Cuomo Announces $456 Million Settlement With Downstream Broker Td Ameritrade In Ongoing Investigation Of Auction-rate Securities

NEW YORK, NY (July 20, 2009) - Attorney General Andrew M. Cuomo today announced a settlement with TD Ameritrade, Inc. (“TD Ameritrade”), under which the company has agreed to return $456 million to investors across New York State and the nation holding illiquid auction-rate securities. Attorney General Cuomo also announced imminent legal action against Charles Schwab & Co. (“Schwab”) for deceptively selling auction-rate securities as safe, liquid, short-term investments that were similar to money market instruments. These are Attorney General Cuomo’s latest steps in his ongoing effort to restore liquidity to investors caught in the collapse of the auction-rate securities market.

“I commend TD Ameritrade for working with regulators to restore investor confidence, and for joining what has become the single largest consumer recovery in history,”said Attorney General Cuomo. “But given a record replete with misrepresentations, it is disturbing that Charles Schwab, who had been holding itself out as an industry expert, has stonewalled its customers. Today’s notice should send a signal that if Charles Schwab will not stand by its customers, this Office will.”

With the $456 million settlement today, TD Ameritrade joins eleven underwriting securities firms and another downstream broker, Fidelity Investments, in resolving allegations that they misrepresented auction-rate securities as liquid, short-term investments and agreeing to provide liquidity to their customers. As a result of these settlements and settlements with other regulators, over 20 firms have recognized widespread problems in the sale of auction-rate securities and agreed to buy-back billions of these illiquid securities from investors. To date, regulatory settlements called for over $61 billion in investor buy-backs, representing the largest return on behalf of investors ever.

Under Cuomo’s settlement, TD Ameritrade has agreed to purchase illiquid auction-rate securities from individuals, charities, non-profits and small businesses and institutions purchased from TD Ameritrade before February 13, 2008 (collectively “retail investors”). TD Ameritrade will purchase such illiquid auction-rate securities from retail investors with accounts of $250,000 or less within seventy-five (75) days; by March, 2010, for all other eligible TD Ameritrade customers. TD Ameritrade will also:

  • Fully reimburse all eligible investors who sold their auction-rate securities at a discount after the market failed; and
  • Consent to a special arbitration procedure to resolve claims of consequential damages suffered by eligible investors as a result of not being able to access their funds.

TD Ameritrade customers who purchased auction-rate securities at TD Ameritrade or its predecessor entities, but who transferred their securities away before January 24, 2006, should contact TD Ameritrade directly to request to participate in the buyback. Investors should take note that they need to provide appropriate notice to TD Ameritrade in order to participate in the settlement, and could lose their rights to sell their auction-rate securities if they fail to do so.

Cuomo also announced today that his Office intends to file fraud charges against Charles Schwab based on their unlawful and deceptive misrepresentation of auction-rate securities. An imminent action letter sent Friday to the company allows Schwab five business days to resolve the Attorney General’s investigation or show the Attorney General why action should not be taken. The Attorney General’s legal actions seek to stop Schwab’s illegal practices, and obtain injunctive relief, restitution, damages, civil penalties, costs, and other relief.

Attorney General Cuomo’s ongoing investigation into the collapse of the auction-rate securities market revealed that Schwab brokers consistently misrepresented auction-rate securities as safe, liquid, short-term investments suitable for cash management purposes or as good investments in which to temporarily “park” cash. Such misrepresentation was the result of Schwab’s failure to train or otherwise ensure that its brokers had a basic understanding of auction-rate securities before they sold millions of dollars of these securities to Schwab’s customers.

Audio recordings obtained during the investigation confirm that Schwab brokers repeatedly misled investors about the risks of investing in auction-rate securities. One Schwab broker described preferred auction-rate securities to a customer as a “short-term institutional holding instrument” that was particularly suitable for managing the customer’s cash balances: “If you need to have that access to them at any time, that’s a good place for those to be. You know if you think you might need to get into that money, that’s probably as good a place if not better than anywhere to leave them.”

The Attorney General thanked the North American Securities Administrators Association (NASAA) and its multi-state ARS Task Force, who joined the Attorney General in announcing the agreements, for their efforts in achieving today’s settlement. He also thanked specifically the Pennsylvania Securities Division for its assistance. In addition, the Attorney General thanked the Securities and Exchange Commission and its enforcement staff for their cooperation in the ongoing auction-rate securities investigation.

Assistant Attorneys General Peter Dean, Pamela Mahon and Armen Morian conducted the investigation under the supervision of David A. Markowitz, Chief of the Investor Protection Bureau, and Eric Corngold, Executive Deputy Attorney General for Economic Justice.

A copy of the five-day letter to Schwab and the agreement with TD Ameritrade is available at the Attorney General's website: http://www.ag.ny.gov/press-releases.Cuomo’s auction-rate securities investigation is continuing.

 

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