Charles Schwab sued over auction rate securities on clarkhoward.com

Charles Schwab has been sued by New York Attorney General Andrew Cuomo for misrepresenting auction rate securities to investors, according to The Washington Post.

Auction rate securities were sold very heavily by just about everyone, including Merrill Lynch, Citibank, UBS, Morgan Stanley, J.P. Morgan Chase and Wachovia. They were typically pitched as a "safe as cash" substitute to savings accounts and money-market accounts.

Schwab brokers told customers they could easily liquidate their auction rate securities at any time. But many investors found themselves stuck with their holdings when the big banks stopped buying auction rate securities during the credit freeze.

Many of the companies involved in selling the securities have since made refunds to their customers that lost big money when they were unable to sell. Schwab has so far resisted any similar concessions, hence Cuomo's lawsuit.

The sad thing for "Chuck" is that no matter what happens in court, they've already lost in the court of public opinion.

Clark has a simple rule that should protect you from getting burned on unsafe investments in the future: Know what you are buying. If you can't explain it to a fifth grader, don't buy it!

What others are saying

Auction Rate Securities
I recommend Clark's advice to my clients on a regular basis, but on this one I think he's missed the boat. Auction Rate Notes (ARS) are nothing like the mortgage-backed securites that started the credit crunch - they are a victim of that crunch. The ARS mkt froze when the full service brokers (not the banks) stopped buying back any that were not sold in the weekly auctions. These same brokers were the ones who underwrote, assessed the risk, and were paid huge fees for originating the product to begin with. The aggressively marketed them to their clients. Those same full service brokers were the ones pressured by NYAG into buying them from customers who did not want to keep them and had no market to sell them in. The ARS securities have not lost value, are generally issued by high quality Not-for-profit entities (universities, hospitals, municipalities, etc.), but are not liquid as they had always been and the tax-free rates they carry are very low (everywhere!). Schwab did not originate these ARS, did not make the huge fees for doing so, relied on the underwriters assessment of the risk and liqudity, and made small fees for the purchase of them by Schwab customers. It is not fair to categorize Schwab the same as Merrill Lynch, etc. Schwab does not make markets in securities the way full service brokers do, and does not hold significant inventories of investments as those brokers do. Clark, you need to research all the facts and be fair to your friend, Chuck. I'm glad to see someone stand up to the NYAG, a position that is constantly running for Gov. Check out Schwab's Press Room for their corporate statement.
By Sandy Pierce @ 08/21/09 11:05:55 AMreport abuse
Auction rate Securities
Many of my analysts at Raymond James Financial said they could not explain the risk and recommended we not buy. We didn't. Thank you Raymond James Financial.
By Phil McMullin @ 08/20/09 07:24:40 AMreport abuse
Auction Rate Securities
I hope Mr. Cuomo doesn't forget the likes of TD Ameritrade as well. They were in it with the rest just as heavily and promoted it just as vigorously.
By victim @ 08/19/09 06:01:09 PMreport abuse
Auction Rate Securities
Bought these through Wachovia years ago and after they froze up and I needed some cash so Wachovia gave me a loan the same rate the shares generated, basically a wash. Later Wachovia bought back all the frozen securities at par. During the freeze the securities continued to pay CD rates mostly tax free(muni bond derivative.) Gotta give Wachovia Brokerage credit for stepping up to the plate especially while circling the drain. It is my understanding that these securities are not junk but somehow orphaned by the banking crisis and regulations. I agree with the comment about "Chuck."
By Ralph A. @ 08/19/09 03:01:28 PMreport abuse
Wall Street = Ponzi Scheme
It's all about wealth transfer from the economic slaves to the international banksters.
By Abolish the Fed & IRS @ 08/18/09 05:04:26 PMreport abuse

Auction Rate Securities

I recommend Clark's advice to my clients on a regular basis, but on this one I think he's missed the boat. Auction Rate Notes (ARS) are nothing like the mortgage-backed securites that started the credit crunch - they are a victim of that crunch. The ARS mkt froze when the full service brokers (not the banks) stopped buying back any that were not sold in the weekly auctions. These same brokers were the ones who underwrote, assessed the risk, and were paid huge fees for originating the product to begin with. The aggressively marketed them to their clients. Those same full service brokers were the ones pressured by NYAG into buying them from customers who did not want to keep them and had no market to sell them in. The ARS securities have not lost value, are generally issued by high quality Not-for-profit entities (universities, hospitals, municipalities, etc.), but are not liquid as they had always been and the tax-free rates they carry are very low (everywhere!). Schwab did not originate these ARS, did not make the huge fees for doing so, relied on the underwriters assessment of the risk and liqudity, and made small fees for the purchase of them by Schwab customers. It is not fair to categorize Schwab the same as Merrill Lynch, etc. Schwab does not make markets in securities the way full service brokers do, and does not hold significant inventories of investments as those brokers do. Clark, you need to research all the facts and be fair to your friend, Chuck. I'm glad to see someone stand up to the NYAG, a position that is constantly running for Gov. Check out Schwab's Press Room for their corporate statement.

By Sandy Pierce @ 08/21/09 11:05:55 AMreport abuse

Auction rate Securities

Many of my analysts at Raymond James Financial said they could not explain the risk and recommended we not buy. We didn't. Thank you Raymond James Financial.

By Phil McMullin @ 08/20/09 07:24:40 AMreport abuse

I hope Mr. Cuomo doesn't forget the likes of TD Ameritrade as well. They were in it with the rest just as heavily and promoted it just as vigorously.

By victim @ 08/19/09 06:01:09 PMreport abuse

Bought these through Wachovia years ago and after they froze up and I needed some cash so Wachovia gave me a loan the same rate the shares generated, basically a wash. Later Wachovia bought back all the frozen securities at par. During the freeze the securities continued to pay CD rates mostly tax free(muni bond derivative.) Gotta give Wachovia Brokerage credit for stepping up to the plate especially while circling the drain. It is my understanding that these securities are not junk but somehow orphaned by the banking crisis and regulations. I agree with the comment about "Chuck."

By Ralph A. @ 08/19/09 03:01:28 PMreport abuse

Wall Street = Ponzi Scheme

It's all about wealth transfer from the economic slaves to the international banksters.

By Abolish the Fed & IRS @ 08/18/09 05:04:26 PMreport abuse

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Aug 18, 2009 -- Charles Schwab sued over auction rate securities

What others are saying