Schwab YieldPlus Losses Caused by Violations of Prospectus: Report

A new research report cites a heavy reliance on private-label mortgages for the huge Charles Schwab Yield Plus losses suffered by investors who held shares in what they thought was a relatively low-risk bond mutual fund. The Schwab YieldPlus Select Fund lost 31.7% between June 2007 and June 2008, after the mortgage securities market crashed, which was far more than losses seen with similar bond funds.

The report, titled Schwab YieldPlus Risk, was released last week by the Securities Litigation and Consulting Group, Inc. (SLCG), concluding that the ultra short bond fund suffered more from the market crash than its competitors because the fund violated its own prospectus with its heavy investment in risky mortgage instruments. The report indicates that those mortgage investments went beyond the prospectus’s stated limits on concentration and liquidity.

A number of Schwab Yield Plus lawsuit claims have been pursued against the brokerage firm by investors who experienced losses, some of which have already been resolved through arbitration for about $21 million. In the claims, investors allege the fund was sold as a low-risk, high yield fund and that the heavy reliance on mortgage-backed securities was not adequately disclosed.

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In comparison to the substantial Schwab Yield Plus losses, other similar ultra short bond funds only lost .16% during the same time period, according to the report.

“Not only did YieldPlus suffer much larger losses than the average of ultra short bond funds, its returns were worse than every one of the 35 ultra short funds for which data was available on Bloomberg – even considerably worse than the fund with the second worst return,” the report (PDF) states.

The report also states 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.

Although several Schwab YieldPlus class action lawsuits have been filed on behalf of all investors who held shares in the fund during the time period, securities fraud lawyers have suggested that investors who lost over $10,000.00 may be in a better position to recover their losses through an individual Schwab YieldPlus arbitration claim.


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