Was Charles Schwab a simpleton when it came to auction rate securities?

Tomorrow, July 21, 2011, yet another court appearance will take place in the long-running case People of the State of New York vs. Charles Schwab & Co., Inc. (WebCivil Supreme index 453388/2009).

Having convinced its lap-dog regulator FINRA to look the other way, the only thing left between getting away with auction rate securities fraud and having to make good on its misrepresentations to little guys like me is this case brought by the New York state attorney general.

As I have occasionally thundered about on this blog, Schwab has been hiding behind “principle” since the case was filed in late 2009, asserting it was just the victim of other players in the marketplace and that as a “downstream” seller of these toxic assets, it should not be held liable for selling them.

Coupled with its, ahem, principles, it has delayed and delayed and delayed the NY AG’s case. First, by trying to move it to Federal court — a move it lost — and then by slowing a determination on its own motion to dismiss the charges.

The motion to dismiss was filed in March, 2010. Between then and now, the motion was heard once. There have been 11 adjournments. Apparently, a change in judges is at least partly responsible for the delays. But it’s pretty clear that Schwab doesn’t intend to settle and that delay, despite the continuing pain of people with illiquid auction rate securities, works to Schwab’s advantage.

In reviewing the case documents available on eTrack, I ran across the NY AG’s response to the motion to dismiss. Originally filed in May, 2011, its introduction is a must-read for anyone who is interested in this case and its impact. Here is the entire document.

But you only have to read these short excerpts to understand in a New York minute how vapid Schwab’s stand on “principle” is.

…Schwab claims to have had a limited role in the ARS market, and that it somehow was a victim of the practices of the major underwriter broker-dealers whose ARS Schwab distributed to its customers. If Schwab truly was such a simpleton in the marketplace as it suggests, then it was reckless in selling products it did not understand. But the evidence alleged in the Complaint belies any claim by Schwab that it was unaware of the risks in selling ARS.

And…

At base, this motion is another attempt by Schwab to delay adjudicating the case on the merits, and, more importantly, doing something to alleviate the suffering of its customers who continue to experience illiquidity for twenty-eight months and counting since the failure of the ARS market.

On behalf of all of us who’ve been robbed by Charles Schwab, I want to thank the NY Attorney General for making such a logical and crystal-clear argument for the court to consider. I hope tomorrow the judge will agree, rule against Schwab’s ridiculous motion to dismiss and allow the case to proceed.

I’ve been hoping since the case was filed nearly two years ago that NY courts would do the right thing and force the gonifs at Charles Schwab to make restitution to the thousands of customers they lied to about the safety and liquidity of ARSs.

But frustration has begun to boil over due to the constant legal delaying tactics by Schwab in the case (click on the image to enlarge). Since at least April, 2010, Charles Schwab has used the courts to slow down justice by delaying a hearing on its own motion. It must be pretty obvious to its legal team that the motion to dismiss will be denied, so the next best thing is to never give the judge the chance to rule. (And think of the billable hours for Schwab’s laywers!)  The motion has been repeatedly rescheduled without a hearing (“adjourned” in legalese). If only normal people like me could afford to stave off judgement day like these thieves are able to.

In Schwab’s twisted logic,  its refusal to provide liquidity for its victims is an issue of “principle.” That is, it was only a transmitter of the toxic waste ARSs sold to trusting rubes like me. But it defies logic that any business can be “downstream” of offal and not smell it — or as in this case, bathe in it.

Schwab gladly sold me ARSs on Monday, February 18, 2008 — the day before the auctions collapsed completely — when it knew for certain the auctions had been in turmoil for weeks before. On that day, they were still telling me these ARSs were safe and liquid. They lied then; they are lying now. And there’s that smell in the air.

Now, they’ve not only retreated behind an alleged principle, they’re cynically preventing that principle from being tested in a court of law. My message to Schwab (I know you read this blog every time I post on this topic): stop hiding behind your lawyers’ skirts, man up and take the medicine. Your claim of “principle” is undone by your scorn and manipulation of the judicial process.

If you, like me, have been sold auction rate securities by Charles Schwab, you know they have refused to buy them back or make good on them. You probably also know that in 2009, then New York Attorney General Cuomo filed suit against Charles Schwab for a long list of violations of securities laws. You might remember that Schwab tried (and failed) to get the case into Federal court where its arguments would have presumably found a more friendly hearing.

All of this information you would have had to piece together from the occasional news report (from a financial website or paper willing to risk the wrath of the principled financiers from San Francisco).

But I have recently discovered that the NY state Civil Supreme Court has made proceedings from this case available online and will automatically email you updates on the case. You can even read the filings in the case — which I strongly recommend.

