SEC Warns of Charles Schwab Bond Fund Lawsuit Over Securities Violations

The U.S. Securities and Exchange Commission (SEC) has warned Charles Schwab Corp. that it could face a regulatory lawsuit over its handling of the Schwab YieldPlus Fund and Schwab Total Bond Market Fund, for which the company already faces pending securities fraud arbitration claims and an investor class action lawsuit for misleading investors.

Charles Schwab Corp. acknowledged last week that they received an SEC “Wells notice”, which indicates the regulators plan to recommend the company and the funds’ president be brought up on civil charges.

A number of arbitration claims over the funds and a Schwab YieldPlus class action lawsuit are already pending, after 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.

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.

Although the SEC notice is not a formal charge of wrongdoing, nor is it a finding of guilt, the civil charges could increase the likely hood of a Schwab YieldPlus settlement for investors who are pursuing arbitration or class action claims, according to a report by Investment News. The company has already lost a number of arbitration cases through the Financial Industry Regulatory Authority (FINRA), resulting in losses of more than $20 million so far.

Charles Schwab Corp. indicates that they plan to respond to the SEC “Wells notice” over the Schwab YieldPlus Fund and Schwab Total Bond Market Fund to explain why they believe the civil lawsuit and enforcement charges are not appropriate.