Please Note: You are viewing the unstyled version of Subprimelosses. Either your browser does not support CSS (Cascading Style Sheets) or it is disabled. As a result, much of this website will not look the way it was intended, although all of its contents will be accessible to you. For more information, visit our Browser Support page.

Skip to Primary Site Navigation, Secondary Site Navigation, Content

Home > Cases > Charles Schwab > Charles Schwab Overview

Charles Schwab Under Investigation

Schwab YieldPlus Funds: What Investors Need To Know

On Oct. 14, 2009, the SEC formally issued a Wells Notice to Charles Schwab Corp. The Notice serves as a warning that investigators plan to recommend legal action against the company related to its Schwab YieldPlus Funds. Currently, the YieldPlus Funds are the subject of a class action lawsuit and numerous arbitration claims over allegations Schwab misrepresented the funds as a safe alternative to money-market investments and a cash substitute. Instead, Schwab managers invested more than 45% of the YieldPlus Funds' assets in risky mortgage-related securities.

The Oct. 14 Wells Notice states that the SEC intends to file civil enforcement action against Schwab Investments, Charles Schwab Investment Management, Charles Schwab & Co., Inc. and the president of the funds for possible violations of the securities laws with respect to the two funds. However, in the event that the SEC does move forth with its lawsuit, it is still not a guarantee of any restitution to investors or that individual investors would not potentially recover more of their losses through initiating their own arbitration proceedings with FINRA.

Companies that receive Well Notices like the one issued to Schwab have a chance to respond to the SEC's allegations before the commission decides whether to approve an enforcement action. The notice is not a formal allegation or finding of wrong doing.

For more than a year now, the Charles Schwab YieldPlus Funds have been depicted as an “unmitigated investment disaster” in the financial press. Marketed and sold as a safe alternative to money market investments and a cash substitute, the Schwab YieldPlus Funds were supposedly designed to preserve capital and generate income with very minimal price fluctuation.

As it turns out, the representations by Charles Schwab were misleading and inaccurate. Over time, Charles Schwab YieldPlus managers invested more than 45% of the YieldPlus Funds' assets in mortgage-related securities. This over concentration in housing related investments in 2007 and 2008 exposed investors to substantial risks that ultimately resulted in significant losses to Schwab YieldPlus investors.

Many investors have filed arbitration claims with the Financial Industry Regulatory Authority (FINRA), alleging that Charles Schwab not only misrepresented the YieldPlus Funds but also failed to disclose crucial details about the funds' large and inappropriate concentration in mortgage-related holdings. As reported Oct. 14 by Investment News, Schwab stated in July that it had paid $21 million in the first half of the year to settle client complaints and arbitration claims related to the YieldPlus investments.

On Aug. 21, a California federal court issued an order allowing a Schwab YieldPlus lawsuit - which includes the Schwab YieldPlus Fund Select Shares (SWYSX) and the Schwab YieldPlus Investor Shares (SWYPX) - to proceed as a class action. For Schwab YieldPlus investors, this legal development means they must now either stay in the class action lawsuit or “opt out” if they wish to file an individual arbitration claim with FINRA.

Class members have a limited amount of time to formally opt out of the class action. The deadline to submit opt-out requests is Monday Dec. 28, 2009. In addition, investors must:

  • Provide a written statement requesting exclusion from the Schwab YieldPlus class-action lawsuit;
  • Sign and date the request and include your mailing address; and
  • Ensure the written request is received by the Notice Administrator no later than Dec. 28, 2009. The address to mail the opt-out request is: Schwab Corp. Secs. Litigation Exclusion, c/o Gilardi & Co. LLC, P.O. Box 808061, Petaluma, CA 94975-8061.

Aggrieved investors need to weigh their decision carefully when determining whether to move forward with the Schwab YieldPlus class-action lawsuit or to opt out and proceed in an individual FINRA arbitration. It is important to understand that you are generally in a class action unless you formally ask to be excluded. In other words, if you do not opt out of the class action, you will be bound by its results.

In general, an individual FINRA arbitration may present more opportunities for a greater recovery for individual and institutional investors if they have suffered significant losses. However, where an investor's losses are small, it may not be economically feasible to proceed with a FINRA arbitration and therefore the Schwab class action lawsuit might be a more viable option.

Our lawyers are actively advising individual and institutional investors regarding their Schwab YieldPlus investment losses. For information on how to opt out of the Charles Schwab class action or if you would like to discuss the facts and circumstances surrounding your YieldPlus investments, please contact us.


Return to Charles Schwab >


Top