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Charles Schwab Under Investigation

Legal Recourse For Investors In Schwab YieldPlus Funds

Ultra-short bond funds Schwab YieldPlus (SWYPX) and Schwab YieldPlus Select (SWYSX) were once marketed as a conservative and higher-yielding alternative to money-market funds - good investments for families or retirees to park cash for future expenses such as college tuition or the purchase of a second home.

Impressed with the sales pitch and comforted by the safety and low-risk factors of the funds, investors quickly jumped on board.

In 2007, however, fallout from the collapse of the subprime mortgage market created an altogether different scenario for investors in the two Schwab YieldPlus funds. It turns out that both of the funds were not comprised of the large, well-diversified portfolios that their managers had represented to investors. Instead, their assets had been overly concentrated in risky subprime mortgage-backed securities and even more risky collateral debt obligations (CDOs).

The failure of Schwab management to diversify the funds' portfolio exposed investors to much more risk than they ever realized. In the past year alone, the Schwab YieldPlus Fund has lost more than 40% of its value, making it one of the worst-performing ultra-short bond funds on record.

As for investors, they are left with devastating financial consequences because of Schwab's misrepresentation of the fund. Many are retirees who had their entire life savings in the YieldPlus Funds. Now, those savings have vanished and their future is up in the air.

Betrayed investors have since taken their frustration to the Financial Industry Regulatory Authority (FINRA), filing arbitration claims against San Francisco-based Charles Schwab & Co. and the YieldPlus managers for misrepresenting the asset makeup of the YieldPlus funds, as well as their failure to disclose critical information about the high levels of subprime holdings contained in the funds. In October 2008, FINRA awarded more than $500,000 to an investor as a result of the losses he sustained from the collapse of the YieldPlus Fund.

In 2009, it is likely FINRA will review hundreds of additional claims from investors connected to the Schwab YieldPlus funds. In the past two months, our firm alone has filed more than 25 arbitration claims with FINRA on behalf of investors for damages totaling more than $4 million.

Adding to investors' fury are claims that Kimon Daifotis, the lead portfolio manager of the YieldPlus Fund, sold 2.9 million shares of the fund between Jan. 31, 2008, and April 1, 2008, on behalf of other Schwab mutual funds. At the same time, Schwab's other portfolio managers, as well as the company's corporate Web site, were encouraging investors to hold on to their YieldPlus shares.

At one time, the Schwab YieldPlus Fund was a $14 billion fund. All that changed in late 2007 and early 2008, when shareholders started heading for the exits and portfolio managers were forced to sell the fund's illiquid assets at the worst possible time. By the end of July 2008, the YieldPlus Fund had approximately $500 million, down from $6.5 billion just six months earlier.

Charles Schwab and Co. likes to market itself as an “honest broker” - the kind of brokerage that investors can count on during times of market turmoil. When it came to the YieldPlus funds, though, the corporate moniker failed to live up to its promises.

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.


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