Charles Schwab YieldPlus Settlements and Damages Could Cost $1B: Report

Charles Schwab could face close to $1 billion in damages and settlements stemming from securities fraud lawsuits over their Schwab YieldPlus bond fund. 

In an earnings release issued by Charles Schwab Corp. last week, the company announced that it faces at least 194 individual stockbroker arbitration claims for up to $34 million, in addition to a YieldPlus Bond Fund class action lawsuit that looks to recoup $890 million for investors. In addition, other claims may still be filed against the brokerage firm over investment losses allegedly caused by their handling of the bond fund.

The 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 funds lost much of their value when the sub-prime mortgage market crashed in late 2007, leaving investors with substantial losses. The investor claims allege that Schwab misled investors and failed to properly disclose the nature of the risks associated with certain securities held by the bond funds.

In October, 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.

Earlier this month, a summary judgment from a federal judge in California determined that the company erred in failing to get investors’ approval before shifting half of the fund’s assets into mortgage-backed bonds. The ruling clears the way for the pending class action lawsuits for three classes of plaintiffs to proceed.

Two classes of plaintiffs are scheduled to go to trial on May 10.