New York AG Sues Schwab Over ARS. The suit alleges, "Schwab engaged in fraudulent and deceptive conduct in the sale of hundreds of millions of dollars of auction rate securities to the investing public. Schwab misrepresented auction rate securities to hundreds of its customers as safe, liquid investments that were suitable for their short-term, cash management purposes. In fact, auction rate securities were complex financial instruments with significant, inherent and increasing liquidity risks. Schwab persistently failed to disclose or made misrepresentations that concealed the risk that customers would not be able to sell their auction rate securities and could thus lose liquidity should auctions fail." The complaint continues, "Audio recordings produced by Schwab confirm that Schwab brokers repeatedly misled investors about the risks of investing in these securities, describing auction rates securities as liquid investments from which investors could always withdraw their money. One Schwab broker told a customer: 'I think [auction rate securities are] great alternatives to cash, frankly.' Another described preferred auction rate securities to a customer as a 'short-term institutional holding instrument' that was particularly suitable for managing the customer's cash balances: If you need to have that access to them at any time, that's a good place for those to be. You know if you think you might need to get into that money, that's probably as good a place if not better than anywhere to leave them."

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