Schwab Backs Out of $235M YieldPlus Class Action Lawsuit Settlement

Charles Schwab has announced that it is backing out of a proposed $235 million settlement agreement previously reached in a class action lawsuit over losses suffered by investors in the Schawb YieldPlus fund. 

The Schwab YieldPlus settlement agreement was announced earlier this year, but Schwab officials indicated last week that they are terminating the agreement, as they only recently found out that the settlement would only protect them from lawsuits by California investors, leaving other investors nationwide able to file individual claims.

Plaintiff attorneys say the coverage of the settlement was agreed upon early in the settlement process and will ask the U.S. District Court in San Francisco to hold the company in contempt of court for reneging on the deal, which was awaiting court approval.

The move by Schwab raised eyebrows among financial legal experts, who say that it is hard to believe Schwab only just found out that they were not fully covered from other lawsuits by the settlement agreement. It is rare for agreements to break down this late in the process, and how well protected the defendant will be from future lawsuits is usually one of the earliest subjects addressed in settlement talks. 

Schwab YieldPlus funds are ultra-short bond funds that were heavily promoted as conservative investment alternatives to money market funds or cash. Despite being advertised to generate income with minimal changes in share price, the fund lost more than 30% of its value between June 2007 and June 2008 due to heavy investments in risky subprime mortgage securities, which some experts indicate violated the prospectus.

The Schwab class action lawsuit represents about 250,000 investors who say they lost about $800 million when the YieldPlus fund tanked. The claim alleges that Schwab misled investors and failed to properly disclose the nature of the risks associated with certain securities held by the bond funds. Schwab still faces at least 194 individual stockbroker arbitration claims for up to $34 million. Those investors opted out of the class action lawsuit.

In October 2009, Schwab announced that it had received a “Wells notice” from the U.S. Securities and Exchange Commission (SEC) indicating that they plan to recommend that the company be brought up on civil charges. No charges have yet been filed.