Auction Rate Securities and Stock Broker Arbitration

New York, NYNew York Attorney General Andrew Cuomo has filed a lawsuit against brokerage firm Charles Schwab, alleging the company committed fraud and misled investors in the sale of auction rate securities. Some investors who have not had their auction rate securities bought back by their brokerage firms are now considering filing a stock broker arbitration to recover their money. Some say they were victims of stock broker fraud and were misled about the liquidity of their auction rate securities.

In defending his company, Charles R. Schwab, founder and chairman of the Charles Schwab Corporation, wrote in The Wall Street Journal (online.wsj.com, August 19, 2009) that his company serves almost 10 million accounts, the majority of which involve investors making their own decisions about buying, selling and holding financial products.

"We have never guaranteed individual success," Schwab writes. "Our investors understand that along with investing comes risk as well as potential reward. Unfortunately, we are now seeing a conscious effort to limit—if not eliminate—all risks for the individual investor, whether through consumer 'protection,' fiduciary liability for brokers, or the threat of litigation…"

Regarding the lawsuit, Schwab writes that his company had no direct involvement in establishing or maintaining the auction rate securities market and no involvement in the collapse of that market. However, some critics say the auction rate securities were marketed as being as safe, liquid, money market-like products when in fact, the market was failing and there was a possibility investors' money could be frozen.

The auction rate securities market failed in 2008, leaving investors with no access to their money—according to some reports, billions of dollars were lost. Now, some investors are turning to stockbroker arbitration to recover their lost money. These investors could be eligible to recover not only money that was frozen when the auction rate securities market collapsed, but also money lost if financial deals fell through because of the freeze. These are known as consequential damages.

For example, people may have lost money on deposits made for real estate transactions. They may have made the deposit expecting they could cash in their auction rate securities to complete the transaction only to discover that their money was frozen and they lost out on the deal, at the same time losing the deposit they paid.

In such cases, investors may be able to turn to stockbroker arbitration to recover not only the money that was frozen but also attorney's fees and consequential damages. Some companies, including Citibank and UBS have agreed to buy back auction rate securities from their clients, but other companies have not done so, leaving it up to the investor to take matters into his or her hands.