New York Attorney General Andrew Cuomo, probing illegal marketing and sales of auction rate securities (ARS), is likely to file a lawsuit on Monday against Charles Schwab Corp for civil fraud, the Wall Street Journal said, citing people familiar with the matter.

As a part of the lawsuit, Cuomo will likely present transcripts of recordings between Schwab brokers and customers that allegedly show how the ARS were misrepresented by brokers as easy-to-sell alternatives to cash, according to the paper.

Cuomo also claims that Schwab did not train brokers about the risks that the ARS market could stop functioning, leading to money being locked for a long time, the paper said.

Schwab, the largest U.S. online brokerage, which has maintained that the allegations are without merit, said in a statement that the filing of any charges against the company is totally unwarranted.

The Attorney General's demand that Schwab act as an insurer against an unprecedented market collapse that it did not cause and could not predict is legally unsound, the company said in a letter to Cuomo, which it posted on its website.

Schwab said the letter was sent to Cuomo's office on July 24.

Cuomo's office could not be immediately reached for comment by Reuters.

ARS are long-term debts whose rates are set at periodic auctions. The credit crisis of 2007 put increasing pressure on the ARS market, and by February 2008 the market froze after brokerages stopped supporting the auctions.

Several brokerages targeted by authorities have agreed to buy back ARS from investors. Schwab, part of a small group that has not settled, said it did not create the products and had no involvement in the events that led to the collapse of the ARS market.

(Reporting by Ajay Kamalakaran in Bangalore; Editing by Lincoln Feast)

New York Investment