Schwab may be sued over securities

Marketplace Staff Aug 17, 2009
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Schwab may be sued over securities

Marketplace Staff Aug 17, 2009
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TEXT OF INTERVIEW

Bill Radke: New York state’s Attorney General Andrew Cuomo is expected to file a lawsuit this morning
against the brokerage Charles Schwab — that’s according to today’s Wall Street Journal. The suit reportedly focuses on how Schwab marketed and sold something called auction-rate securities, and that requires a little explanation. Marketplace’s Alisa Roth joins us from New York. Good morning.

Alisa Roth: Good morning.

Radke: OK Alisa, what are auction-rate securities?

Roth: Auction-rate securities are kind of an investment tool. They’re usually issued by big places like municipalities. And they give the issuer a way to borrow money for a long time, but pay only short-term interest rates — so those are the lower rates. Now, those rates get reset periodically at auctions. And that’s where the name comes from. And what those auctions do is they give investors the chance to turn the investments over. So in theory anyway, the investors can get their money out whenever they want to.

Radke: Yes, that’s the theory. Now what is the problem?

Roth: Well, you can get your money out of these securities any time you want — as long as somebody else is willing to buy them. But last year, the market for these securities pretty much froze up. So investors were stuck.

Radke: Which brings us to this lawsuit about to be brought reportedly by New York against Schwab. What’s that about?

Roth: Well, the lawsuit says Schwab misled investors about the risks that were involved in buying these securities, so including how easy it would be to get their money out again. Now it’s important to say that Schwab isn’t the only one in this situation. Regulators have accused places like Goldman Sachs and Merrill Lynch of doing the same thing. But most of them have already agreed to pay investors back. Schwab says it’s impossible to have predicted that the market would freeze up like this, and that it was itself misled about how risky the whole business is.

Radke: Marketplace’s Alisa Roth in New York. Thanks.

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