Aug. 20 (Bloomberg) -- Fidelity Investments, Charles Schwab Corp. and Oppenheimer Inc. may be punished for their sales of auction-rate securities, New York State Attorney General Andrew Cuomo said, as he laid out his argument for pursuing brokerages that he says deceived investors.

``It seems highly unlikely that the firms had no understanding of what was happening in the ARS market,'' Cuomo's deputy counselor, Benjamin Lawsky, wrote in a letter today to the Regional Bond Dealers Association. If the brokerages ``continued to actively market these products to unknowing investors, that will certainly be relevant to our calculus of the firms' culpability.''

The attorney general and federal and state regulators have already wrung agreements from five Wall Street banks, including Citigroup Inc. and UBS AG, to repurchase about $35 billion of auction-rate securities. The regional bond dealers group last week told regulators that the banks -- not brokers -- should be required to buy back the securities they created.

Cuomo said he has subpoenaed Fidelity, Schwab, Oppenheimer, TD Ameritrade Holding Corp. and E*Trade Financial Corp. The regulators are examining how the securities were marketed before February, when firms overseeing periodic auctions for the debt abandoned their routine role as buyers of last resort, saddling investors with holdings they couldn't sell.

`Liquidating' Securities

Greg Gable, a Schwab spokesman, didn't return calls seeking comment today. Oppenheimer Secretary Dennis McNamara also didn't return a call. E*Trade spokeswoman Pam Erickson didn't return a call, and nor did TD Ameritrade's Kim Hillyer.

Cuomo's office has also stepped up its probe into Goldman Sachs Group Inc., Bank of America Corp. and Deutsche Bank AG, a person briefed on the matter said. Cuomo is asking the banks for more documents than those already produced in the investigation, the person said, speaking on condition of anonymity. The Wall Street Journal earlier today reported the requests.

Ted Meyer, a spokesman for Deutsche Bank in New York, declined to comment. Goldman spokesman Michael DuVally said the firm is ``cooperating fully'' with regulators and declined further comment. Bank of America's Shirley Norton said the bank doesn't discuss talks with regulators.

Cuomo shares the regional brokerage group's concern in ``providing relief to investors who were defrauded,'' Lawsky wrote. ``With that in mind, your member firms should consider liquidating the ARS investments of their clients, especially those clients who were marketed and sold these instruments by your firms.''

Fidelity

The bond dealers group's co-chief executive officers, Michael Decker and Mike Nicolas, said in response to Cuomo's letter that they expect regulators to take ``full appropriate measure'' against any firms that broke securities laws. ``Our focus has been and remains on investors and ensuring they can liquidate their ARS positions as soon as possible.''

Fidelity, the world's largest mutual-fund manager, has also been targeted in the auction-rate probe. Massachusetts Secretary of State William Galvin yesterday urged Fidelity Investments to buy back frozen auction-rate securities from individual investors who bought them through the company's brokerage unit.

To contact the reporters on this story: David Scheer in New York at dscheer@bloomberg.net; Patricia Hurtado in New York State Supreme Court in Manhattan at pathurtado@bloomberg.net.

Last Updated: August 20, 2008 18:30 EDT