| 20 July 2009

The SEC and New York Attorney General's office has arranged auction rate securities settlements with Citgroup, Wachovia, Bank of America, RBC Capital Markets, Deutsche Bank and, as we just reported, TD Ameritrade. But Schwab is sticking to its guns and putting up a fight, forcing NY AG Andrew Cuomo to sue.

Cuomo sent a letter to Schwab on Friday saying it intended to sue the brokerage if it didn't partake in the settlement process. Schwab immediately shot back and in a statement, saying "the Attorney General’s allegations are without merit. They 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."

This is a big twist in an otherwise amiable resolution process. It's clear that Schwab intends to fight the allegations. But it's also clear that Cuomo won't back down. While he's still willing to settle, his threat is to go after Schwab for fraud.

At issue is roughly $780 million in securities purchased by about 900 individuals at Schwab. As more and more banks and brokerages settle with the SEC and more details are revealed, we think Schwab is going to be fighting an uphill battle. But we think this tit-for-tat between Schwab and Cuomo reveals as much about the process of settling and regulation (or lack thereof) as it does about the selling practices at brokerages.