Brokerage house Charles Schwab & Co. (NASDAQ: SCHW) is facing the wrath of New York Attorney General Andrew Cuomo. The state's top attorney sent a letter to Schwab last Friday, warning that he plans to sue the firm for civil fraud in relation to its marketing and sales of auction-rate securities (ARS). Cuomo added that he is open to a possible settlement, although Schwab must be willing to repurchase ARS from its investors who are still holding them.
In response, Schwab is defending itself. "The Attorney General's allegations are without merit," stated the brokerage firm. "They unfairly lay blame on our company for an illiquid market and improper behavior by the large Wall Street firms."
However, it's not exactly as though Schwab is being singled out for ARS misconduct. Other major firms, including Bank of America (NYSE: BAC) and Citigroup (NYSE: C), have already settled with the New York AG's office.
Investors seem relatively unfazed by the news, with SCHW holding steady near breakeven at last check. The shares are hovering near the middle of their recent trading range between $16 and $19; this narrow sideways channel has contained all of the stock's movements since mid-April.
As SCHW remains range-bound on the charts, pessimism is starting to take root on Wall Street. Short interest on the shares rose by 4.1% during the most recent reporting period, and now accounts for 3.1% of the equity's available float.
Elsewhere, puts were the option of choice last Friday on the International Securities Exchange (ISE). During the course of the session, traders on the ISE bought to open 1,779 puts on SCHW, compared to just 218 calls. This rush toward bearish bets came on the heels of Schwab's second-quarter results, which hit the Street last Thursday.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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Reader Comments (Page 1 of 1)
7-20-2009 @ 10:39PM
rubin said...
Good for Cuomo.
Charles Schwab is unquestionably guilty of this.
Please call me at 650-604-6450 and I will relate
my experience with them selling me an auction rate
security.
It will be good to establish contacts with other clients
who have a similar problem with Shwab & auction rate
securities.