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Schwab Faces Auction-Rate Lawsuit

Zacks Equity Research

The Charles Schwab Corporation (SCHW) has been burdened with the auction-rate securities lawsuit again, after a New York state appeals court revived two of the four charges in the suit. Though the lawsuit was filed by the New York State’s Attorney General (AG) Office in 2009, a trial judge in Manhattan had dismissed it in 2011.
In 2009, the AG Office had accused Schwab of indulging in fraudery while marketing and selling the securities. Allegedly, the company had wrongly claimed that auction-rate securities were safe and that they were liquid investments.

While reviving the case, the New York's Appellate Division commented that the state had given adequate proof to warrant a trial on two claims that were under the purview of the Martin Act. Further, the charges related to the company’s conduct prior to Sep 2007 (the first failure of auction-rate securities sold by Schwab) were revived as well.

Additionally, the lawsuit demands Schwab to buy back auction-rate securities from investors and pay restitution and civil fines.

Notably, Schwab plans to defend its position in the court. The company stated that approximately 98% of auction-rate securities have been redeemed at par. Further, the company denied providing any additional incentives to its registered representatives for selling auction-rate securities.

Very few firms had acted in a manner similar to Schwab and challenged the AG Office charges. Other firms including Citigroup Inc. (C), UBS AG (UBS) and Merrill Lynch, the brokerage division of Bank of America Corporation (BAC) had agreed to settle charges and repurchase more than $60 billion worth of auction-rate securities.

Currently, Schwab carries a Zacks Rank #3 (Hold).

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