The Shine-Vernon legal team filed claims today on behalf of three Florida investors with principal losses totaling more than $1 million asserting that Charles Schwab & Co. and its former high-profile fund manager committed fraud when they deceptively marketed the Schwab YieldPlus Fund as a safe cash alternative.
Schwab marketed its Schwab YieldPlus Fund (SWYPX, SWYSX) to investors as a safe, ultra-short-term bond fund, but actually, the bond mutual fund managers loaded the fund with high concentrations of risky mortgage- and asset-backed securities that exposed fund investors to the danger of substantial losses of their principal, the claims asserted.
The Shine-Vernon legal team, headed by former SEC enforcement attorney Thomas Shine and longtime investor rights’ attorney Chris Vernon, has interviewed more than 100 investors as part of its Schwab YieldPlus investigation and filed arbitration claims on behalf of investors in Florida, California, Texas, New York, Missouri, Minnesota, Illinois, and Hawaii.
The three claims filed today are on behalf of three Florida investors, two of whom are in their 70s, with the third in his early 60s and nearing retirement age.
Many Schwab YieldPlus investors are conservative investors and retirees who’ve suffered steep losses of principal even though Charles Schwab compared its Schwab YieldPlus Fund to the safety of 1 and 2-year certificates of deposit and described it as “portfolio cash” on its website.
The claims filed today assert that the Schwab YieldPlus Fund managers’ reckless actions and negligence set the stage for the catastrophic freefall of Schwab YieldPlus in which the bond mutual fund saw net assets plunge from a high of $13.5 billion on the eve of the subprime credit crisis in July 2007 to $507 million as of May 31, 2008. Schwab reports the YieldPlus Fund’s current assets as of May 31, 2009, at $161.72 million.
The claims filed today include the following allegations:
— This risky investment composition of the Schwab YieldPlus Fund by fund managers compromised the fund’s liquidity and forced it to sell off asset-backed and mortgage-backed securities at distressed prices as more and more investors sought redemptions beginning in August 2007. As of July 31, 2007, the Schwab YieldPlus fund held an astonishing 56 percent of its assets in risky mortgage-backed securities and asset-backed obligations (38 percent of all assets held in collateralized mortgage obligations) at a time when it was holding itself out as a safe haven for conservative investors and retirees, the claims assert;
— Schwab’s management opened the door to the fund’s high concentration of risky mortgage and asset-backed securities by unilaterally determining that the mortgage industry didn’t constitute a single industry for purposes of analyzing diversification of risks in the portfolio, the claims assert;
— On the eve of the credit crisis in May 2007, the Schwab YieldPlus Fund had 6.5 percent of its holdings in cash, compared to its peers in the Ultrashort Bond Fund category who held, on average, 26.8 percent of their positions in cash. The meager cash holdings of the Schwab YieldPlus Fund set the stage for the fund’s meltdown when investors sought approximately $2.8 billion in redemptions during August 2007 in the wake of concerns following the collapse of two Bear Sterns hedge funds, the claims assert;
— Schwab’s management on Nov. 2, 2007, filed with the SEC the Schwab YieldPlus Fund annual report for the period ending Aug. 31, 2007. The annual report disclosed the fund’s total net assets ($10.696 billion) but failed to disclose the approximately $2.8 billion in investor redemptions that took place in August 2007. The redemptions were also not disclosed in the revised prospectus for the YieldPlus Fund filed Nov. 14, 2007. By Nov. 30, 2007, the Schwab YieldPlus Fund’s total net assets had dropped further to $8.027 billion, a $5.464 billion or 40.5 percent decline from the fund’s total net assets of $13.5 billion on July 31, 2007, the claims assert;
— Schwab ignored the warnings of securities and banking regulators about the risky nature of mortgage-backed securities and collateralized mortgage obligations that date back to the early 1990s. Securities regulators, including FINRA (formerly known as NASD), warned member firms as early as 1992 to refrain from deceptive advertising of CMOs including comparisons to certificates of deposits. Banking regulators warned of the liquidity risks of CMOS, the claims asserted; and
— Charles Schwab executives and former high profile fund manager Kimon Daifotis committed misconduct when they embarked on a “damage control” campaign to avert liquidations of Schwab YieldPlus by Charles Schwab retail clients. Behind the scenes, Schwab dumped 2.9 million YieldPlus shares from the portfolios of its other proprietary mutual funds from Jan. 31, 2008, to April 1, 2008, while unwitting Schwab clients simultaneously held on to their shares, the claims asserted.
“By comparing YieldPlus to the average losses suffered by other ultra-short-term bond funds as a whole, it becomes clear that it was Schwab’s reckless fund management and not the ‘market’ that caused the damages in these cases,” investor attorney Chris Vernon said.
“The tragedy is that these cases involve people who were attempting to avoid the risks of the ‘market’ and willingly gave up the potential reward that goes with higher risk. They suffered significant losses to their principal because the fund was dramatically riskier than Charles Schwab portrayed it,” Vernon said.