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Another day, another inadequate disclosure of investment risk …
By Lauren | August 17, 2009
The Washington Post reported today that New York Attorney General Andrew M. Cuomo has filed a fraud suit against brokerage firm Charles Schwab. The suit reportedly accuses Schwab of failing to adequately disclose to investors the risks associated with “auction-rate securities.” If you have no idea what those are, you’re not alone. Auction-rate securities are bond instruments used by hospitals, local governments and schools to raise money; their interest rates are set at auctions held as frequently as every seven days. They’re not exactly the sort of thing you’d expect an unsophisticated investor to understand well enough to purchase.
According to the Post, however, Schwab has been selling auction-rate securities as a higher-yielding alternative to cash investments. The market for them essentially evaporated in last year’s financial crisis, leaving investors holding the bag. Cuomo accuses Schwab of failing to properly understand and explain auction-rate securities to its customers, and seeks to have Schwab buy back the securities at face value, arguing that the firm either knew or should have known about and disclosed to its customers problems in the auction-rate securities market that began to emerge two years ago. He may have some success; Cuomo’s office has reportedly brokered at least twelve settlements with other firms that
sold or wrote auction-rate securities, so Schwab may simply be the next in line. (Then again, Schwab denies any wrongdoing, so it may escape the fate of its fellows.)
You’d think that brokerage firms would realize by now that they shouldn’t sell what they can’t (or won’t) clearly explain. Exotic investments may not carry any more financial risk than more commonplace investments like stocks and bonds, and may be a good buy. But if their value plummets, brokerage firms can expect to face serious legal trouble if their customers didn’t understand what they were buying. Come on, folks - you’re the experts. If you’re going to tell a client that something out of the ordinary is a great investment, bring your expertise to bear and, first, tell them clearly what they’ll be getting for their money.
To read the Post article, go to http://www.washingtonpost.com/wp-dyn/content/article/2009/08/17/AR2009081702035.html.
Topics: Business Ethics, Professional Ethics, Risk Management, business communications, customer relations, ethics |