Arbitration Claim Results in 100% Recovery of Schwab YieldPlus Losses

An arbitration panel through the Financial Industry Regulatory Authority (FINRA) has ruled in favor of a pair of investors who filed a fraud claim against Charles Schwab to recover losses they suffered from the substantial decline in Schwab YieldPlus Fund, awarding 100% of their net out-of-pocket losses, plus attorney fees, interest and costs associated with the arbitration.

Raymond and Elsie Kelly were awarded $74,430 for the losses they experienced after Charles Schwab recommended the Schwab YieldPlus Fund Select Shares (SWYSX) and Schwab YieldPlus Investor Shares (SWYPX). They were also awarded attorney fees of $25,650, interest and Charles Schwab was assessed the $5,250 in costs associated with the financial fraud arbitration process.

The Schwab YieldPlus funds are ultra-short bond funds that were heavily promoted by Charles Schwab as conservative investment alternatives to cash or money market funds. Although they were advertised to generate income with minimal changes in share price, the funds lost 31.7% of their value between June 2007 and June 2008 due to heavy investments in subprime mortgages, which investors claim violated the prospectus. By comparison, other ultra short bond funds averaged only lost 0.16% during the same period of time.

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The Kelly’s claimed that the brokerage firm failed to disclose how heavily invested the fund was in risky mortgage related investments, alleging claims for breach of contract, breach of fiduciary duty, negligent supervision, negligent misrepresentation and omissions, and fraud.

The loss is the latest blow to Charles Schwab, which has paid out more than $21 million to resolve Schwab YieldPlus arbitration claims brought by investors who say that the brokerage firm misrepresented the ultra short bond YieldPlus fund.

A recent research report by the Securities Litigation and Consulting Group, Inc. (SLCG) found that Charles Schwab violated the fund’s prospectus by over investing in mortgage instruments. The study also found that Schwab inflated the value of the fund’s holdings in late 2007 and early 2008, deceiving investors about the value of their investments, and causing new investors to pay far more for shares in the Yield Plus fund than it was worth.


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