updated 3/14/2005 7:20:11 PM ET 2005-03-15T00:20:11

Discount brokerage pioneer Charles Schwab Corp. sued the TD Waterhouse Group Inc. Monday, alleging its rival’s advertisements falsely labeled Schwab as a high-priced firm with inferior service.

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The trade libel complaint filed in state court underscores Schwab’s determination to reclaim its reputation as a bargain brokerage.

After being undercut by smaller rivals for years, San Francisco-based Schwab has lowered its trading commissions twice in the last nine months and waived some of the recent account fees that it rolled out recent years to offset a deep financial slump.

With the recent changes, some of New York-based Waterhouse’s prices are now higher than Schwab’s. For instance, a Schwab customer with $55,000 in his accounts would pay $12.95 for an online trade compared to $17.95 for a Waterhouse customer with the same amount of money.

Waterhouse’s aggressive ads, which first appeared in late 2003, rankled Schwab’s founder and chief executive even before the company’s recent price cuts.

“I have been working darn hard for more than 30 years to build our reputation, so I am not going to stand by and let them run ads that are patently false,” Charles Schwab said in an interview Monday.

TD Waterhouse stands by its ads, spokesman Kevin Dinino said Monday. “We’re surprised that Schwab would use litigation in an attempt to silence the competition,” he said.

Charles Schwab said he tried to convince Ed Clark, the CEO of TD Bank Financial Group, which oversees TD Waterhouse, to abandon the ads before filing the lawsuit.

Schwab wants a court order to ban the ads besides unspecified damages. “There is no telling how many prospective customers we have lost because of their actions,” Schwab said.

Waterhouse ads, which have been broadcast on TV and appeared in print, first raised Schwab’s ire by lumping the firm together with Merrill Lynch & Co., one of the Wall Street brokerages that inspired Charles Schwab to create a less expensive and more independent alternative during the 1970s.

An early ad in the campaign featured Waterhouse’s advertising spokesman — Sam Waterson, a star on the “Law & Order” television ads — telling viewers to “switch to TD Waterhouse, the alternative to higher priced brokers like Merrill and Schwab.”

Waterhouse agreed to end that ad campaign in June 2004, but Schwab alleges the misleading spots subsequently aired in several major markets, including Atlanta and Seattle during September 2004 and New York in November 2004.

The current Waterhouse ads contain slightly different wording. The kicker now describes Waterhouse as “the alternative to Schwab and higher priced brokers like Merrill Lynch.”

In 2002, Schwab raised Wall Street’s hackles with a television ad that suggested full-service brokerages recommend shoddy stocks to generate commissions and bring more business to their investment banking affiliates.

The Schwab ads featured a brokerage executive encouraging his sales force to ignore a stock’s financial shortcomings and “put some lipstick on this pig.” The ad didn’t mention a specific brokerage, but the spoof appeared after the public disclosure of internal e-mails from Merrill Lynch analysts who used similar language.

Those 2002 ads “were a totally different situation,” Schwab said. “We were addressing an industrywide problem and didn’t target any individual institution. (Waterhouse) is clearly targeting us.”

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