Charles Schwab Corp. lost a bid to dismiss claims it misled investors on the amount of mortgage- back securities its YieldPlus mutual fund held, causing them to lose millions of dollars in the housing market's 2008 collapse.
U.S. District Judge William H. Alsup in San Francisco, in an order filed today, said a jury could find that Schwab and YieldPlus's former manager “should have made it clearer” that the fund's investment concentration policy had been changed to allow more than 25 percent of assets in mortgage-backed bonds.
The investors' lawsuit alleges Schwab incorrectly described the fund, once the world's largest short-term bond fund, as “safe.” It names as defendants Schwab, the largest independent brokerage by client assets, fund manager Kimon Daifotis and YieldPlus's independent trustees.
“While we are disappointed that he declined Schwab's request to dismiss the case prior to going to trial, it is important to note that he did not make a final determination of any issues in the case,” David Weiskopf, a Schwab spokesman, said in an e-mail.
Schwab has denied wrongdoing and said the fund's losses were caused by the collapse of financial markets. David Bayless, an attorney for Daifotis, didn't immediately respond to a voice- mail message seeking comment.
The lawsuit, brought on behalf of YieldPlus investors nationwide, seeks damages of as much as $802 million, the estimate of losses made by the plaintiffs' lawyers' experts. A trial is scheduled for May.
The fund's 1999 registration statement said the YieldPlus wouldn't invest more than 25 percent of its assets in a particular industry. Schwab amended the statement in 2006 to say it no longer considered mortgage-backed securities an industry. By 2008 the fund's investments in those securities, backed by home loans without government guarantees, grew to 50.1 percent of the portfolio, the lawsuit claims.
Alsup said in his ruling today that the change was “inadequately disclosed.”
YieldPlus assets peaked at $13.5 billion in 2007, and had fallen to $184 million as of Feb. 28, Bloomberg data show.
Alsup ruled on March 30 that Schwab violated an investment adviser law when it failed to get shareholder approval before investing more than 25 percent of the fund's assets in mortgage- backed securities. Lawyers for shareholders said damages for that claim are estimated at $157 million.
