FINRA Claims Keep Coming Over Investor Losses In Schwab YieldPlus Fund
Hidden risks and bad bets by fund managers have translated into huge financial losses for investors in the Schwab YieldPlus Fund (SWYPX). Many investors now fault the marketing techniques used by Charles Schwab Corporation, accusing the company of pitching and selling Schwab YieldPlus as a higher-yielding alternative to money- market funds.
In truth, the Schwab YieldPlus Fund was overexposed to high-risk mortgage-backed securities. That fact, as well as information regarding the fund’s concentration in toxic collateralized obligations (CDOs), was never revealed to investors. The alleged deception not only exposed investors to substantially more risk but also compromised the liquidity of the fund itself.
San Francisco-based Charles Schwab first began offering shares of the Schwab YieldPlus Fund in 1999. At the time - as is the case even today - documents and sales materials characterized the fund as “providing higher yields on cash with only marginally higher risk.” Also touted were the fund’s investments, which would primarily be made in “high-quality investment-grade bonds,” according to corporate literature on the Schwab YieldPlus Fund.
Later, investors discovered the YieldPlus Fund was far from well-diversified or low risk. Instead, more than 50% of the fund’s assets had been invested in toxic mortgage-backed securities. The fact that Schwab management also relied on investment ratings from credit agencies paid by their own broker-dealers only added to the fund’s eventual financial troubles. In addition, the net asset values of the Schwab YieldPlus Fund ultimately turned out to be highly speculative and reportedly inflated.
The Schwab YieldPlus Fund is an ultra-short bond fund. According to a Nov. 17, 2007, YieldPlus prospectus, the fund is designed to generate income with minimal changes in share price. In marketing the fund to investors, Schwab managers and the company’s own Web site highlighted the fact that the safety of the YieldPlus Fund would be enhanced by the short duration of holdings in its portfolio. Both statements would later be proved inaccurate.
For risk-averse retirees living on a fixed income, the marketing hype produced a quick sell but ultimately devastating financial results. Illiquidity and investor redemptions took the Schwab YieldPlus Fund from nearly a $14 billion fund in July 2007 to a fund whose net assets had fallen to $500 million one year later.
Today, investors who’ve suffered losses in the Schwab YieldPlus Fund continue to file arbitration claims with the Financial Industry Regulatory Authority (FINRA) in an attempt to recover their financial investments. In October, one of those investors, Jeffrey Nielson, was awarded $542,340 as part of an arbitration claim against his broker for making misrepresentations and false statements about the extent of risk associated with the Schwab Yield PlusFund.
Many believe the October 2008 ruling by FINRA could be an omen of things to come for other investors with losses in the Schwab YieldPlus Fund. In addition to the increase in arbitration claims filed against Charles Schwab for its alleged mismanagement of the Schwab YieldPlus Fund, class action lawsuits also are underway. As in the arbitration claims, the lawsuits charge Charles Schwab of misrepresenting the Schwab YieldPlus Fund as a safe alternative to money market funds and omitting key facts, including the risks tied to the fund’s high concentration of subprime holdings.
At one time, the biggest holders in the YieldPlus Fund were other Charles Schwab funds. But, in what can only be described as a true vote of no-confidence, the company said in April 2008 that no Schwab funds now held the YieldPlus Fund.
Our affiliation of securities 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.
November 9th, 2009 at 6:57 pm
I first invested in Schwab Yield Plus form my IRA in Novemer of 2004. I am a 63 year old single semi-retired nurse on a very limited income. I had invested in short term government bond funds for about 15 years and the price had never varied more than $1.00. I had started by IRA with Schwab in the mid-80’s. I was advised by Schwab to buy this as something similar to those and had been an IRA customer of Schwab since the last 80’s. I sold it in the spring of 2008 after I realized how much it had dropped in value. I had been taking full-time care of my 96 year old mother for two years and had not been watching the statements..but it never varied, so I wasn’t worried..
My losses are about $6,000
which is very significant to me. The SEC said I should first approach Schwab.. but I have not done so yet as I am not sure how to present this to them. I appreciate any advice you have.