Schwab slapped with SEC warning; YieldPlus settlement may be on the horizon

The Charles Schwab Corp. has acknowledged that it received a Wells notice from the SEC over two bond funds; observers suggest that this could put pressure on the company to settle litigation over unexpected losses in the funds

Oct 15, 2009 @ 2:50 pm

By Bruce Kelly

The SEC's warning to the Charles Schwab Corp. that it could face civil charges over two fixed-income mutual funds may have a direct effect on current and looming legal actions from investors over losses suffered in the funds.

Perhaps most significantly, industry analysts and attorneys said the SEC's Wells notice could paint Schwab into a corner in the class action now in litigation over the two funds, YieldPlus Fund and Total Bond Market Fund.

“Schwab will be given the opportunity to defend itself against enforcement charges before the SEC takes any action, but in our view this announcement, coupled with the ongoing [Finra] arbitration related to the funds, heightens the probability that Schwab will likely need to settle its class action suit related to YieldPlus out of court,” wrote Matt Snowling, an analyst with FBR Capital Markets. “Regardless of the outcome of the SEC investigation, this news is likely to highlight the risks and lack of earnings momentum for Schwab heading into 2010.”

In August, a federal court in California certified an investor lawsuit involving the YieldPlus Fund Select Shares and YieldPlus Investor Shares as a class action.

“The Wells notice and supporting documents are a road map” for the class action, said Andrew Stoltmann, a plaintiff's attorney. “The class action dwarfs individual arbitrations by hundreds of millions, if not billions, of dollars.”

The blowup of the YieldPlus funds has been nagging at Schwab for almost two years.

At its peak in May 2007, the Schwab YieldPlus Fund had more than $13 billion in assets. The YieldPlus funds are short-term bond funds that investors say were marketed to them as conservative investments. Instead, they lost value last year due to investments in mortgage-backed securities.

Schwab said in an SEC filing on Wednesday that it received the Wells notice advising the firm that the SEC staff intends to recommend civil charges against several Schwab affiliates for possible securities violations. The notice is not a formal allegation nor a finding of wrongdoing.

Schwab, which reported its third-quarter earnings today, said the charges are unwarranted and that it plans to respond to the notice.

Schwab has faced dozens of individual arbitration claims by investors over its fixed-income funds.

Between Sept. 1 and Oct. 1, the date on which the most current available decision was posted, Schwab lost seven of 10 YieldPlus Finra arbitration cases, with awards against the firm totaling $772,000, according to Finra's web site. The Oct. 1 claim was for $327,000.

Alison Wertheim, a Schwab spokeswoman, would not comment about the Wells notice.

Dan Jamieson contributed to this story


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