These documents are tough sledding for non-lawyers, but buried in the filings is the logic Schwab is using to avoid doing the right thing (and what almost every other downstream seller of these toxic assets has done).

See for yourself the the real Schwab — the Charles Schwab disowning responsibility for ruining people and small businesses —  not the cuddly-talk-to-Chuck, we’re-your-pals Charles Schwab of the TV and newspaper commercials. Be sure not to miss the “memorandum of law” filed in August, 2010 by Schwab’s attorneys. This document lays out the arguments for Schwab’s motion (to be heard in February, 2011) for dismissing the case.

The NY courts website isn’t all that easy to use, but they get major props for putting everything online — giving important judicial proceedings like this light and air and making it possible for people like me to keep abreast of the case.

Here are some links and the all-important case number to enter into the eTrack system, once you have created a user id.

First, sign up for eTrack: http://iapps.courts.state.ny.us/webcivil/etrackLogin.

Next, go to Web Civil Supreme: http://iapps.courts.state.ny.us/webcivil/FCASMain

Select “index search” and enter case 453388/2009.

Then, click where indicated in this screenshot to open the case (click to see a larger image).

Finally, in the screen that pops up after selecting the case number, you can read documents filed in the case and, best of all, be notified by email of events (click for a larger image).

Let’s hope that the court in February is able to separate Schwab’s fallacious legal arguments from the overwhelming evidence of fraud contained in the original complaint and that the court will allow this case to proceed.

Oh, BTW, FINRA, where are YOU in all this? Still “investigating?”

Have you ever had a problem with a huge company that tries to “make you go away” by stonewalling and ignoring you? That’s what Charles Schwab has been trying to do since it sold me auction rate securities in 2008 on the day before markets froze. They had to have known when they took the order that these things weren’t liquid and safe, the two reasons they sold them to me in the first place. They were happy to take the order then…but today they, alone among retail brokers, have refused to make good on the ARSs they sold to conservative investors like me.

I have been using this blog (see my previous posts) and the interest of reporters to make my displeasure public.

Beth Healy of the Boston Globe missed the irony of Massachusetts residents lending the state money for the Big Dig and not being able to get it back by pointing out that the state “saved” money by not calling the notes.  Healy asserts, “…regulators say they’ve done all they can to help.”

Uh, no, not quite. I’ve never received a single response to repeated inquires to the governor, the secretary of state, the attorney general, my local representative and, above all, the source of these ARSs, the treasurer’s office. Why the silence? Simple: it would be too embarrassing for the politically ambitious Treasurer Cahill to force Schwab to settle. And no state department is going to make another department look bad. AG Coakley can get headlines for pursing fraud from just about any company. Why expose the shady dealings the state itself engages in?

Still, Schwab hated that Globe story enough to send me a letter terminating my accounts. No problem, guys, I was happy to leave.

So, you might think, why not complain to the SEC and to Wall Street’s “self-regulator,” the Financial Industry Regulatory Agency (FINRA)? I have, of course. In 2008 I filed complaints with both agencies. How’d that work out?

Just as you might expect. We all know how well the SEC has done at protecting people from Madoff, Stanford and CDOs. With so many larger fish to pry off the hook, paying no attention at all to individual investors stuck in ARSs is a natch.

And FINRA, known as Wall Street’s favorite regulator, actually contributed its former boss, Mary Schapiro, to the helm of the SEC. Miraculously, after years of doing nothing to protect the little guy at FINRA, Ms. Schapiro apparently grew a pair just in time for her confirmation hearings. Just saying you are for strong consumer protection is, I guess, enough to assure congressional committees you should run an agency we now know was dysfunctional.

Still, FINRA — like Schwab — is listening to the political discourse and is maybe (finally) rubbed a little raw by the attention their abject failures have generated. When Jed Horowitz of Investment News wrote about the lack of action in New York’s suit against Schwab, something must have clicked at FINRA headquarters.

A week or so after Horowitz’s article, I got a call from FINRA. I assume the timing wasn’t accidental. They probably hoped to convince me to shut up, at least for another year or two until they find a way to exonerate Schwab or the whole thing blows over.

They wanted me to know they were “actively engaged” and they’d “made progress.” They couldn’t say what, if anything, they actually plan to do. Or when, if ever, they plan to do whatever they decide they are going to do.

While Congress debates partially re-regulating Wall Street, the simple fact is that the entire industry is morally bankrupt and the interests of the country have been repeatedly subjugated to the greed of the industry. Worse, regulators, such as they are, are victims of “regulatory capture.” Even if FINRA wasn’t designed as Schwab’s concubine, it has willingly become one. Schwab asks, FINRA dances.

