Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, November 1, 2011

New York State Court Throws Out AG's Case Against Schwab Involving ARS Sales

On Oct. 24, 2011, a New York State Supreme Court (County of New York) Justice dismissed the New York Attorney General's complaint against Charles Schwab & Co. involving the firm's sale of auction rate securities (ARS).(Download Schwaborder ) Filed in 2009, the AG charged that Schwab failed to disclose to investorsthe risks involved in ARS, but instead repeatedly described the investments as "liquid," while knowing that major underwriter broker-dealers in the ARS market were supporting the market with proprietary bids to keep the auctions from failing and that the market would collapse if they stopped maintaining it.  The AG further alleged that Schwab failed to ensure that its sales force was knowledgeable about the features and risks of ARS.  Bringing claims under the Martin Act as well as consumer fraud, the AG sought to compel Schwab to buy back the ARS at par and other equitable remedies and penalties.

The court found, however, found that the complaint did not allege any representations that the ARS were liquid at a time when they were illiquid and accordingly dismissed all claims.  Further, "despite having conducted an investigation for over a year prior to the filing of the complaint during which time the AG demanded and obtained more than 4,000 documents, received audio and call recordings involving more than 200 ARS transactions and deposed eleven witnesses, the complaint is devoid of any allegations of representations made that were untrue when made." Emphasizing that this was a misrepresentations and not an omissions case, the court held that the AG's allegations were essentially "fraud by hindsight."

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