentations were true when they were made.


Auction-rate securities are long-term debt similar to bonds whose interest rates reset periodically through auctions. The banks that handled the auctions abandoned the $330-billion market in February 2008, and the market collapsed, leaving thousands of investors without the ability to sell the supposedly liquid securities.

Citigroup Inc., UBS, Bank of America Corp.'s Merrill Lynch & Co. and other banks and brokerages agreed to repurchase more than $60 billion in debt to settle claims that they marketed auction-rate securities as safe cash alternatives.

Schwab said Cuomo was trying to blame the company for the collapse of the market. Schwab said the brokerage and its customers were misled by the underwriters, who it said got off easy. Other brokerages that, like Schwab, only sold the securities — including Fidelity Investments and TD Ameritade Holding Corp. — settled with Cuomo’s office.

Thousands of Schwab customers held about $787.9 million of auction-rate securities as of Feb. 13, 2008, Cuomo’s office estimated. The lawsuit sought to have Schwab buy back securities from customers and pay restitution and civil penalties.