It’s no secret I’m angry at Charles Schwab (here and here). And they don’t like me back. In fact, they’ve “fired me,” sending me a letter terminating my accounts with them in February. (What was it, guys? The blog posts? The Boston Globe story? Did I offend you by insisting that you send me written terms for the “loan” you wanted me to take on these bonds? No matter…when the state of New York whoops your ass in court, you’re still gonna have to settle with me.)

Let’s review: Schwab sold me Massachusetts auction-rate securities underwritten by Goldman Sachs, promising safety and liquidity, but never sent me a single document that described the bonds as ARSs, much less described the auction process and the possibility of them becoming illiquid. Then it sat by while the auctions tanked in 2008 and instead of settling, blamed everyone else for their lies and deceptions.

Worse, when Goldman Sachs settled with its customers who bought these ARSs directly from them, Schwab — alone among downstream sellers — decided not to do the right thing for its customers. They were “not responsible.” They were “just the middle man.” Instead, Schwab decided to manufacture a pile of principles (or what’s really just a pile of you-know-what) that’s convenient for their bottom line.

So you can imagine I search for every bit of news about New York State Attorney General Mario Cuomo’s suit against Schwab and try to follow its progress closely.

And just a week or so ago, a federal judge in the Southern District of New York crushed Schwab’s legal hopes of moving the NY AG’s suit to a federal court. I’ll bet the legal team’s dreams that the judge would move the case to federal court went something like this: “Let’s go for a Bush-era appointee on the Federal bench. You know, a business-friendly Bushie who believes caveat emptor means ‘go ahead and steal from the rubes and we’ll cover for you.’ We gotta shop around, because that NY AG has got us by the you-know-whats with the Martin Act and those recordings of us lying to customers. Unless we can turn this into a case about something other than what we actually did, we’re gonna lose.”

Interestingly, the judge’s decision was based on a fascinating legal concept going back to the Constitution: “diversity of citizenship.” As the linked explanation notes, the framers were concerned about bias when a state court heard a case made up solely of its citizens who sued solely citizens of other states. IOW, if people in Massachusetts could sue in Mass. court those carpet-baggin’ brokers from California, what Mass. judge wouldn’t favor folks from his or her own state?

Well, my former friends at Charles Schwab, your arguments against remand to state court apparently didn’t cut too much mustard with the feds. You’re right back in state court, the AG’s home field. And there I hope you’ll get the shellacking you so richly deserve for treating me and other small-fry investors like lemons to be squeezed dry.

As the judge who remanded the case back to state court wrote in the decision (a full copy of which is attached below):

“[T]he purpose of seeking this wide-ranging relief is not merely to vindicate the interests of a few private parties. Rather, it is to take a step toward eliminating fraudulent and deceptive business practices in the marketplace…The State’s goal of securing an honest marketplace in which to transact business is a quasi-sovereign interest. It is completely understandable that a state should…seek to prevent the recurrence of harmful conduct in the future and to remedy the damage it has caused in the past.

Here’s the ad she’s running ad nauseum:

Each time I see it, it rings less and less true, based on my direct experience.

The claims about getting “$1B back from banks” conveniently leave out the fact that the Mass. AG’s office left thousands of small-fry holders of ARSs high and dry in the Commonwealth’s settlement with the banks. She got her press conference announcing a settlement…freeing the AG, the Treasurer’s Office and the banks to get back to business as usual. And the claims of accountability don’t match up with the fact that nobody from her office has ever returned my calls or a letter about this in nearly two years.

Madame Attorney General, isn’t it time, as you say in your ads, that you or someone in your office responds to retail customers’ frozen ARSs? (On the off chance you didn’t see my letter from December, 2008, I’ve attached it to this post.) Isn’t it time for you to stop claiming you’re for the little guy when your office cut deals with Goldman Sachs and UBS that left us out in the cold?

There’s at least one voter in the Commonwealth who knows what the AG’s brand of accountability will mean.

And, no, I am not a Republican.

It felt so good to unload two weeks ago on Charles Schwab for lying about the safety and liquidity of auction-rate securities they sold me. Blogging as catharsis is underrated, especially if you have as much tied up as I do in these now illiquid ARSs. As I pointed out in my previous post, just about every other firm else has settled, but not Schwab. No, they blame everyone else — the underwriters, the customers and, now, even the New York attorney general.

Today, the big news is that the New York State Attorney General is making good on the threat to file suit. This welcome but not-unexpected turn of events gives me not only another chance to vent against Schwab, but also for the first time to document that I wasn’t the only customer they lied to.

Today, the Wall Street Journal has published excerpts of what the lies the brokers told customers. Check out some of what they told people:

Customer from Massapequa, N.Y. Customer: “You know, I’m not trying to make a ton of money. I just want to play it safe.”
Broker: “Understood.” …
Broker: “When you go to get out of this, even though you tell the rep sell it that means you want to stop the auction. The hardest part of this auction is getting into it. That is the tough part. Getting out of it is easy as just selling.”

