Federal judge to Charles Schwab: pound sand

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.





2 responses to “Federal judge to Charles Schwab: pound sand”

  1. Alex Neihaus Avatar
    Alex Neihaus

    I believe (and hope) this case is still active. But I have no idea how it’s going. The NY AG doesn’t return calls or emails asking for updates. Let’s hope that the inertia that legal cases have keeps this going.

  2. Nancy Ortega Avatar
    Nancy Ortega

    Is the New York State Attorney General Mario Cuomo’s suit still in the process against Schwab and the Massachusetts auction-rate securities that Schwab sold?
    I hope you can give me current information. Thank you.

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