Charles Schwab ( SCHW) said allegations by New York Attorney General Andrew Cuomo of civil fraud in the marketing and sales of auction-rate securities are "without merit." In a statement on its Web site, Schwab, the largest online brokerage, said the attorney general's office "unfairly lay blame on our company for an illiquid market and improper behavior by the large Wall Street firms that created and then, despite their obligations, stopped supporting auction-rate securities." In an official notice sent to Charles Schwab on Friday, Cuomo warned that his office plans to sue Schwab over the marketing of the products, the Wall Street Journal reports. Emails and testimony cited in Cuomo's letter show Schwab's brokers had little idea of what they were selling and later failed to tell clients that the market was collapsing, the newspaper reports. Cuomo writes in the letter that his office would be open to a settlement with Schwab, but it must agree to buy back the securities from investors still stuck with them, according to the Journal. Schwab said it didn't create the auction-rate securities and "had no involvement in the events that led to the collapse of the ARS market, events brought about by the Wall Street underwriters who manufactured, marketed and then simply abandoned their responsibility as lead managers for the auctions. " "The NYAG presumes that Schwab somehow knew of a risk that the entire ARS market could seize up at any time, and failed to disclose that risk to its clients, which is preposterous," Schwab added.
"Schwab brokers, while trained to levels beyond industry standards, couldn't be expected to foresee and disclose market risks that even regulators and market experts did not foresee, or that were intentionally veiled by the underwriters," the brokerage said in its statement. Auction-rate securities are debt instruments that caused billions in losses for investors after the $330 billion market collapsed in early 2008, the Journal notes.