Customer from Seaford, N.Y. Customer: “I can just get out every 7 days?”
Broker: “That’s right.”
Customer: “I can just give you 7 days and don’t renew and you put the money back in my account?”
Broker: “That’s correct.”

Customer from Remsenburg, N.Y. Customer: “It is some kind of short term muni-based piece of paper used as an alternative to [a] money market.”.
Customer: “So that is better than what I am getting?”
Broker: “Yeah, yeah. It is better than saving in the money market at the moment.”
Broker: “You pick up about 50 to 60 basis points over what you would get in a money market, and what you are giving up is next day liquidity.
Customer: “OK. I can adjust it by $100k amounts every week?”
Broker: “In terms of if you wanna get out?”
Customer: “Yeah.”
Broker: “Yeah.”
Customer: “I’ll know a week ahead of time if I wanna make a big investment.”

Customer from New Hyde Park, N.Y.
Broker: “And it’ll roll over monthly unless you call me and say, ‘Hey [Broker], don’t roll it over anymore.’”
Customer: “Oh, I see. OK.”
Broker: “And then next month I’ll stop the auction and all the cash will come back to your account.”
Customer: “OK, [Broker], thank you.”

Customer — location unidentified Customer: “Well I need the liquidity because I may buy a house soon.
Broker: “I see.”
Customer: “I sold my house and this is money that’s just there temporarily.”
Broker: “instead of looking for the highest yield, I would personally look at the highest security. And that would be my second thing. And probably periodic auction rate securities. That would work better than any bond mutual funds for you. That’s my humble opinion.”
Customer: “OK. And it would be safer?”
Broker: “It would be much, much safer, for sure.”

Assurances like these are what lead me to invest money. Schwab brokers delivered these same lies to me.

What’s Schwab’s response to this news? Well, they issued a press release this morning, saying, in essence, “Not our fault…not our problem…all those customers we talked to about safety and liquidity can schove it. We ain’t schettleing.”

The short version of a long story is that Charles Schwab sold me auction-rate securities, promising liquidity, then stonewalled me when the market disappeared for the ARSs. Meanwhile, every other firm on the planet — and I mean every one – made their clients whole. Goldman Sachs, the auction agent for the ARSs I bought: settled. Fidelity: settled. BofA: settled. TD Ameritrade (late of zero-doc mortgage loan fame): settled.

You can only imagine the lengths I’ve gone to to try to bring this to the attention of regulators. I’ve spoken to regulators in Massachusetts (the issuer of the ARS I bought, the proceeds of which were used to finance the Big Dig), Illinois, and last summer, New York.

I’ve written letters…called representatives…filed complaints with FINRA (famous for being the securities industry’s favorite regulator and the former home of the new SEC chairman. Buy lots of empty mattresses as long as these people are protecting you).

I clearly remember the conversation I had with the NY AG’s office last year. They “got it” but when nothing happened for months, I assumed that office, like all the others I had implored, had moved on to more newsworthy pursuits. Like compensation at AIG and why Lehman Brothers’ collapse was good for the candle-making industry.

Then, finally — finally! – last week, the New York State Attorney General — from among all the attorneys general in the country who were beating their chests about protecting investors last year — sent Charles Schwab a demand letter (attached below).

Charles Schlemeil had convinced themselves they hadn’t lied…they hadn’t stolen my money…that it was those nasty Wall Street firms who were at fault when the ARS auctions tanked. “We’re not the bad guys,” they claimed. “We just sold these things ‘downstream.’ We don’t have anything at all to apologize for or make good on.” Schwab stood on principle! It was a victim, too!

Principle, shminsciple. Now that the NY AG is onto them, they’re talking about how much it’ll cost them to hold off the litigation and whether or not that’s a better deal for them than paying up. This was always a calculation of cost and until now it simply cost those bozos-in-$900-suits less to stonewall than to pay up. When nobody appeared to care, it was easy to argue principle.

Yes, I’m upset that I can’t get to my money…that Schwab lied to me…that talking to Chuck turned out to be talking to a wall. That Schwab is full of schit when it comes to doing the right thing — what everyone else did — for their clients.  But mostly, I was unhappy that in the face of such obvious avarice and fraud, none of the responsible regulators did anything about it. One nastygram like this was all I was looking for…and now that my home state AG has sent it, it’s only a matter of time until Charles Schwab capitulates.

But until then, I am anticipating the pound of flesh the NY AG will extract from Schwab and grateful to my fellow Noo Yawkers for stickin’ with it for us little guys.