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Quinn Emanuel Slams Cuomo's 'Unwarranted' ARS Suit Against Charles Schwab
The American Lawyer
August 18, 2009
When confronted with allegations of manipulations of the auction-rate securities market by New York Attorney General Andrew Cuomo, most firms have decided to settle up and keep quiet. Not Charles Schwab. Last month, in anticipation of the fraud suit Cuomo filed on Monday, Schwab's outside counsel, Faith Gay of Quinn Emanuel Urquhart Oliver & Hedges, sent a letter to David Markowitz, who heads the Investor Protection Bureau at Cuomo's office. The letter, which responds to an earlier report that a lawsuit was coming, was made public by Schwab on Monday. It makes for pretty juicy reading.
Gay alleges that the New York AG's investigation was flawed from the start. "The attorney general's decision to sue Schwab for a market calamity that it neither caused nor could have foreseen is the foregone conclusion of an investigation that was driven from the outset by a self-imposed mandate to reach a predetermined result: nationwide buybacks of illiquid ARS by every firm, regardless of fault and despite major differences in the roles that each firm played in the ARS market," she wrote.
The Quinn lawyer argued that Schwab is not like the firms that actually underwrote auction-rate securities because it merely made them available to its customers. So Cuomo's decision to go after "downstream" firms like Schwab, Gay wrote, is an unfair outcome of a "fraud by hindsight" approach. "Such an indiscriminate, outcome-driven approach necessarily ignores crucial distinctions among the various actors, the drawing of which lies at the very heart of the proper exercise of prosecutorial power and discretion," she asserted to Markowitz. "That your office's limited settlements with the upstream firms left out an entire class of investors harmed by their misconduct does not now justify going after innocent downstream firms to rectify that omission."
It's hard to blame Cuomo for his efforts. After all, in a July settlement with his office, TD Ameritrade, another so-called "downstream" player, agreed to return some $456 million to customers who bought the illiquid assets. Fidelity Investment, another downstream brokerage firm, has also settled with Cuomo.
When we spoke with Gay on Monday afternoon, we asked her whether those other "downstream" players made a mistake by settling. She declined to comment on other settlements, given the fact-specific nature of the cases. But she took the opportunity to make the case for her client, reminding us that Schwab didn't underwrite the securities, didn't market them and was assured by the underwriters that there was no problem in the auction-rate securities market just weeks before it collapsed.
"That's why we're going to go to trial," Gay said.
This article first appeared on The Am Law Litigation Daily blog on AmericanLawyer.com.
