SEC slaps Schwab with warning over bond funds

Wells notice heightens likelihood of YieldPlus settlement, experts say

Oct 18, 2009 @ 12:01 am

By Bruce Kelly

The Securities and Exchange Commission'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, the Total Bond Market Fund and the YieldPlus 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,” Matt Snowling, an analyst with FBR Capital Markets, wrote in a report. “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 said 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 last week that it received the Wells notice advising the firm that the SEC staff intends to recommend civil charges against several firm affiliates for possible securities violations. The notice isn't a formal allegation or a finding of wrongdoing.

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

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

From Sept. 1 through 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 the Financial Industry Regulatory Authority Inc.'s website. The Oct. 1 claim was for $327,000.

Alison Wertheim, a Schwab spokes-woman, would not comment about the Wells notice.

Dan Jamieson contributed to this story.

E-mail Bruce Kelly at


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