Schwab Beats $788 Million Auction Rate Securities Suit Through Technicalities

Wednesday, November 02, 2011 07:10
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Schwab Beats $788 Million Auction Rate Securities Suit Through Technicalities

A New York State judge has dismissed a complaint against Charles Schwab that argued that Schwab brokers oversold $788 million in auction rate securities as being liquid under any market conditions.

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When the credit markets imploded in mid-2008, auction rate securities were among the casualties. Trading in the asset class dropped off drastically, leaving retail investors stuck holding paper that they could not sell at any price.

 

Schwab's lawyers argued that when the firm's brokers told clients these securities were liquid, the claim was "true at the time."

 

They also hammered the plaintiffs in the New York Attorney's Office for failing to provide more details on when, where, and to whom the Schwab sales force made their allegedly overzealous claims. 

 

This kind of victory may be better than nothing, but the clients have to ask whether a broker that could make that kind of mistake on relatively exotic instruments once could do so again -- and then get away with it on technicalities.

 

The credit crash of 2008 was a unique and in some ways unpredictable event, but as we are seeing now, nothing is certain in modern markets.

 

Rather than fine-tune the language on sales claims, these firms -- and their clients -- might be better served by building portfolios that can withstand any imaginable disruption in one or more asset classes.

 

That may mean insurance, larger cash allocations, or simply stronger risk models.

 

And for advisors who already offer such a level of protection, cases like this are an opportunity to differentiate yourself as better than the competition. 

 

 

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