Schwab Ordered to Face Auction-Rate Suit by New York State (1)
By Chris Dolmetsch
Charles Schwab Corp. must face a lawsuit in which New York state accused it of falsely describing auction-rate securities as liquid investments without disclosing the risks, an appeals court ruled.
The San Francisco-based brokerage was sued by Andrew Cuomo in August 2009 when he was attorney general. A trial judge in Manhattan, Justice O. Peter Sherwood of state Supreme Court, granted Schwab’s motion to dismiss the case in 2011.
A four-judge appeals court panel today reinstated two of the four claims in the case, securities fraud allegations based on the state’s Martin Act law, saying the attorney general’s office presented enough evidence for a trial.
“We find the Martin Act causes of action to be sufficiently pleaded given the fact that the statute is remedial and should be broadly construed in order to attain its beneficial purpose,” Justice Richard Andrias wrote. “Under the statute, the word ‘fraud’ is broadly defined so as to embrace even acts which ‘tend to deceive the purchasing public.’ Based on this standard, the complaint sets forth actionable Martin Act claims notwithstanding the absence of a specific allegation that Schwab represented ARS to be liquid at times when they were illiquid.”
Auction-rate securities are municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically reset through auctions. The attorney general’s office sued on behalf of investors who bought the securities through Schwab.
http://www.businessweek.com/news/2013-08-27/schwab-ordered-to-face-auction-rate-suit-by-new-york-state-1