Schwab Yield Plus Class Action Settlement Reached

Charles Schwab Corp. has agreed to pay investors $200 million to settle a YieldPlus Fund class action lawsuit over losses their bond fund suffered as a result of the subprime mortgage market crash. 

The settlement was reached last week between the company and investors who claim that the company was deceptive about the nature of the YieldPlus funds. Investors say they lost $800 million when the bottom fell out of the fund in 2007, and Schwab still faces at least 194 individual stockbroker arbitration claims for up to $34 million. Those investors opted out of the class action lawsuit.

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.

The company did not admit to any wrongdoing as part of the settlement, which reduced the company’s quarterly profits from $119 million to $14 million.