Schwab's about-face on suit triggers downgrade

FBR cuts rating on stock to "market perform'

Nov 14, 2010 @ 12:01 am

By Bloomberg News

FBR Capital Markets downgraded The Charles Schwab Corp. last week on concerns that the company could face more litigation from investors.

FBR expressed concern in a report about Schwab's recent decision to terminate a settlement agreement that would have ended a class action from investors who bought the company's ill-starred YieldPlus bond fund. FBR cut its rating on the stock to “market perform,” from “outperform,” though it maintained its $17 price target on the company's shares.

FBR wrote that Schwab is exposing shareholders to material risks by walking away from the agreement to settle claims over the YieldPlus fund, which lost 30% of its value between 2007 and 2008. Investors claim that Schwab improperly hid the bond fund's risks.

Schwab's settlement would have required the company to pay $35 million to settle California state law claims and $200 million for the plaintiffs' federal claims. But Schwab decided to drop the agreement after plaintiffs claimed that they would still have the right to sue after the settlement, FBR wrote in the report.

The case will go back into litigation with an uncertain outcome, according to FBR's report.

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