It turns out that Charles Schwab (NASDAQ: SCHW) and TDAmeritrade (NASDAQ: AMTD) may have sold auction-rate securities by using misleading marketing about whether or not the instruments were "cash equivalents." According to The New York Times, the "point of sale" activity at the discount and retail brokerages is similar, they said, and some of the discount brokerage firms use financial advisers or may have improperly listed information on their websites.
Schwab argues that it was only an "agent" and did not slant the marketing of auction-rates one way or the other.
It is safe to predict that Andrew Cuomo, the New York State Attorney General, will get discount brokerage firms to buy the auction-rate paper back from their customers. Cuomo can probably find some marketing material where the nature of the securities was represented the wrong way.
But, Cuomo's actions have stepped over the line. In all probability, many discount brokerage customers bought the auction-rates on their PC without seeing any information about whether their liquidity could be undermined. Discount brokerage customer often do their own research.
Cuomo won't care. He won't try to find out which people got their auction-rates without being attracted to them by marketing. He will get the discount firms to buy all of the paper back. The companies do not want years of litigation.
Cuomo is running for governor, or perhaps the U.S. Senate. He does not have time to pause for such details.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
8-16-2008 @ 1:19PM
Kathy said...
This column was clearly written by the investment industry. The author completely, perhaps deliberately, misses the point.
The point is that there was no legitimate "auction" in auction rate securities. The auctions were fixed, and the instrument was inherently flawed. On that basis, anyone who sold it was responsible for selling bad paper.
It really doesn't matter whether customers responded to marketing. What matters is that they were sold tainted instruments, illegitimately constructed, without disclosure of risks.
When I buy a financial instrument from an institution that claims to operate within the boundaries of our financial and marketing laws, I have a right to expect a legitimate instrument that is not fixed, one in which risks are properly disclosed.
8-16-2008 @ 5:07PM
Mike Sanders said...
What's needed here, is a 90-day same as cash guarentee. If for any reason you are unsatisfied with any banking product, you return it with 90-days (unopened) and you'll receive 100% of your money back. This works very well and will save you customers, in the long run.