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Home > Cases > Charles Schwab > Subprime-Related Lawsuits Hound Charles Schwab

Subprime-Related Lawsuits Hound Charles Schwab

For years, Charles Schwab Corp. employed a clever advertising campaign featuring founder Charles Schwab and a “Talk to Chuck” slogan. Now, as the subprime litigation wave gains momentum, Schwab clients are doing just that - but in court.

Schwab, which is the largest online brokerage firm in the United States, recently announced that it may pay out more than $250 million to settle investors' claims over losses connected to a bond fund with subprime-related holdings.

As reported in a June 10 article on Bloomberg.com, Schwab is accused in eight class-action suits of misleading investors by describing its YieldPlus mutal fund as just slightly riskier than cash. As of April 30, investors in the fund had lost about $1.3 billion, according to Bloomberg.

The fallout from the subprime mortgage mess has created a public relations nightmare for Wall Street, with the number of subprime-related lawsuits growing by the day. Schwab's case in particular stands out because of the company's dominant standing as the largest U.S. online broker. Then there are the legal heavyweights involved in the case, which include the likes of firms that successfully recovered shareholder losses in the Enron, Visa and MasterCard and state tobacco suits.

Apparently, Schwab issued a statement in its regulatory filing last month that it may settle the suits “because of the uncertainty and risks of litigation.” The company didn't disclose in the filing whether it had set aside reserve money to cover investor losses related to the YieldPlus suits.

Prior to its recent troubles, YieldPlus was the nation's largest short-term bond fund, peaking at $13.5 billion last summer, according to the June 10 Bloomberg article. The fund fell nearly 10 percent this March, which was the most among peers sold as alternatives to low-risk money-market accounts.

Meanwhile, investors who owned shares in YieldPlus suffered massive financial losses - losses on funds they thought were low-risk cash alternatives when in fact they had been exposed to subprime-backed securities.

In a complaint filed against Schwab, investors claim the company failed to disclose that mortgage-related securities eventually accounted for more than half of the fund's value and might prove hard to sell. Reportedly, Schwab has started offering some clients anywhere from 50 percent to 90 percent of losses under $10,000. For losses of $50,000 or more, offers are in the 5 percent to 20 percent range.

Schwab's current legal troubles underscore a familiar theme cropping up on Wall Street these days. As investor lawsuits mount, it's no longer business as usual. Instead, public relations departments are going into over drive, burning the midnight oil in an attempt to salvage once-reputable corporate images. For many of these Wall Street companies, as in the case of Schwab, the best course of action may be to settle their legal issues - and fast.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


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