Ameritrade settles securities case for $456M

NEW YORK (CNNMoney.com) -- Brokerage TD Ameritrade agreed Monday to pay $456 million to settle a lawsuit involving the marketing of a debt class that ended up crippling investors.

But New York State Attorney General Andrew Cuomo, who brought the suit, said another firm, Charles Schwab, has refused to settle claims involving the sale of auction-rate securities (ARS) to individuals, charities, non-profits, small businesses and institutions.

Cuomo's office said TD Ameritrade joined 11 underwriting securities firms and rival broker Fidelity Investments in settling his allegation that they "misrepresented auction-rate securities as liquid, short-term investments," according to a statement.

The office said the settlements by 20 firms with his office and other regulators have resulted in more than $61 billion in buybacks of the securities.

As part of the settlement, Omaha, Neb.-based TD Ameritrade (AMTD) said it will repurchase all auction-rate securities it sold before Feb. 13, 2008. TD Ameritrade will buy the securities from retail investors with accounts of $250,000 or less within the next 75 days.

The firm said it will repurchase the remaining securities by March 2010, and will reimburse investors who sold at a loss after the market failed.

The auction-rate securities market involved buying and selling long-term bonds that resembled corporate debt. Hospitals, cities and corporations sold the securities at weekly or monthly auctions, where interest rates were reset each time.

Many investors had treated ARS like cash investments, but the $330 billion market collapsed in early 2008 as the credit crisis took a turn for the worse.

Cuomo's office said it is pushing auction-rate securities brokers and underwriters to repurchase them from investors who were left with steep losses.

Schwab objects: Cuomo's office also announced "imminent legal action" against Charles Schwab (SCHW, Fortune 500) for alleged deceptive selling of auction-rate securities as safe.

"It is disturbing that Charles Schwab, who had been holding itself out as an industry expert, has stonewalled its customers," Cuomo said. "Today's notice should send a signal that if Charles Schwab will not stand by its customers, this office will."

In a statement, Schwab said it did not plan to settle, and that Cuomo presumed the company "somehow knew of a risk that the entire ARS market could seize up at any time, and failed to disclose that risk to its clients, which is preposterous."

Regulators like the Securities and Exchange Commission -- and Cuomo's office itself -- did not know the auction-rate market was going to fail, Schwab said, adding it "could not be expected to foresee and disclose market risks that even regulators and market experts did not foresee."