TD Ameritrade Settles; Next Up: Schwab

The long, sorry tale of the auction-rate securities market continues today as more sordid chapters simultaneously closed and opened. Both the Securities and Exchange Commission and the New York Attorney General's office settled charges with TD Ameritrade ( AMTD), who they allege misrepresented the risky nature of ARSs to customers.

According to a press release from the New York AG's office, the online brokerage agreed to buy back some $456 million for the faulty securities. But it looks like ARS news won't end there, as Attorney General Andrew Cuomo also announced plans today to file fraud charges against Charles Schwab ( SCHW) based on similar allegations.

Auction-rate securities are a type of debt instrument with interest rates that reset regularly according to Dutch auction rules. But when the credit markets seized, the entire ARS market collapsed with it back in February 2008. It is alleged that many brokers and underwriters had marketed the investments as almost as safe as cash.

Statements from the SEC and the New York AG's office alleged that TD Ameritrade had told customers that ARSs were fairly uncomplicated investments, not unlike certificates of deposits or money-market accounts. With a slew of individuals, small businesses, non-profits and charities left frozen with the instruments, today TD Ameritrade committed to buying back all of the ARSs it sold before the market crash last year.

"TD Ameritrade improperly marketed ARS to retail customers as short-term investments without telling them about the special risks of the ARS market," Donald M. Hoerl, Regional Director of the SEC's Denver Regional Office, said. "This settlement provides hundreds of millions of dollars to thousands of TD Ameritrade customers who hold ARS that are now illiquid."

According to the SEC's press release, the SEC's ARS investigations have already ensnared Wall Street stalwarts such as Citigroup ( C), UBS ( UBS) and Bank of America ( BAC), among others, leading to settlements for each. A statement from the New York AG's office noted that more than 20 firms have agreed to buy-back over $61 billion.

"While our role in the market for these securities was significantly different from that of other financial institutions that have previously announced similar programs, we believe this is the best way for us to help clients who have been unable to find liquidity in the current market environment," Ameritrade CEO Fred Tomczyk said in a statement.

On Friday, the Attorney General Cuomo put another target in his crosshairs after sending an imminent action letter to Charles Schwab.

"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," Attorney General Cuomo said in a press release. "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."

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