The
Charles Schwab Corp. will pay $119 million to regulators to settle charges related to its disastrous YieldPlus bond fund, the company said last week.
The fines settle charges brought by the Securities and Exchange Commission, the
Financial Industry Regulatory Authority Inc. and Illinois regulators.
Most of the money will be returned to the fund's investors.
The YieldPlus Fund was misrepresented as a safe, ultrashort-bond fund despite a growing concentration of mortgage-backed securities, the SEC and Finra said in statements.
In addition, the regulators said that Schwab deviated from the YieldPlus Fund's stated investment policy without obtaining the required shareholder approval.
At its peak in 2007, the fund had $13.5 billion in assets and more than 200,000 accounts, the SEC said. During the credit crisis of 2007 and 2008, the fund's assets fell to $1.8 billion, due to redemptions and declining asset values.
“We regret that fund shareholders lost money, but the decline in the YieldPlus fund was the result of an unprecedented and unforeseeable credit crisis and market collapse,” Schwab said in a statement.
Regulators see things differently.
According to Finra, some Schwab employees referred internally to YieldPlus as “YieldMinus.” Company executives knew that the fund was being marketed improperly but allowed sales representatives to continue to describe the fund as being very low-risk, Finra said in a statement.
The SEC also alleged that Schwab officials knew that the fund was in trouble.
EXECUTIVES CHARGED
It charged two Schwab executives, Kimon Daifotis, former chief investment officer for fixed income at Charles Schwab Investment Management, and Randall Merk, a former president of that unit, with fraud in the sale of the fund.
The SEC claimed that in August 2007, Mr. Daifotis assured independent investment advisers and Schwab brokers that the fund had minimal outflows. The SEC said, however, that Mr. Daifotis knew that YieldPlus had experienced more than $1.2 billion in redemptions over the prior two-week period, which caused the fund to sell more than $2.1 billion of its securities at reduced prices.
Mr. Daifotis and Mr. Merk intend to “pursue a vigorous defense fully contesting the allegations,” Schwab said in a statement.
In November, a federal judge approved a revised settlement in a class action brought by YieldPlus investors. Schwab agreed to pay $235 million in that case.
Schwab, which neither denied nor admitted any wrongdoing in agreeing to the settlement with regulators, said that it would take an after-tax charge of $97 million in its fourth quarter to cover the payout.
In its statement, the company also took a shot at Wall Street for the mortgage meltdown.
“The company hopes that greater focus and attention will ultimately be given to the investment banks that created mortgage-backed securities, and the ratings agencies that legitimized them with triple-A ratings, which have so far largely escaped scrutiny and accountability,” the statement said.
E-mail Dan Jamieson at [email protected].
