Losses Awarded in Charles Schwab YieldPlus Arbitration Claim

An arbitration panel through the Financial Industry Regulatory Authority (FINRA) has ruled against Charles Schwab, ordering the firm to pay a family 125% of their out-of-pocket investment loss as a result of mishandling Schwab YieldPlus bond funds, which suffered tremendous losses in 2008 due to heavy investment in subprime mortgages.

The Los Angeles-based arbitration panel awarded the family $80,000 for its losses, plus $16,000 in expert witness fees and the entire cost of the stock fraud arbitration proceeding. The ruling is the sixth straight arbitration loss for the company in Schwab YieldPlus arbitration cases brought by former investors.

Charles Schwab has paid out about $21 million in arbitration claims over the YieldPlus funds, not including this most recent loss.

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The Schwab YieldPlus funds are ultra-short bond funds that were heavily promoted by the company as conservative investment alternatives to money market funds or cash. Despite being 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.

Following the crash of the subprime mortgage market, the value of Schwab YieldPlus funds dropped substantially, while other ultra-short bond funds only lost an average of 0.16% during the same period.

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.

Hundreds of additional investor claims are pending against the company and Schwab YieldPlus lawyers are continuing to review new cases for investors who lost money in the bond fund.


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